Midday Update: No Buyers Ahead of Holiday Weekend

The market opened on a weak note and has stayed that way all morning. Down volume is running about 84% of total volume on the NYSE so far. So there does not seem to be many buyes around ahead of the long weekend.

I was saying all last week that I wanted to sit on the cash I had recently raised until we got a pullback, which I felt was overdue. That pullback showed up big-time this week. The S&P 500 is currently off -4.5% from its Monday highs. That's about as much of a pullback as I was looking for. At the time, I thought something in the 3-5% range could be in the cards.

Also, the S&P is right about at its 50-day average, where the market could find some support. I am reviewing my buy list, and will look to put some money to work either toward today's close or on Monday.

The hard part is figuring out where to add exposure. I think energy and materials need to pull back more, and probably the same for tech. So I will look for select names that have already pulled back, as well as areas where I recently took profits to add back to (steel, ag, nat gas).

Oil has given back most of its early gains today, which is a good sign. Yesterday's high volume reversal still looks like a short-term top to me.

The dollar remains weak today vs. the Yen and Euro. And the 10-year yield is falling 9 bps to 3.83%. The VIX is really spiking, up +9.3% today alone, and +23% for the week. The ARMS Index just hit 2.31, as the selling pressure increases.

Is Oil A Bubble? (Part One)

Oil is now front and center on everyone's radar. CNBC is running a special tonight about oil, and has a banner running across their ticker titled "America's Oil Crisis". Congress is looking for scapegoats to blame for high oil prices, and is hauling in oil executives to testify, and propsing stupid ideas like a windfall profits tax.

Funny, look at the first chart below of wheat (and the chart for corn looks identical). Looks like wheat and corn have had parabolic moves higher, but I haven't heard any talk of windfall profit taxes on the farmers. Rather, Congress is trying to pass further subsidies for the farmers, who are arguably in the best position of any industry in the country.


The next 2 charts show the extreme, straight up moves in other commodities. I have included lead and nickel, but there are several that fit the bill. What I am highlighting is that these parabolic moves higher are never sustainable. And when they eventually run out of steam, they usually succumb to large corrections.

Given what we have seen in many of the other commodities, take a look at the chart below for oil. Look similar? If I showed you the charts for all of the other commodities, a logical conclusion would be that the trajectory of the upward moves was unsustainable, and susceptible to a sharp pullback.

But for oil, for some reason, people think that the recent high prices are a sure signal that $150 and then $200 are right around the corner. Now I want to be the first to say that I have no idea how high oil will go. To be honest, I am surprised it ever reached $135.

But unlike stocks, which can shoot to the moon, high oil is self-defeating. As prices skyrocket, it slows economic activity and can bring some forms of transportation to a halt (just look at the news from AMR that it is cancelling flights, and Ford is curtailing production on some of its gas guzzling vehicles). That, in and of itself, would cause a correction in the price of oil (as demand trails off).

The chart below is from the good folks at Bespoke. It shows the relationship of the current oil bubble to the last 2 big bubbles in tech stocks and then the housing market. This week, the rise in oil eclipsed the mammoth rise in tech stocks in the late 90s. Pretty incredible, huh?

And we know what the end result of those 2 bubbles were, right? They both ended very badly, especially for folks who got sucked in anywhere near the top. Which brings me to the million dollar question: where is the top?

No one knows for sure where the top is, and those that tell you they do are simply lying. If you had bailed on tech stocks in 1998, you missed quite a move higher still. If you sold your house in 2004, you left a lot of money on the table. So my hunch is that I want to remain long oil/energy names, although I do not want to chase the recent move higher.

That said, when this bubble bursts, most people won't believe it and will continue to buy on the way down. But history tells us that we should look for those signals as a reason to lock in profits for good, and then simply move to the sidelines.

Tomorrow in Part 2, I will delve into who is really to blame for high oil prices (hint: its not the oil companies)

Bond Yields Move Higher After Jobless Claims Fall

Jobless claims fall by 9,000 for the week, and came in at 365k, which is below expectations. These levels are still below those normally associated with recessions, and the 10-year yield is spiking higher as a result.

The 10-yr yield is up a full 12 bps to 3.95%. If it closes up here, it would be the highest close so far this year. I continue to think that the 10-year yield reflects that the economy is not in recession. Additionally, ace economist Ed Hyman was on CNBC earlier this week and said that he doesn't see the U.S. in recession either.

The brokers are weak this morning after more downgrades from analyst Dick Bove, as well as news that UBS plans to raise some $15 billion in capital.

Asian markets were mostly lower overnight; the dollar is higher vs. the Yen and Euro today; and oil is lower after touching $135. It is currently trading near $132. The world seems micro-focused on oil right now, and I think that the recent price rise is both unsustainable and entering bubble territory. I will try to post more thoughts on this later.

Late Day Market Selloff Accelerates After FOMC Minutes Released

Every headline in the media will likely say that the cause of today's selloff was the release of the FOMC minutes, where the Fed basically said that they see no more rate cuts in the cards, inflation is creeping higher, and GDP growth will likely be slower.

But these aren't really new revelations. We already knew this. There is a saying in the market that the 'news breaks with the cycle'. I have been saying for over a week that the market was due for a correction, and that I was waiting before putting any cash to work.

So today, the market was already setup to add to yesterday's downside move. The release of the FOMC minutes was just news, but the market was already moving down and would have likely declined today regardless of what the news was.

The S&P 500 has now declined roughly -3.5% from Monday's intraday highs. I am not looking for more than a 3-5% correction right here, so we are getting in the range where I will be looking to put some of my cash to work.

The sentiment indicators spiked higher today, which is a good sign. I would be more worried about this selloff if it was greeted with a yawn by investors. But this does not appear to be the case. Here is a quick look at today's levels:

• The ARMS Index closed very high at 1.94
• The CBOE put/call also closed high at 1.17
• The ISEE call/put was fairly low at 115
• The VIX spiked another +5.8% to 18.6

The big wildcard is obviously oil. Oil is in a full blown bubble, no doubt about it. The surprising reaction today was that even the energy stocks all closed lower despite the record spike in oil. So no one is winning with oil this high, except for the oil speculators themselves.

FOMC Minutes Show Continued Concern On The Part of the Fed

Here are the highlights from the just released minutes of the most recent FOMC meeting:

• Fed says cuts '08 GDP forecast to +0.3-1.2% from +1.3-2%
• Fed says they expect U.S. GDP to contract slightly in 1st half 2008, recover in 2nd half
• Fed says food, energy prices to keep boosting overall inflation
• Fed says core inflation improvement probably temporary
• Fed says that most members viewed growth risk still to 'downside'
• Fed says unemployment to rise in 2008 and 'stay elevated' in 2009
• Fed says sees no sign of bottoming out in housing activity or home price declines
• Fed expects growth rebound in 2008 second half
• Fed says housing 'bleak,' consumer spending 'slowed to a crawl'
• Fed says 'most' Fed officials viewed April rate cut as 'close call'
• FOMC minutes signal no more rate cuts even if economy contracts

Oil Tops $130, Airlines Get Hurt

Inventories of crude oil fell for the week, which pushed oil prices further into record territory above $130. The airline index is getting crushed, down -5.5% after AMR announced it is cutting its 2008 domestic capacity by 11-12%.

The company said the airline industry is not build to withstand oil prices at $125 per barrel. First off, I don't remember any of these guys doing such a great job operating their businesses even when oil was at $25. Second, since fuel costs are one of their biggest inputs, shouldn't these guys have sophisticated hedging programs on to reduce the risk of a big spike in oil?

There were a few more earnings reports last night (INTU, ADI, BJ), which actually came in better than expected. But most of the stocks are lower this morning.

Financials are weak again, and the major indexes were briefly higher after the open but have since slipped into negative territory.

Asian markets were mixed overnight, while the dollar is down again vs. the Yen and Euro; the 10-year yield is back up to 3.80%.

On the plus side, the put/call ratio closed at 1.10 yesterday, and has again opened at a high level of 1.26. So at least traders aren't taking these declines lightly. The ARMS Index just hit a high level of 1.64. My gut tells me this pullback might not amount to much more than a 2-3% wiggle.

The Energizer Oil Bunny

I can't remember the last time oil was down. Well, that's an exaggeration, but the relentless ascent that has taken oil to $129 this morning has been astounding. You can see why no one wants to short oil.

The energy stocks are again higher, while the rest of the market is sharply lower. Financials are weak after AIG said it plans to raise a total of $20 billion, and the brokers saw more earnings estimates cuts this morning.

The semis are also weak, following the cautious comments yesterday from SNDK's management. Retailers are also lower after a weak earnings report from Home Depot (HD). Drug stocks and biotechs are bucking the early weakness so far.

The core PPI rose +0.4%, above expectations; Asian markets were lower across the board overnight; the dollar is down vs. the Yen and Euro; gold is back above $900; the 10-year yield is lower at 3.80%.

I have commented recently about the low put/call ratios and declining volatility index, but this morning they are flashing renewed signs of investor angst. The put/call is very high at 1.28, while the VIX is +6.3% higher to 18. Let's see if this helps keep this selloff from getting out of hand.

Market Wrap: Stocks Reverse Early Gains, Close Lower

The market gave up all of its early gains, after waves of profit taking knocked stocks from their highs. It looked like profit taking started in the dry bulk shipping names, then rolled over to hit the ag stocks also. And comments from SanDisk (SNDK) out of a tech conference led to selling in all the tech stocks late in the day as well.

The 2 most important charts for today to me look like the S&P 500 chart and the Dow Transportation Index chart.

The S&P 500 broke through its overhead 200-day moving average this morning, but that move proved unsustainable. This often happens the first time a stock or index test major overhead resistance. It also often marks a natural area for that stock or index to take a little breather. I have been looking for stocks to take a little rest here, and today's action looks like one could be at hand.

But the most surprising chart to me is that of the Dow Transports (TRAN). This index contains all of the railroads, truckers, and shipping stocks that are often the most economically sensitive. This index has also been very sensitive to rises in the price of oil over the years, as fuel costs are the major input costs for most transportation companies.

So it was very surprising to see the continued rise in the transport stocks, in the face of rising oil prices. Today, oil continue to move higher into record territory. But guess what? So did the transport index. The chart shows how the index today made a new high, surpassing the former highs set back in July 2007.

On the surface, this is a very bullish indicator for the strength in the economy as we emerge from this period of weakness. These stocks are looking past the valley, and saying that economic growth will be okay, and that the global economy will continue to hum along next year.

This is a longer-term bullish sign. In the short term, I continue to worry just a bit about the low VIX, which hit lows not seen since last July before reversing much higher. The put/call ratio also opened at very low levels. This makes me think a little shakeout might be in order, just to keep the newly minted bulls on their toes.

Monday Morning Musings

The market is once again higher this morning, and must be giving fits to the bears as well as those looking for a pullback to put money to work.

And there was not a whole lot of news to get things going this morning. The leading indicators report came out a touch better than expected, which is good for the economic outlook. And Microsoft (MSFT) said it is still talking with Yahoo (YHOO), but about some other form of business alternative as opposed to a full acquisition.

Also, Lowes (LOW) reported better than expected earnings, but the stock is lower after the company issued a cautious outlook.

Asian markets were mostly higher overnight, while the Yen is lower today; oil is higher again, near $126.67; and the 10-year yield is roughly flat at 3.85%.

In another sign that complacency is creeping in to the market, the put/call ratio opened this morning at the low level of 0.51. This, combined with a multi-month low in the VIX still has me cautious at this market juncture. Sometimes patience is difficult, but I still think a much better buying opportunity is still ahead of us.

Weekly Wrap

Here is a look at Briefing.com's Weekly Recap:

Oil prices came within a hair of $128 this week, industrial production was reported to have declined 0.7% in April, Moody's expressed new concerns about the financial strength of the bond insurers, Fed Chairman Bernanke said conditions in the financial markets are still far from normal, Wal-Mart's guidance for the current quarter was conservative and the stock market... well, the stock market gained 2.5%.

It was another example this week of the marked improvement in sentiment since the bailout of Bear Stearns in mid-March. While bad news was attended to, it was the good news - and the thought of good news - that carried the market this week.

On this note, it wasn't lost on participants that the effects of the fiscal stimulus are starting to kick in with the arrival of tax rebate checks. Additionally, it's starting to register that this is just about the time the first of the Fed's rate cuts should start to impact the real economy. Since last September the Fed, in a series of eight rate cuts, has knocked 325 basis points off the fed funds rate.

These pleasing considerations helped mitigate the effects of bad news and placed a higher premium on relatively good news such as retail sales, weekly initial claims, the consumer price index and April housing starts all being better than expected.

The retail sales report was arguably the most pleasant surprise in this week's economic reports. On Tuesday the Department of Commerce reported retail sales rose 0.5% in April, excluding autos. The better news, though, was that retail sales were up about 0.6%, excluding autos and gasoline. This positive number suggests there is still a decent underlying trend in consumer spending despite the macro headwinds.

If not the most pleasant surprise, the report that housing starts rose 8.2% in April to an annualized rate of 1.032 million units may have been the biggest surprise. Granted that increase was driven by starts on multi-unit dwellings, yet the April number was almost exactly equal to the average level of 1.031 million for the prior four months.

This doesn't mean the housing recession is over, but it does provide some hope that stability is returning to the housing market such that residential construction won't be near the drag on GDP growth that it has been in past quarters.

The industrial production report, admittedly, wasn't good news from an economic standpoint and both the Empire State Index and Philadelphia Fed Index showed negative readings that signaled a contraction in manufacturing activity in those respective regions. Strikingly, though, the business outlook component for those regional manufacturing surveys was in positive territory and comfortably above the prior month's level, which reflects a more favorable view of the outlook for the economy.

Earnings news this week slowed noticeably from prior weeks, but like past weeks, the majority of reports were better than expected. Dow component Hewlett-Packard (HPQ), which announced an acquisition of Electronic Data Systems (EDS) for $13.9 billion, also reported preliminary fiscal second quarter results that topped consensus estimates.

Separately, Freddie Mac (FRE) reported a sizable first quarter loss, yet its loss wasn't as great as feared and its stock rallied as a result, gaining 9% the day of the report.

Numerous retailers also beat quarterly expectations. Wal-Mart (WMT) was one of them, but its conservative guidance and the understanding that its stock had gained approximately 15% in the two months leading up to its report, left the stock pretty much flat for the week.

In other corporate developments, Carl Icahn made proxy fight waves for Yahoo! (YHOO) while General Electric (GE) said it is reviewing strategic options for its appliance business.

Friday's session, which included an options expiration, marked a fitting end to the week. Stocks sold off early on profit-taking activity, with the S&P 500 dropping 9 points, or 0.7%, before mounting an afternoon recovery that left it with a slight gain at the closing bell.

Into The Stretch: Stocks Resilient Again Despite Record Oil Prices

This market has shown amazing resilience in its ability to shake off declines this week, and continue to rise despite oil making record highs.

The S&P has made up all of its earlier losses, and the Nazz is trying to make it 5 straight up days in a row.

Oil and gold are still up, while the dollar is down. The 10-year yield has bounced some, and is currently 3.85%.

The put/call ratio is around average at 0.91, and has been slightly low all week. This is one the the concerns I sighted for a market that looks like it might need a little breather. Also, the VIX is back down to 16.50, a level that marks a fair amount of complacency has crept back into the market.

Offsetting this is what I beleive to be a lot of investors with too much cash on the sideline, and looking to use any little pullback to get more invested. Also, there are a lot of shorts who probably begin to salivate with each small decline, only to become disheartened and cover when the market fails to follow-through and rebounds higher.

Tough market.

Consumer Sentiment Still Depressed

The Univ of Michigan consumer sentiment survey came in below expectations this morning, and at 59.5 it was the lowest reading since 1980. Are things really that bad? Or are consumers taking their cue from the doom and gloom media who love to prop up the negativity bubble?

The market is trading lower, but a pullback is well overdue given the relentless advance stocks have enjoyed lately.

Oil is the big mover this morning, topping $127 for the first time. This has all the energy stocks trading higher, while the financials and retailers are lower. Tech is mixed.

Asian markets were mostly higher overnight; the dollar is lower vs. the Yen and the Euro, and dollar weakness is helping both oil and gold trade higher; bond yields are lower, with the 10-year yield down to 3.79%.

I think that this week's upside move was also exacerbated a bit by option expiration, which occurs today. If too many traders were leaning short, this can result on upward pressure on stocks to adjust exposure ahead of expiration. It will be interesting to see how the market holds up next week, and if it experiences the options "expiration hangover" that we used to see from time to time.

Market Wrap: Nazz Breaks Above 200-day Average

The market powered higher again today, showing both surprising resilience as well as outright strength. Even oil, which reversed lower midday, quickly turned tail and rallied back to even. Nearly every sector saw gains today.

What the charts above have in common is that all 3 of these major indexes have now broken above their 200-day moving averages. It may take some time, but once the 50-day averages can get back above the 200-day lines, it will confirm the bull market is back.

I still did not put any new money to work today, choosing not to chase the strength. Two things that continue to give me pause are the low put/call ratio (0.87) and the plunging volatility index (16.30). These indicate a few too many bulls have entered the picture, and I would prefer to wait for a little shakeout before putting my cash to work.

Economic Data Comes In Fairly Sluggish; Oil Up Again

There were several economic reports that came in this morning, but nothing really stood out. They were all fairly sluggish, and didn't seem to have much impact on the market.

GE announced that they are putting their appliance business up for sale. I think this is a good move, although in this environment there are probably not that many buyers. It would probably be a good fit for a foreign company, who would get a good buy in terms of the weakness of the dollar making the purchase price cheaper.

Asian markets were mostly higher overnight; the dollar is lower vs. the Yen and the Euro; gold and oil are higher, with oil topping $125 again; the 10-year yield is down a bit to 3.89%.

The market reversed lower yesterday in the last hour of trading. It looked to me like profit taking set in. When the tech stocks like AAPL, GOOG, and RIMM rolled over, it pretty much took the whole market down with it. I continue to think that the market needs a bit of a rest after the big rally since March, but it keeps stair-stepping higher.

long AAPL, GOOG

Doug Kass and the Negativity Bubble

Today on RealMoney.com, Doug Kass posted that the negativity bubble has burst, and thus a correction is at hand. He cited the Investor's Intelligence numbers as one aspect.

Here was my response:

As a resident proponent of the 'negativity bubble', I feel compelled to respond to Doug's earlier post. I would expect Doug to say it has burst at the first signs of bearishness lifting, but he is looking at a very short time frame.

The bull/bear spread in the II survey is up to +16, which may be the highest level since January, but it is still far, far below October's levels of +42. Ditto for the Market Vane bulls, which are back to 55%, but still well off last October's level of 69%.

I could also make the same argument for the put/call ratios. They are not as bearish as they were in March, but still not close to levels associated with outright bullishness. But beyond that, let's look at the big picture:

There is a record $1.2 trillion in retail money market accounts, an all-time record. That money mountain is so scared to move off the sidelines, that it is willing to accept paltry 2% returns just to remain safe. There also remains record levels of short interest on the NYSE; record inflows into absolute return/low-correlation type strategies; and consumer sentiment is at multi-decade lows.

And what about the bears' prediction of a nasty recession? With each datapoint, it seems the odds of an official recession continue to drop. So I will concede that sentiment has moved more towards the 'neutral' camp, and that a pullback would be a normal result of this. But don't expect the negativity bubble to burst until stocks move meaningfully higer and drag money in off the sidelines, kicking and screaming.

Market Cheers CPI Inflation Report

The market opened on a weak note yesterday, and then reversed all of its losses into the close. Today, the market has opened on a strong note. So I am wondering if we can maintain this into the close, or if the early gains might fade?

Investors cheered the CPI report before the bell, which showed that the CPI rose +0.2% (vs. +0.3% consensus), and the core CPI (ex- food and energy) rose just +0.1%. High inflation is usually bad for stocks, so this report that shows that maybe inflation is moderating is a big positive for stocks. Of course, it doesn't help that food costs rose the most since 1990, but is that sustainable?

Oil is trading a bit lower after the Dept. of Energy said that crude inventories rose, albeit by a smaller amount than forecast. Oil is still trading near $125. And with oil this high, solar stocks look increasingly attractive.

Deere (DE) and Whole Foods (WFMI) are trading lower after missing earnings estimates, while Freddie Mac (FRE) is trading higher after topping expectations.

Asian markets were mostly higher overnight, and the Yen is lower vs. the dollar for the 3rd day. The 10-year yield is steady at 3.90%, after a big day yesterday. And the VIX is another -3.3% lower at 17.40. With volatility this low, its probably not a bad idea to buy some puts for protection, if you're so inclined.

Metro Home Sales Report Shows Big Drops in California Real Estate

The NAR metropolitan home sales report for Q1 came out this morning, and showed some nasty declines. For the most part, falling home prices accelerated sharply in the first quarter, with California getting hit particularly hard.

Overall, for the U.S. as a whole, Q1 home prices fell -7.7% from year ago levels. But as California had held up better than most markets for a while, those cities now look like they are playing catch-up on the downside.

Here are some of the cities showing the largest declines:

• -29.2%: Sacramento, CA
• -27.7%: Riverside/San Bernadino, CA
• -22.9%: San Diego, CA
• -22.2%: Sarasota, FL
• -21.3%: Los Angeles, CA
• -20.7%: Grand Rapids, MI
• -20.2%: Las Vegas
• -18.5%: Memphis, TN
• -17.2%: Miami, FL
• -17.0%: Ft. Myers, FL
• -16.9%: Cleveland, OH (Go Cavs!)
• -15.4: Phoenix, AZ

There were few cities showing big increases, but here are a few showing gains:

• +11.8%: Binghamton, NY
• +10.4%: Peoria, IL
• +10.1%: Spartanburg, SC
• +9.0%: Yakima, WA
• +6.3%: Farmington, NM
• +3.5%: Salt Lake City, UT

And here are how some other notable large cities are faring:

• -13.1%: Washington, DC
• -9.6%: Atlanta, GA
• -7.8%: Boston, MA
• -6.6%: Chicago, IL
• -6.1%: San Francisco, CA
• -3.9%: New York, NY
• -2.1%: Dallas, TX

While I think that the pace of the declines has seen its worst levels, I still do not have the sense that real estate markets overall have bottomed. I think the fact that credit remains hard to obtain has made the pool of buyers permanently lower. I also think there are many sellers that remain unwilling to lower their prices.

Unlike stock markets, real estate markets often form long and shallow bottoms that take years to take shape. As such, I think it will be many years before we see the highs in residential real estate values that peaked around 2006.

Retail Sales Stronger Than Expected

The market had a nice bounce yesterday, although it came on very low volume. This morning, despite a strong retail sales report, the market is giving back some of yesterday's gains.

April retail sales rose +0.5%, excluding autos, vs. expectations of +0.2%. This is a pretty good sign for the consumer, and doesn't even include the rebate checks that are coming out. And Wal-Mart (WMT) topped earnings expectations, so it isn't just the luxury items that seeing buying.

Bernanke spoke this morning, and didn't really have much new to say. But he did say that the credit markets are not yet back to normal, and that the Fed is ready to increase its Term Auction Facilities as needed.

Asian markets were mostly higher overnight, except for China following the earthquake. The dollar is up vs. the Yen and the Euro. And oil is slightly higher again, back near $125. Bond yields are higher also, with the 10-year up to 3.85%.

The NAR metropolitan home sales report came out this am, which shows strength and weakness by region. I'll be back later with a follow-up of that report.