Archive for February, 2008

The Option Queen Newsletter for February 24, 2008

Sunday, February 24th, 2008

Here is the skinny on the stock market. The bullish view is that we test the lows of January and “V” bottom, and turning the tables on the bears and make a huge high volume run to the upside. The bears have a different take on the market believing that this is just a consolidation period before the next leg down in the market. This is what you need to take away from both sides is, that they both believe that January’s lows will be retested. So now that we have the direction of trade, strap on your skis and follow the money as it skis to the bottom of the hill. Check the landscape to see if the ledge is the bottom or it if it is simply a resting spot before you continue you trip to the bottom of the mountain. Now, that seems easy enough, and perhaps so easy that it can’t work. We will see won’t we! Just in case you have forgotten, this week is the end of the month so we will have some portfolio adjustments as is customary at the end of the month. This naturally, brings with it wild swings as portfolio managers attempt to “dress up” their reported holdings adding winners and removing losers.

The world has become much smaller and easier to access. We see a problem here in the USA and can translate the problem to another part of the world with a simple click on our computer. Where information used to take twenty minutes, it now is accomplished in seconds. The news of Castro’s resignation from office has impacted all sorts of investment ideas. Many of these investments are keyed to the expected removal of the economic embargo which the USA imposed on Cuba in the 60’s.

Many of the Wall Street Pros today aren’t old enough to remember the last real bear market. These Wall Street wizards have never seen that the removal of funds from mutual funds is a sure sign that the market is at a bottom. We respectfully remind these “bull babies” that in the mid 70’s there was a sort of mutual fund problem, it was called the “gunslinger” era which lead to a period of time when the public withdrew their investments from funds and further avoided mutual funds. Investor confidence slowly returned in the mid 80’s and finally bloomed in subsequent years.

We have been warning that inflation is here, and doing very well, thank you. We can not blame inflation on the price of energy alone. Look at the agricultural commodities, the softs and the metals all have rallied in recent times. It is interesting to note that the FOMC does see the inflation genie escaping from the bottle, but has opted to address the weakening economy rather than take a stand to compress the inflation problem. The effort is resulting in higher prices for necessities of life. The other unfortunate part of this puzzle is that incomes are not keeping pace with this increase in costs. Further complicating the mess is valuations on real-estate have been retreating. The consumer used the “old homestead” as the family ATM machine for years. They tapped this asset to pay bills, buy luxuries while funding the inflationary costs of living. This method of removing excess value from the house worked until the axe fell on the sub-prime market, forcing the value of real-estate lower and ARMS higher. This led the consumer into a bind that has fueled the economic slow-down, delinquencies on mortgage payments, and now, the default on credit card payments. We have been pointing this out for many months. Actually we have been concerned about the “old homestead ATM machine” for about a year and a half, warning our readers not to follow that path to pain.

We also have warned that this failure on the domestic front would bleed into the commercial market. We are beginning to see some of that come to be. Be careful with your money. Cash isn’t bad and doesn’t have to be spent. There are places in the investment world which will not feel as much pain as here on the home front. Europe is not an option, if we feel pain, here in the USA, they will feel pain. Look beyond, to countries that are doing well, and that are not at all dependent on the USA. Countries in Asia, India, Thailand, South Korea, Australia, Russia, and most of the Arab world are good places to look at. Remember also that they have different rules than we do. View each country on its own. Australia is much like the USA, while Russia is a bit scary unless you invest with the mob, then, after their cut, you will make money. Last week we described Russia as the Wild West with Al Capone ruling the ranch. Remember that the mob can do as it pleases and justify all results. China and Russia have a certain similarity. China is communist and Russia is ruled….well, they don’t admit it but we know better than that. When investing in China remember that after the Olympics, they will slow down their growth somewhat. On the other hand, improvements to Chinese infrastructure will aid in keeping labor costs low, as peasants make their way to factories, on newly built roadways to work on the cheap.

Monday: Fed Governor Kroszner speaks and Fed Governor Mishkin speaks.

Tuesday: January PPI is released at 8:30, S&P /Case-Shiller December home price index is released at 9:00, February consumer confidence is released at 10:00 and January equipment leasing and finance index is released at 10:00, and Fed Vice Chairman Kohn speaks.

Wednesday: Fed Chairman Bernanke speaks on the “Hill,” January durable goods are released at 8:30, January new home sales are released at 10:00 (look for this number to be better than expected as builders reduce costs just to clean up inventory) and NASDAQ short interest is released.

Thursday: 4th Quarter GDP is released at 8:30, personal income and consumption for January is released at 8:30, mutual fund sales and redemptions for January are released, and February Chicago PMI is released at 9:45 and Chairman Bernanke makes a repeat presentation on the “Hill.”

Friday: January personal income growth is released and Chicago purchasing managers report is released at 9:45, and February Michigan Sentiment is released.

The US Dollar index retreated in the Friday session opening the door to the uptrend line at 75.15. Under that level, we do have some support at 75.02 and, of course, at the old low of 74.65. All the indicators that we follow herein continue to uniformly issue a sell-signal. We are approaching oversold levels but there doesn’t look like a bounce is nearby as yet. The 5-period moving average is at 75.98. The top of the Bollinger band is at 77.124 and the lower edge is seen at 75.017. We do have an 8-count as of the Friday session which indicates that we are getting oversold enough to usher in a bounce, of sorts. We believe with the Fed on ease and wearing blinders regarding inflation that the US Dollar will probably test the lows again. There was a comment in the FOMC minutes which gave us a glimmer of hope that these highly educated and experienced people did see inflation. There was a statement to the effect that should inflation appear to be a problem that the FOMC will move quickly to reverse its position on interest rates. It seems as though many people missed that part of the minutes. All the indicators on the weekly chart are uniformly pointing lower confirming the findings of the daily chart. The uptrend line at 75.15 remains a pillar of support even on the weekly chart. The monthly chart does give a glimmer of hope for the US Dollar index. All the indicators are pointing higher…..well, sort of. We continue to remain in a downtrend and until and unless we change course, the best we can hope for is a consolidation at these levels.

The Euro is on track to challenge the much anticipated 150.00 level. Much as $100 oil was anticipated so is 150 Euros. We continue to believe that Europe is in a slowdown much as the USA is in a slowdown. The chart however, tells us that 150 is in the cards. The stochastic indicator is getting overbought but continues to point higher. The RSI is sort of bending higher and approaching overbought levels. The Thomas DeMark Exert indicator is curling over and has issued a sell-signal. Our own indicator is curling over to the downside and will, within a day or so, issue a sell-signal. The 5-period moving average is at 147.424. The top of the Bollinger band is at 149.319 and the lower edge is seen at 144.354. The chart shows signs of exhaustion. The weekly chart shows that the stochastic indicator, the Thomas DeMark Expert indicator, the RSI and our own indicator are all issuing a continued buy-signal. That is unanimous for the indicators! The monthly chart is exhausted and overbought. The indicators are, for the most part, at overbought levels and turning to the downside.

The Canadian Dollar is coiling, forming a triangle, forming a pennant. We are consolidating and going sideways in a tight range. We did have a 13 count in the Wednesday session and it would not be unlikely for the Canadian Dollar to retreat. The indicators verify that finding and are all issuing a sell-signal. The 5-period moving average is at 98.66. The top of the Bollinger band is at 100.97 and the lower edge is seen at 98.09. Notice also, that the Bollinger bands are becoming very narrow. This confirms the triangle, pennant, coil information gleaned from the chart. We believe that the market will break out of its range. On the weekly chart only the Thomas DeMark Expert indicator is pointing higher. The stochastic, while not negative is also not positive and is going sideways. Our own indicator and the RSI are issuing a continued sell-signal. The indicators are as confused as the chart. From the weekly chart; we would sell should the market take the Canadian Dollar below 96.40 on a closing basis. The monthly chart supports the findings of the weekly and daily charts.

The British Pound Sterling needs to close above 197.00 to open the door to 198.92. All the indicators that we follow herein are issuing a uniform buy-signal. The 5-period moving average is at 195.31. The top of the Bollinger band is at 199.14 and the lower edge is seen at 193.16. The weekly chart tells us that so long as we don’t remove 193.30, on a closing basis, we seem to be making a bottom. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. Unfortunately for the bulls, the monthly chart continues to point lower, we will see.

The S&P 500 looked as though it was going to break out of the consolidation pattern in the Friday session but in the last forty five minutes of trading, zap back into the range with a dramatic turn-a-round taking the index from a minus 19 to a positive 8.5. The stochastic indicator, the RSI and our own indicator are all issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period moving average is at 1353.64. The top of the Bollinger band is at 1386.74 and the lower edge is seen at 1320.41. The weekly chart shows the triangle lives! The Thomas DeMark Expert indicator is issuing a buy-signal on the weekly chart. The stochastic indicator, our own indicator and the RSI are all flat…going nowhere. The monthly chart is sad and continues to point lower. We will break out of the triangle perhaps by the Friday session, after all, it is the end of the month and wild things happen at this time. Should we remove the January low, we will open the door to the low of 1231.00 seen in July of 2006 and 1229.20 seen in June of 2006. Many in the media have trotted out gurus most of which have declared that the market is “cheap” and at a bottom. Many have told us to buy. There are a few, most of who are boomers as we are, that understand that this may not be a bottom nor is the market cheap. With earnings on the decline, how can one view the market as cheap. With the economy possibly in recession already and growth definitely slowing how is the market cheap? With inflation flirting with weekly highs, and costs going thru the roof, how is this market cheap?

The NASDAQ 100 is trading in a narrow range between 1832 and 1738. We did cut off the upper edge and lower edge. Had we used the upper edge the number would be 1876.75 and the lower edge would be 1713. The stochastic indicator is issuing a buy-signal. Our own indicator is curling over to the upside but has not issued a buy-signal. The RSI is going sideways…no signal. The Thomas DeMark Expert indicator is issuing the same none signal as the RSI is. The 5-period moving average is at 1789.65. The top of the Bollinger band is at 1853.08 and the lower edge is seen at 1745.41. When reviewing the weekly chart you see the pennant formation. We did have an expansion to the downside in this week’s trading. The uptrend line is at 1738.15 for this coming Friday. It should be interesting to watch which way the trend breaks on Friday. The monthly chart is pointing lower.

The Russell 2000 chart did follow the remarkable turn-a-round seen in the other indices but fail to get positive in the Friday session. It is most important for the Russell 2000 to stay above 682.60 a level seen in the Friday session. All the indicators that we follow herein are pointing lower however; the stochastic indicator and our own indicator are curling to the upside. The 5-period moving average is at 704.50. The top of the Bollinger band is at 726.17 and the lower edge is seen at 687.50. When we view the weekly chart we notice that we are consolidating within a downtrend. In other words, the lows are getting lower and the highs are getting lower, but not dramatically so. The Thomas DeMark Expert indicator is issuing a continued buy-signal. Our own indicator and the stochastic indicator are pointing lower. The RSI is just going sideways. We need to keep a close eye on this index which has been leading its larger cap brothers lower.

The Continuous Commodity Index continued its venture into untested territory in the Friday session and printed a new life-of-contract high. We have a 10-count in this market. All the indicators that we follow are flat….going nowhere fast all but the Thomas DeMark Expert indicator are at overbought levels. There is nothing outrageous about this continuing uptrend. It is slow and steady to the upside. The 5-period moving average is at 538.74. The top of the Bollinger band is at 547.43 and the lower edge is seen at 487.28. This past week’s rally is seen as a huge green candle on the weekly chart. The indicators are pointing higher, except the trendless Thomas DeMark Expert indicator. There is no overhead supply, nothing but thin air overhead as many commodities in this index head for new life-of-contract highs.

May cocoa ran in the Friday session rallying to 25.75 where it found some sellers. The market closed the session at 25.53. We seem to be setting up for a run to the old high of 25.87 seen on February 15th of this year. All the indicators that we follow herein are issuing a buy-signal, all! The 5-period moving average is at 25.05. The top of the Bollinger band is at 25.88 and the lower edge is seen at 22.16. The weekly chart is overbought and we see the Thomas DeMark Expert indicator and our own indicator both issuing a sell-signal. The stochastic indicator is overbought a looks as though it will also issue a sell-signal but not just yet. The RSI is overbought and going sideways with a very slight upside tilt to it. We believe that should the market fail to make a new high, it will retreat and fall to 24.26. Should the market close below that level and not make a new high prior to that fall, we believe that the market will retreat to 23.76 at a minimum.

Sugar has been on an upside tear taking it to 14.56 before profit takers stepped in. Friday’s session completed the sell-set up which was at 14.12. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal. The Thomas DeMark Expert indicator is going sideways at neutral. The 5-period moving average is at 14.10. The top of the Bollinger band is at 14.41 and the lower edge is seen at 11.85. We have signs of exhaustion on the weekly chart. The stochastic indicator, our own indicator and the RSI are all overbought and appear to be going sideways. The Thomas DeMark Expert indicator is flat at neutral. May sugar is even overbought on the monthly chart. People are looking at the possible lifting of embargo’s on Cuban products in the near future. As you know, Cuba was a source of sugar cane production and this island did, in the past, produce a lot of sugar. Perhaps, this new supply will apply some pricing pressures to sugar. We are not sure how this will play out.

Did you see May coffee? New life-of-contract highs were seen in the Friday session. True, coffee has been higher historically but for this expiry it was a life-of-contract high. The stochastic indicator is issuing a fresh sell-signal. Our own indicator is flat at overbought levels. The RSI has a slight tilt to the upside but is extremely overbought. The Thomas DeMark Expert indicator is overbought but going sideways.

The newsletter will be very short this week due to a personal emergency in the family.