Today's Markets

Both the SPYs and the QQQQs gapped higher at the open. Then both sold off to their respective support levels. Once they hit those levels, the selling started in earnest on higher volume. Once again, we have an end-of-the day sell-off on big volume. My guess is traders are concerned about the CPI report tomorrow. A number high enough to imply the Fed can't lower rates anymore will probably be trouble for the markets.



With the QQQQs, I'm beginning to wonder if we're going to see a dead-cat bounce. This occurs when prices drop hard, rebound a bit and then drop back to levels from the hard sell-off. On this chart, prices would go back to the $48.60 level. A hard sell-off indicates a rapid reverse in overall psychology along with underlying concern about something. Traders may not know exactly what they are concerned about, but something has them spooked enough to get out quickly.



With the SPYs, notice we're still clearly in a downward sloping range, coming down from a peak in early/mid October. Prices have crossed the 200 day SMA -- a good sign -- but they have printed a bearish bar. Also note the 10 and 20 day SMAs are headed lower.

And the Hits Just Keep On Coming

From Business Week:

AAA's Daily Fuel Gauge Report shows that motorists nationwide paid an average of $3.11 per gallon of gasoline on Nov. 14, up from $2.75 a gallon a month ago. Guy Caruso, head of the Energy Information Administration, an arm of the U.S. Energy Dept., warned that gasoline prices, while high, don't yet fully reflect the price of crude oil, which is trading around $94 per barrel. On Monday, the U.S. Energy Dept. warned prices could rise another 20¢ a gallon over the next two to three weeks if refiners pass along the increase in crude oil prices.

Isn't that just wonderful news.

The Only Thing You Need to Know About PPI

From Econoday -- the yearly percentage change in PPI.



I don't see any inflation -- or any kind of inflationary trend. Do you?

Follow That Lemming.....Redux

From CNBC:

Bear Stearns expects to write down $1.2 billion of assets linked to mortgages in the fourth quarter, but the worst of the bank's mortgage writedowns is over, Bear's chief financial officer said.

Right. And we can win a land war in Asia....

Follow That Lemming.....

From Bloomberg:

Goldman Sachs Chief Executive Officer Lloyd Blankfein told a New York conference yesterday that the largest U.S. securities firm by market value doesn't plan ``significant'' writedowns from subprime-mortgage securities. Bank of America said its losses will be restricted to $3 billion next quarter and UBS AG analyst Glenn Schorr said the potential for losses at Lehman Brothers Holdings Inc. is ``negligible.''

From the latest IMF report





I could be wrong and all of the problems in the financial sector could be front loaded. But with three years of resets out there (chart 1) and increasing delinquencies that undermine the underlying assumptions of most CDO structures (chart 2), I have a hard time believing that.

Your Daily Loan Loss Increase Post

From Bloomberg:

HSBC Holdings Plc, Europe's biggest bank by market value, said emerging-market lending lifted third- quarter profit, offsetting losses in U.S. mortgages that are spreading to credit-card and unsecured loans.

Shares of the London-based bank rose 3.7 percent after HSBC said in a trading statement that its securities unit has ``very little direct exposure to U.S. subprime mortgage-backed collateralized debt obligations.'' HSBC set aside $3.4 billion to cover U.S. defaults, $1.4 billion more than it forecast in July.

``Given that they have increased provisions by more than $1 billion, for them to say pretax profit in the third quarter is ahead is little short of amazing,'' said Alex Potter, a London- based analyst at Collins Stewart Plc who rates the shares ``buy.''

HSBC's consumer lending in the Middle East, Hong Kong and China are ``strongly ahead'' of last year, the bank said without providing specifics. That's helping Chairman Stephen Green counter a ``broader deterioration'' in U.S. housing and credit markets than he forecast four months ago. The bank said it will take a $55 million charge to close an additional 260 consumer finance branches in the U.S.

Let's look at the numbers here. According to the article, HSBC estimated their loan loss provision at $2 billion in July. Three months later, that increases by $1.4 billion -- that's a 70% increase in three months. Something really changed in three months regarding their estimates of the US market -- and none of the underlying reasons for that change are good. Either HSBC underestimated their loan loss in July (highly unlikely), or something fundamentally changed in the market over the last three months.

But right now it's time to bottom fish in the financial sector? Please.

A Closer Look At the Oil Market

From the WSJ:

Over the next few years, supplies are likely to be tight and demand is expected to keep rising. A security scare, cutoff in supply or shift in sentiment could send prices soaring again. But traders have begun taking into account other factors that could complicate the near-term outlook.

The International Energy Agency, the industrialized world's energy watchdog, said yesterday it was lowering its prediction for global demand growth for the fourth quarter, easing fears of a short-term supply crunch. Meanwhile, some officials at the Organization of Petroleum Exporting Countries have said it may consider raising its production ceiling next month.

Wall Street's speculators, who contributed to oil's 49% rise since the beginning of the year, have shifted direction this week. Yesterday marked the expiration of a key deadline in the crude-oil options markets. As it became clear that oil wouldn't hit $100 a barrel by the deadline, a chain reaction of selling ensued as traders unwound bets pegged to the risk of $100 oil.

In Riyadh, the de facto leader of OPEC, Saudi Arabian oil minister Ali Naimi, argued strenuously against "the pessimists," who he said have driven up prices by predicting supply shortages as demand in emerging markets soars.

Repeating a frequent lament of oil-industry officials, Mr. Naimi told reporters, "The price today has really no reflection whatsoever with the fundamentals" of supply and demand.

First, this analysis seems somewhat contradictory. The first paragraph contains a tacit admission of tight supplies and geo-political risk. However, the Saudi oil minister then states prices don't reflect the fundamentals. Frankly, the fundamentals to me look incredibly bullish. While I am sure there is understandable disagreement about the degree of the market tightness and political risk, the overall outlook for the energy sector still looks like a bull market to me -- especially with 2 billion more Indian and Chinese consumers coming online in a their respective growing economies.

That being said, let's look at the chart.



Yesterday, oil broke a short-term uptrend that started in early October. However, notice there are four technical areas of support along with the 50 day SMA. In other words, there are plenty of places for prices to consolidate without having the market turn into a bear market.

For the rally to continue, it is crucial for oil to maintain the second uptrend that started in late August. Eyeballing the chart, that looks to be about 86 or so.

In other words, before we start popping the champaign corks, let's wait and see what the market does over the next week or so.

A Closer Look At the Financial Sector

Today we saw a rally in financial shares.



But the fundamentals of this sector are still terrible. We've seen a ton of writedowns over the last few months (if memory serves, the total is nearing $50 billion). So what we're seeing here is bottom fishing. People are looking at the chart and thinking, "gee, that looks really cheap". But there are some serious problems with this.

1.) We don't know if the writedowns are over. And I seriously doubt they are.

2.) Just because something is cheap, doesn't mean its good. And again, right now, financials aren't good investments.

3.) Note the chart's technicals. Prices are still below the 200 day SMA by a wide margin, the SMAs are all moving lower and the shorter SMAs are below the longer SMAs. This is still a bearish chart in a big way.

Follow That Lemming.....

From the WSJ:

At the investor conference in New York, sponsored by Merrill Lynch & Co., Blankfein said Goldman, the world's most profitable investment bank, doesn't plan to take any significant writedowns on mortgage-related assets. Goldman shares rose 8.5 percent to $233.04 at 4 p.m. in New York Stock Exchange composite trading, and other financial stocks also climbed.

Everybody else has written down their debt holdings. But Goldman is immune. Color me impressed -- and in a case of thorough disbelief.

Today's Markets

What a difference a day makes.





Both the SPYs and QQQQs gapped higher at the open and than rallied for the rest of the day. Notice that the markets closed at high points on heavy volume. This indicates traders were buying into and at the close.





Both the daily SPYs and QQQQs show a strong rebound on decent volume.

OK -- now that the dust has settled, let's figure out why this happened.

1.) The market does not continually move in one direction forever. A rebound was bound to happen.

2.) Notice the financials increased 4.79% today. This on the same day Bank of America announced $3 billion in writedowns and Countrywide announced a 48% drop in mortgage underwriting from year ago levels. The bottom line is this sure looks like bottom fishing or the proverbial "technical bounce" to me, at least in this area of the market.

3.) In addition, Wal-Mart announced an 8% increase in earnings along with an optimistic outlook for holiday sales. Considering the street is pretty concerned about holiday sales, this was good news.

4.) Oil dropped 3% today. This jibed well with Wal-Mart's news of a better than expected Christmas season.

Basically we had a market that was short-term oversold plus some good news.

Henry "Strong Dollar" Paulson has Problems with, Well, the Dollar

From Bloomberg

As U.S. Treasury Secretary Henry Paulson prepares to meet counterparts representing the world's biggest economies, he carries some extra baggage on the plane to Africa.

It's the 13-year-old ``strong'' dollar mantra.

Paulson, like his four predecessors, has stuck with former Treasury chief Robert E. Rubin's phrase that a ``strong'' dollar is in the U.S. interest. Officials repeated the phrase whether the dollar was rising or falling. Now, Paulson is under pressure from European policy makers to more forcefully defend the currency after it fell to a record low last week.

``It's increasingly urgent that the U.S. bolsters its rhetorical position,'' said Ernest-Antoine Seilliere, president of BusinessEurope, the European Union's employers' federation. Paulson should avoid a ``collapse of the U.S. dollar,'' he said.

Here are the daily and weekly dollar charts, respectively:





Both these charts are classic bear market charts. Notice

1.) Prices have been moving consistently lower for some time. There is a two year bear market trend in place.

2.) All of the simple moving averages (SMAs) are moving lower

3.) The shorter SMAs are below the longer SMAs

4.) Prices are below the SMAs, which will pull the SMAs lower.

Gas Prices Still High and Other Consumer Pressures

From the WSJ:

The U.S. Department of Energy's top forecaster expects gasoline prices to climb an additional 20 cents a gallon by December and said prices could go still higher if OPEC doesn't increase production.

The estimate came as mixed signals on the intentions of the Organization of Petroleum Exporting Countries contributed to a drop in oil prices on futures markets. The drop, coming after several weeks of new oil-price highs, signals increasing volatility in oil markets as the price has approached $100 a barrel.

Yesterday, the national average retail price for a gallon of regular gasoline was $3.10, according to the AAA, formerly the American Automobile Association. Guy Caruso, who heads the department's Energy Information Administration, said the price of gasoline will continue to rise even if crude oil prices don't because the past jump in crude prices hasn't been fully passed on to gasoline consumers by oil refiners.

I'm not a big fan of economic forecasting. I'm more of a "try and discern the basic trend and then move on" kind of guy. It's no insult to forecasters; I just don't think a system as complex as the US economy can be shoved into a computer model and then predicted with any degree of accuracy.

However, this article does make a basic point that I think is incredibly relevant right now. It's mid-November. We're 2-3 weeks out from the official beginning of the Christmas shopping season. And gas prices are a lot higher then they were last year. Here is a chart from This Week in Petroleum.



Notice that gas prices are at least 80 cents higher this year than they were at the same time last year. That should cause some concern.

Here is a chart of oil for the few years. Notice that oil is about $30/bbl higher this year than last. That means that prices at the pump have a strong possibility of moving higher as Christmas gets closer.



Add to that:

For one thing, people's cost of living is soaring. Most households are suffering from a vicious combination of higher food and energy prices and the skyrocketing cost of health care.

Consumers' buying power has failed to keep pace with the rising cost of these essentials - and this includes the past year, when job creation was strong and the unemployment rate dipped to as low as 4.4%.

However, by October of this year, there were fewer people at work (as measured by the household survey) and only a jump in the number of people leaving the labor force kept the jobless rate steady at 4.7%.

To make matters worse, the value of people's two biggest assets, their homes and their investments, are falling. Many households have little or no savings to fall back on, having spent more than they have earned for at least the past two years.

As for borrowing, forget about it! The credit squeeze has made banks increasingly wary of lending money - not just to consumers, but to businesses as well.

I've counted out the US consumer before and found out the hard way that Americans love to shop and will do anything to keep on shopping. That just seems to be the way we are.

But, it's also important to note the general macro-environment this holiday season is the worst we've had in a long time. And that could make this season different.

Traders Are Moving into Safe Assets.

From Minyanville.

What I find most disturbing is the leadership being offered by stocks like Proctor and Gamble (PG), Coca Cola (KO) and Pepsi (PEP). These are great companies to be sure but also a clear indication that investors are losing their appetite for risk. Is a recession far off? I’ll leave that to the economists but market action is sure pointing in that direction.

According to Stockcharts Performance function, the best performing sectors over the last week are the consumer staples (-0.61%), Health Care (-1.1%) and Utilities (-2.78%). Here are the respective charts.

Consumer Staples



Health Care



Utilities



And here are some charts from the larger, safer companies.

J&J



McDonalds



Phillip Morris



P&G



Pepsi



When companies like these are market leaders, you know traders are getting concerned.

"It's Not Getting Any Smarter Out There"

I'm a huge Frank Zappa fan, and the title of this post is a direct quote from him. The reason for the quote is simple. Financials rose a little over 2% today.



The reason is "bottom fishing". I'm sure there are plenty of people out there who are thinking "I got a great bargain today."

Of course, there's a reason why financials are cheap right now. And it's not a good reason.

Today's Markets

The SPYs did OK today until right before the close. Then they broke through support on heavy volume. End of the day selling is an indication of trader's nervousness; they don't want to hold any positions overnight because they are concerned about the news that might come out between the market's close and the market's open. That also indicates they have a hair trigger; they are more prone to sell.



On the 5 day chart, note two things.

1.) We have had two days in a row with heavy, end-of-the-day selling.

2.) The market broke through the 145 level which was providing some short-term support.



The SPYs went further below the 200 day SMA level today -- never a good sign for the market.



The 5-day QQQQ chart shows a strong, three day downtrend in place. Also note we have had two days in a row with heavy, end-of-the-day selling.



The QQQQs are approaching the 200 day SMA, a key level of support.

Also note that previously mentioned high fliers also fell. Google, Apple, Research in Motion, Dry Ships, Intel were all down again today.

In other words, today furthered the damage done on Friday.

Like Lemmings Off a Cliff....

From Morningstar:

Embattled mortgage lender Countrywide Financial Corp. in a regulatory filing conceded that if its credit ratings fall below investment grade, its access to the public corporate-debt markets "could be severely limited."

Additionally, ratings agencies cutting its debt to junk status would lead to higher rates when the company renegotiates its financing arrangements beyond current maturity dates.

......

The three ratings agencies -- Moody's, Standard & Poor's and Fitch -- currently have investment-grade ratings on Countrywide, but they all have affixed the ratings with some form of negative outlook, Countrywide said. S&P and Fitch both rate Countrywide's long-term debt BBB+, while Moody's has a Baa3 rating. The cutoff for investment grade is considered a long-term rating of BBB- , or Baa3 from Moody's. Bonds rated below BBB- are considered junk.

As of Sept. 30, up to $5.5 billion of Countrywide's custodial deposit accounts on deposit with the bank could be affected if the credit rating fell into junk status, according to the filing.

When Countrywide made their latest earnings announcement, they said their problems for the quarter were the low point and the company would turn around. This despite the fact they announced 10,000+ in layoffs, a big increase in their loan loss reserves and a big writedown of their mortgage portfolio. The market cheered that announcement. The sheer gall it took for Countrywide to say their problems were the trough is simply amazing. What's more amazing is people bought it, especially in light of the current credit market environment.

Now we know the ratings agencies (whose own credibility is severely damaged right now) have Countrywide on negative credit watch. Raise your hand if you think Countrywide has seen the low point in their respective business cycle. For those of you who raised your hand, I've got some great investment opportunities in Florida real estate....

What Inflation?

From Morningstar:

Tyson Foods Inc. said Monday it swung to a fourth- quarter profit from a year ago, helped by cost cuts and operating profits in its chicken and beef businesses.

Still, Tyson shares slipped to a new 52-week low on a bleak forecast for fiscal 2008. The world's largest producer of chicken and beef warned it faces $300 million in increased grain costs for its chicken unit and "extremely difficult" conditions in its beef business.

Tyson should just suck it up. Their costs aren't core inflation measures so they don't count at all. What crybabies.

Week's Preview: Houston, We've Got a Problem

Going into this trading week I am deeply concerned about the markets. My posts from the weekend made the following points. To summarize:

1.) The long-term (5 year) trend is still intact for the SPY and QQQQs. However, the IWM's (Russell 2000) are in a technically precarious position. They are trading right at long-term (multi-year) year support. Assuming the Russell 2000 is a proxy for risk appetite this should cause concern because it indicates traders are moving away from riskier areas of the market. Also see this post regarding the Russell possibly breaking through support in a consolidation triangle.

2.) I've advanced the theory that the SPYs have printed a double top this year, with those double tops occurring at the same level as previous highs nine years ago. In addition, the SPYs are seriously beginning to look like they are in a bearish pattern of lower highs and lower lows. Considering the general economic backdrop of the US economy right now, further continuation of the lower high/lower low seem far more likely.

3.) Last week's 5-minute chart shows three consecutively bad days, with a high-volume sell-off at the end of trading on Friday.

4.) The transports have broken technical support.

Market breadth is negative across the board.

NYSE advance/decline



NYSE new highs/new lows



NASDAQ advance/decline



NASDAQ new highs/new lows



Now -- reference the NASDAQ advance/decline chart from above. A declining advance/decline line means fewer and fewer stocks are participating in the rally. Last week, we saw some of the market's high fliers break trend as well.

Google



Apple



Research In Motion



Intuitive Surgical



Bidu



Dry Ships



Amazon



Intel



New Oriental Education



In other words, the fewer and fewer stocks that were leading the markets higher took hits last week. Considering some traders probably have big profits in these stocks, they may want to book those profits in the face of market weakness.

The SPYs and QQQQs look terrible.



The SPYs are now below the 200 day simple moving average. Last week they sold-off on heavy volume.



The QQQQs - the market darlings for the last few months -- have broken their uptrend. They broke through three SMAs last week on heavy volume.

The bottom line is the technical picture is terrible at best.

1.) We had three days of negative trading ending in a high-volume sell-off,

2.) The SPYs are below their 200 day SMA,

3.) The QQQQs broke their uptrend,

4.) Breadth is negative across the board, and

5.) The market's fewer and fewer strong stocks all took hits last week that broke their uptrends.

6.) There is also the further complication of the CDO/mortgage issue. It's quite possible that before the week is over we'll see more write-down of mortgage portfolios.

On top of that, there is little technical reason for the markets to rally, except, "the markets have sold off so we should nibble at some shares," or in practical parlance, "the technical bounce".

This is not the week to go long on anything. In addition, I would not be surprised to see a further sell-off.

There are four saving graces this week.

1 and 2. PPI and CPI are released this week. I would expect the markets to rally on a good (low) number because that would indicate the Fed has room to lower rates. (Conversely, a spike in either of these numbers could lead to a sell-off because it would lower the possibility of a rate cut.)

3. On the good side (referencing the long-term charts), the SPYs could fall another approximately 5.5% and still maintain their long-term rally. With the QQQQs, that number is 5.6%. That margin gives traders a lot of leeway in making trading decisions.

4. The ever classic random event that no one can plan for.

Transports Break Support

For those who subscribe to Dow theory, this is a very bad sign for the market.

Last Week's Market Action

Here are the charts for the SPY, QQQQ and IWM. Commentary is below







Note the following.

1.) All three averages dropped hard on Wednesday and Thursday. The biggest loser in this sell-off was the QQQQ which was holding onto technical support around 53.5.

2.) All three averages gapped down on Friday.

3.) All three averages had heavy, end-of-day selling on Friday.

What does all of this tell us?

1.) The sell-off was not limited to a particular sector of the market. Assume the SPYs represent more established blue chip companies, the QQQQs represent technology and the IWMs represent small-cap, aggressive growth. Given this assumption traders sold positions in everything. This wasn't one company in a sector reporting bad news and then the sector selling off in sympathy with that report.

2.) The end-of-the day selling on a Friday indicates traders are very nervous about the markets; no one wanted to hold anything over the weekend. If that mentality has not changed then traders could be trigger happy going into the week.

3.) We had two consistent down days (Wednesday and Thursday) followed by a gap down on Friday with heavy end-of-the day selling. That gives us three days of bearish sentiment.

Short version: there is a ton of bearishness and nervousness going into this week.

We have two big news items this week: PPI on Wednesday and CPI on Thursday. These will be very important items because they directly influence Fed policy. A weak number will spur Fed rate cut assumptions and a strong number will do the opposite.