Last Week's Markets

This is not a very impressive chart.

1.) The red line is drawn from the weekly opening to the weekly close. Notice we really didn't move anywhere.

2.) The upward movement for the week came from opening gaps up. I drew two golden colored lines for Wednesday and Thursday. The line extends from the opening to the close for the day. Notice that prices moved around the opening for those days but then returned to near opening levels at the close. If there was real excitement in the market about future prospects we would have seen a rally during the trading session.



On the daily chart notice we have a lot of weak candles -- candles with very small bodies -- and declining volume for the week.



The 5-day QQQQs are somewhat better, but they still have the same problem as the SPY -- big opening jumps without any follow-through during the trading day. The big difference between the SPYs and the QQQQs is Tuesday when the QQQQs had a good day up and the SPYs dropped at the open.



The 10-day QQQQ chart shows a 10-day uptrend firmly in place. Also note there are two trends in place which should help going forward.



The daily chart shows the QQQQs have broken through resistance but also have the small candle bars and decreasing volume that the SPYs had. This indicates traders are mulling their options. While there isn't enough good news to move higher, there isn't enough bad news to move lower either.



The transportation average isn't confirming. It is trading below the 200 day SMA and all of the shorter SMAs are below the 200 day SMA. If the economy were expanding we would need to transport more stuff from point A to point B. This average isn't saying we have more stuff to transport.

Market breadth is getting better.

The New York and NASDAQ new high/new lows are improving.





And the NY advance decline line is moving up in a range.



However, the NASDAQ advance/decline line is still in a range.



Barrons' trader's column summed it up best

MATERIAL, INDUSTRIAL AND ENERGY stocks pushing their midsummer highs make this seem, once again, like the best of times. But straggling financial and consumer-discretionary stocks tell a different tale.

Bifurcated markets like today's don't extend forever and often end when the stronger stocks succumb to the same selling pressure hurting the laggards. Many extended material and industrial stocks already reflect the high hopes of global growth, and "things can change quickly when these stocks hit targets and investors decide to take profits," says Oppenheimer's chief market technician, Carter Braxton Worth. In contrast, the concerns dogging financial and consumer stocks won't change overnight.

The market's split personality becomes even more apparent when a stock chart of the uber-miner BHP Billiton (BHP) is juxtaposed against that for uber-retailer Wal-Mart (WMT): BHP has surged 115% over the past year while Wal-Mart is down 11%. Similarly, the world's largest steel company, Arcelor Mittal (MT), is up 143% while one of the largest consumer stocks, Toyota Motors (TM), is up just 7%.

The bifurcation could limit the stock market's short-term upside. "Take profits in extended names in the material, industrial and energy sectors and hold the cash," Worth says. "Don't redeploy into the beaten-down groups. There will be time enough to get in" when it's clear they aren't headed lower.

Weekend Weimar

The markets are closed. Stop thinking about them or the economy. It's Friday -- do something else.

I'll have a market recap for the week tomorrow and a preview of the coming week on Sunday.

Consumer Spending Increases

From the BEA:

Personal income increased $40.2 billion, or 0.3 percent, and disposable personal income (DPI)increased $37.2 billion, or 0.4 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $54.8 billion, or 0.6 percent. In July, personal income increased $61.5 billion, or 0.5 percent, DPI increased $60.3 billion, or 0.6 percent, and PCE increased $37.3 billion, or 0.4 percent, based on revised estimates.

From Bloomberg:

Consumer spending in the U.S. rose more than forecast in August, a sign the fallout from a weaker job market and collapse in subprime lending has yet to reach the biggest part of the economy.

The 0.6 percent rise in spending was the biggest in four months and followed a 0.4 percent increase in July, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled.

Lower gasoline prices, auto-dealer discounts and a jump in air-conditioning use during last month's hot spell lifted demand, economists said. Smaller price increases give Fed policy makers room to reduce interest rates again should job losses and declines in home values lead to a deeper slowdown.

``Consumers were out in force in August even though we had the credit crunch'' mid month, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the gain in spending. ``Inflation is behaving quite well.''

Here is a chart of chained (inflation-adjusted) personal consumption expenditures.



Here is a chart of the month-to-month percent change in the chained dollar figures



The big reason for the jump was a 2.8% increase (in chained 2000 dollars) of durable goods. However, this figure has been jumping around quite a bit:



In general, these are very good numbers. Last month's increase was good and this month's increase is better. However, I would caution that the big jump is from durable goods. Considering these are usually more expensive items that require financing, we need to look with caution to next month's numbers.

Dollar Hits Record Low

From the WSJ:

The dollar sank to an all-time low against a basket of major currencies as U.S. housing data continued to come in even weaker than economists' already-low expectations.

The New York Board of Trade's DXY dollar index, which began in 1973 and measures the dollar against six top rivals, fell to 78.16 in New York, beating its previous intraday low of 78.19, from 1992.

"The new low in the index was the result of negative dollar sentiment we've been seeing all week, starting with lower-than-expected housing data on Tuesday and magnified by weak new-home sales data" on Thursday, said David Powell, senior currency strategist at IDEAGlobal in New York.

Note on this above daily chart the dollar dropped right after the Fed cut the discount rate 50 basis points. Expect this trend to continue so long as the Fed is in easing mode.



For those of you who want to cement a bearish chart in your memory, this is it. Notice the following.

1.) The trend is clearly downward. The sell-off for the last year has been constant and continued.

2.) All of the moving averages are trending lower. I think of the moving averages as the general price movement for the last x period. For example, a 10 day moving average is the two week trend. The 20 day moving averages is the weekly trend. Notice here all of the moving averages -- short, medium and long-term -- are moving lower.

3.) The shorter moving averages are below the longer moving averages. The means the short-term trend is pulling the longer term trends lower.

4.) Prices are below the moving averages. This is pulling all of the moving averages lower as well.

5.) Recent, post rate cut price action is circled on the chart.

The bottom line is this chart says "sell-me". Period.

Agricultural Price Inflation Will Be With Us Awhile

from the WSJ:

In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.

Not only have prices remained high, but the rally has swept up other commodities such as barley, sorghum, eggs, cheese, oats, rice, peas, sunflower and lentils. In Georgia, the nation's No. 1 poultry-producing state, slaughterhouses are charging a record wholesale price for three-pound chickens, up 15% from a year ago.

What's changed is that powerful new sources of demand are emerging. In addition to U.S. government incentives that encourage businesses to turn corn and soybeans into motor fuel, the growing economies of Asia and Latin America are enabling hundreds of millions of people to spend more on food. A growing middle class in these regions is eating more meat and milk, which in turn is increasing demand for grain to feed livestock. In the U.S., a beef cow has to eat roughly six pounds of grain to put on a pound of weight, and a hog about four pounds.

This is an incredibly important story for several reason.

1.) It highlights how incredibly ridicules the Fed's "core inflation targeting is. The Fed's theory as to why core inflation is important is highlighted in the first paragraph. However, the real reason for the run-up -- which should be the Fed's stance -- is highlighted in the third paragraph. Demand for basic commodities is increasing, which is going to drive up prices for a long time. Hence, core inflation targeting is the dead-wrong inflation policy for the Fed to be targeting.

2.) Consumer spending. As food prices increase food expenditures take more money out of take home pay. This decreases the amount that consumers can spend on other goods and services. Considering consumer spending is responsible for 70% of the US' GDP growth, this has profound implications.

Here are some futures charts. Notice they are all trending up.

Corn:



Oats:



Soybeans:



Wheat:



And notice how higher agricultural prices are bleeding into livestock prices:



My biggest fear is the Federal Reserve is going to miss this boat entirely which has terrible policy implications for the US.

Today's Markets

Just like yesterday, the market gapped up at the open but then traded around the opening price for most of the day. Basically, the markets are torn between a good 2Q GDP report of 3.8% and a lousy new home sales number. The first signals things are fine and the second signals the economy isn't fine.


On the three day chart, notice how choppy trading is. We get a big move up but no follow-through. That tells me the upward movement is technical -- traders buying on the open, but not enough excitement to continue bidding up the market during the rest of the trading session.


The daily chart shows two very narrow trading days. These are not good technical signs. They indicate a lack of excitement among traders.


Something I missed and which was mentioned on the WSJ Marketbeat blog was the transportation average's 50 day SMA crossed below the 200 day SMA a few days ago. So not only are the transports trading below the 200 day SMA (which is a bearish sign) the moving averages are moving lower and into bearish territory. These are not good technical developments.

Along that line, notice the following two transportation charts.


The railroad sector isn't in bad shape. It's just treading water, though.


Trucking is clearly in a major downtrend and has crossed below the 200 day SMA -- a very bearish sign.


Finally, we have the QQQQs. While they are advancing, the candles are very weak, indicating a reversal to retest support will probably happen soon.

New Home Sales Tank

From the Census Bureau:

Sales of new one-family houses in August 2007 were at a seasonally adjusted annual rate of 795,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent (±12.4%)* below the revised July rate of 867,000 and is 21.2 percent (±9.0%) below the August 2006 estimate of 1,009,000.

These are terrible numbers.

The good news in this report is the available supply is decreasing.



However, the months of supply is still high because of the decrease in the seasonally adjusted annual rate of home sales.



Finally, here is a chart of the seasonally adjusted annual rate of sales.

Commercial Paper Market Still Shrinking

Here is a chart from the Federal Reserve that shows total commercial paper outstanding. Note the asset-backed market is still shrinking.



However, the interest rate spread is tightening:



For the week ending September 19, the asset-backed commercial paper market decreased $15.8 billion. It decreased $14.3 billion the previous week.

The decrease in the interest rate spread is welcome news, but the market is still contracting.

Analyst Expects Big Hit to Merrill's Earnings

From the WSJ:

Merrill Lynch & Co. faces a possible third-quarter write-down of as much $4 billion to reflect losses on mortgage-related securities and buyout-financing commitments, a Wall Street analyst predicted yesterday.

Goldman Sachs Group Inc. analyst William Tanona said the write-down, which could exceed those reported by Merrill's main Wall Street rivals, could erase most of the firm's quarterly profit.

Mr. Tanona said he expects Merrill's third-quarter earnings to decline by 89% to $208.9 million, or 15 cents a share, from $1.94 billion, or $2 a share, not counting a gain, a year earlier.

The analyst said he acted based on weak results reported last week by other securities firms whose third quarter ended in August; Merrill's ends in September. He said Merrill "appears to be caught in the cross hairs of a number of headwinds" including losses on loan commitments and mortgages.

This warning about Merrill's earnings illustrates a problem that will happen across the board in the financials this quarter: how will the mortgage/credit market mess impact financial companies' earnings? While we don't know the complete answer to that, we do know the sector has been trading poorly.



For the last three months, the financial sector hasn't really traded in a pattern, but instead has traded within and area of the chart.



On the year to date chart we see the same thing -- no real pattern, no trend and no direction.

Financials are going to have problems through this upcoming earnings season. I don't expect it to be a great time for the industry.

Gas Market Update

Gas stockpiles may have bottomed:



And crude oil inventories may also have bottomed. However, they are still near the top of their range.



However, notice that gas prices are not decreasing the way they did last year at the end of the summer driving season (at least not yet).



Consumers confidence is already at a two year low. The last thing the US consumer needs right now is to have gas prices further crimp their lifestyle.

Oil has dropped from its peak a few days ago. My guess is this is simple profit taking. The next big test for the oil market is to see if it holds or breaks support around $78.

Subprime Delinquencies Rise

From Bloomberg:

Late payments and defaults among subprime mortgages packaged into bonds rose last month, according to data for loans underlying benchmark ABX derivative indexes.

After August payments, 19.1 percent of loan balances in 20 deals from the second half of 2005 were at least 60 days late, in foreclosure, subject to borrower bankruptcy or backed by seized property, up from 17.5 percent a month earlier, according to a report yesterday from Wachovia Corp.

Prepayment speeds for the loans slowed, suggesting it's more difficult for borrowers to sell their homes or refinance, according to another report by New York-based analysts at UBS AG. Record levels of delinquencies and defaults on subprime mortgages are worsening as home prices decline and interest rates on loans adjust higher for the first time. As lenders tighten standards, borrowers are finding it harder to refinance into new mortgages with lower payments.

Thanks to the blog Calculated Risk (link at right) for this chart. It's from Bank of America and it shows their estimates of ARMs resets going forward. Notice it shows a consistent rate of resets for the next year and a half.



This whole situation is going to continue to worsen.

Today's Markets

Today was a nothing day. It meandered around the opening price and eventually closed around the opening price. While the market was up, its inability to move convincingly beyond the opening price jump indicates there is some caution in the market.



The 8-day chart shows the market broke out of the 5-day downchannel, but as the comment above notes the post-opening movement was not convincing.



The daily chart puts the action in the best perspective. The market is still in a pennant pattern, waiting for something to move it in one direction or the other.



The QQQQs continued their upward move today, but the small candle is considered the sign of a market top. I wouldn't be surprised to see some profit taking or consolidation at these levels.

Durable Goods Orders Decrease 4.9%

From the Census Bureau:

New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today. This decrease followed two consecutive monthly increases, including a 6.1 percent July increase. Excluding transportation, new orders decreased 1.8 percent. Excluding defense, new orders decreased 5.9 percent.

Here is a chart that shows both the monthly increases and decreases and the year-over-year change.



There are some interesting numbers in the report.

The last report had a 6.1% increase -- 3.4% without transportation. So this decrease isn't as big as it looks on the surface. It's more of a natural slowing down from a big month.

Total new orders are up 1.7% from last year. But total new orders without transportation is down (-.1%). That means that without transportation capital goods new orders would be down for the year. That is cause for concern, especially for economists who argue that exports and the cheap dollar will keep us out of a recession. Transportation accounts for 30% of durable goods new orders. This means that 70% of the durable goods producers are at last years level.

Motor vehicle new orders are down 4.5% from last year.

More on Technology

In yesterday's market wrap I noted that the QQQQs were doing well. Let's break down that number now in a bit more detail to see exactly what tech sectors are benefiting from this tech bull run.



First, here's the overall technology market, as represented by the NASDAQ 100 tracking stock the QQQQQs. It has risen 12% since the bottom of the mid-summer sell-off. It broke through upside resistant yesterday on decent volume. Overall, this is a good chart.

What sub-sectors of technology are doing well?



The answer is it isn't semi-conductors. This sector is in a trading range and appears to be forming a triangle consolidation. The moving averages are all clustered, which is not a very bullish sign. There is also decreased volume over the last week, which shows a general lack of interest from traders for this sector.



Networking is sort of benefiting. While this sector rose about 10% from its mid-August lows, it is now in a trading range. This range could simply be a consolidation pattern, but we need a move to the upside to see if that is the case. In addition, the moving averages are clustered which should give traders reason to pause.



The big internet players have clearly benefited. The HHHs have a major stake in Amazon, Ebay and Yahoo which are three of the largest internet companies around. The 10 day SMA has crossed the 10 and and 50 SMA. The 20 is also moving up. This is agood chart.



Electronics are also doing well. This ETF's largest holdings are in EMC, Dell, Apple, Sun and Agilent. Again, these are all big, well-established companies. The 10 and 20 day SMAs are moving higher and the 10 day SMA is above the 20 day SMA. The 20 day SMA is also above the 50 day SMA. The only drawback to this ETF is the overall lack of volume.



On the negative side, the Broadband sector is trading below the 200 day SMA which is usually considered bearish. However, the 10 and 20 day SMAs are increasing and the 10 day SMA is about to cross the 50 day SMA. However, I would like to see this sector move above the 200 day SMA.



Software is a great chart. The SMAs are arranged from the lowest to the highest, the 10 and 20 SMAs are clearly moving up, the 50 day SMA is beginning to move up and we have a really nice upward moving trend in place. Like most ETFs, this one has big holdings in the large software companies like Microsoft, SAP, Adobe and Oracle.

Aside from semiconductors, the technology advance appears to be pretty broad-based. However, because the ETFS hold large positions in the largest companies in their respective sector, I have to think smaller cap companies aren't benefiting as much from the rally. This is confirmed from the following two charts.



The S&P 100 chart broke out from it's trading range recently,



but the Russell 2000 is still languishing.