DAILY ETF WRAP-UP by Will Swarts

Published June 12, 2009 – Smart Money

Market Wrap-Up

Stocks ended Friday nearly flat for the week, as a computer glitch halted trading on about 200 names in a sideways session. Commodity prices retreated, knocking back key stocks, as consumer sentiment came in weak. The Dow Jones Industrial Average rose 28 points to close at 8799. For a complete rundown of Friday’s trading session see ourmarket story.

Winners

As crude closed above $72 a barrel this week, the United States Oil fund (USO: 39.43, -0.25, -0.63%) rallied 5.6%. Despite a Friday knock, the SPDR S&P Metals & Miningfund (XME: 41.99, -1.01, -2.34%) rose 5.2% for the week as commodity prices picked up world-wide.

Losers

Worries that semiconductor prices were outpacing demand knocked the chip-heavy iShares MSCI Taiwan fund (EWT:10.15, -0.26, -2.49%) back 2.4% for the week. Despite a strong Friday rally, the Vanguard REIT fund (VNQ: 33.72,+1.18, +3.62%) finished the week down 2.0% on concerns about rising interest rates affecting commercial mortgage financing.

This Week’s Industry News

Earnings Note
Bidding for Barclays (BCS: 19.27, -0.63, -3.16%) appeared to end Friday with New York-based asset managerBlackRock (BLK: 176.56, -6.04, -3.30%) usurping private-equity fund CVC Capital Partners with a $13.5 billion offer for the Barclays Global Investors business. Barclay’s previously signed a $4.4 billion deal for its iShares ETF business with CVC.

Launching Pad
WisdomTree announced plans for a trio of actively managed ETFs pending approval of the Securities and Exchange Commission. The WisdomTree Real Return fund, the WisdomTree Managed Futures fund and the WisdomTree Long-Short fund are designed to use hedge-fund-like investment strategies pinned to underlying instruments. The filing did not contain fee information.

Next Week’s Notebook

Earnings and Conference Calls

Monday
Capstone Turbine Corporation, Casella Waste Systems, La-Z-Boy, Motorcar Parts of America, National Technical Systems, Synergetics USA

Tuesday
Adobe Systems, Best Buy Co., FactSet Research Systems, Smithfield Foods

Wednesday
FedEx, IHS

Thursday
Carnival, J. M. Smucker, Pier 1 Imports, Research In Motion, Wimm-Bill-Dann Foods, Winnebago

Friday
CarMax

Economic Data

Monday
8:30 a.m. June Empire State Fed Manufacturing Survey
9:00 a.m. April Treasury International Capital
1:00 p.m. April NAHB Housing Index

Tuesday
7:45 a.m. ICSC Chain Store Sales
8:30 a.m. May Housing Starts
8:55 a.m. Redbook Retail Sales
8:30 a.m. May Producer Price Index
8:30 a.m. May Producer Price Index, ex-food and energy
9:15 a.m. May Industrial Production
9:15 a.m. May Capacity Utilization
5:00 p.m. ABC/Washington Post Consumer Confidence

Wednesday
8:30 a.m. May Consumer Price Index
8:30 p.m. May Consumer Price Index, ex-food and energy
8:30 a.m. 1Q Current Account

Thursday
8:30 a.m. Initial Jobless Claims
10:00 a.m. June Philadelphia Fed Business Index
10:00 a.m. May Conference Board Leading Indicators
10:00 a.m. DJ-BTMU Business Barometer

Friday, June 19, 2009
No economic events scheduled

A look at how the industry’s most popular ETFs did on Friday:

LONDON, June 12, 2009 /PRNewswire via COMTEX/ — Platts — The Organization of the Petroleum Exporting Countries (OPEC) increased crude oil production by 300,000 barrels per day (b/d) to 28.39 million b/d in May, according to a just-released Platts survey of OPEC members, oil industry officials and analysts. This is an increase from 28.09 million b/d in April.

Production had already risen in April for the first time since August 2008.

According to the May production estimate OPEC-11 (those bound by production quotas) is at only 72% compliance with its 4.2 million b/d in crude output cuts agreed late last year. This is down from 78.7% compliance in April and 81.8% in March.

May production increases totaling 320,000 b/d from Angola, Iran, Nigeria, Qatar, Saudi Arabia, the UAE and Iraq were slightly offset by a 20,000 b/d decline in Venezuelan output.

“With the recent increases in crude oil prices, the drumbeat that we’re on our way back to $100-per-barrel-oil has been growing louder,” said John Kingston, Platts global director of oil. “But this month’s surge in output shows that OPEC has a lot of productive capacity that it can bring on the market relatively quickly, and that should certainly prove a hurdle to any move back to three-digit oil prices.” Before April, OPEC production had fallen steadily in response to the plunge in oil demand caused by the global economic recession. OPEC-11 output failed to drop to this year’s 24.845 million b/d target. The latest estimates leave the OPEC-11 some 1.14 million b/d in excess of this target.

Although seven countries increased production in May, the bulk of overproduction occurred in Angola, Iran and Venezuela. Saudi Arabia, despite having boosted production by 110,000 b/d between March and May, was within its quota.

Initial output cuts by the OPEC-11 subject to the ceiling for 2009 were sizeable — 970,000 b/d between December 2008 and January 2009 and 820,000 b/d between January and February. OPEC is next scheduled to meet in September.

Crude futures prices have been on a broadly upward trend since mid-February, and according to some observers, this may have encouraged over-quota production.

OPEC’s own basket of crudes, for example, stood at $38.14 per barrel on February 19. On June 11, the basket stood at $70.87 per barrel.

SOURCE Platts URL: http://www.platts.com www.prnewswire.com Copyright (C) 2009 PR Newswire. All rights reserved -0- KEYWORD: England INDUSTRY KEYWORD: OIL

By Alexandra Twin, CNNMoney.com senior writer

Last Updated: June 12, 2009: 5:50 PM ET

NEW YORK (CNNMoney.com – Stock Market News) — Stocks churned Friday, at the end of a mixed week on Wall Street, that nonetheless left the Dow industrials in positive territory for the year for the first time since January.

The Dow Jones industrial average (INDU) gained 28 points, or 0.3%, ending above its 2008 close of 8,776.39.

The Dow has now risen in 12 of the last 14 weeks, rising 33% in that time, for its best 14-week stretch since March 1975, according to Dow Jones.

The S&P 500 (SPX) index added 1 point, or 0.1%, to end at a seven-month high.

The Nasdaq composite (COMP) fell almost 4 points, or 0.2%, after ending the previous session at an eight-month high.

For the week, the Dow and S&P 500 ended with modest gains, while the Nasdaq ended lower.

Stocks slumped through the late afternoon as weakness in oil and gold prices dragged on commodity stocks.

But the selling eased on unsubstantiated reports about the outcome of the Iranian presidential race, said Joseph Saluzzi, co-head of equity trading at Themis Trading. He said reports that incumbent Mahmoud Ahmadinejad was unseated by challenger Mir Hossein Moussavi caused markets to recover.

Yet, the results of the election are not yet clear, with both men claiming victory.

Stocks could continue to move up through the next few sessions, but starting in the second half, equities look ripe for a bigger pull back, Saluzzi said.

“The labor market is still bad, the consumer is still out of it, GDP is still a disaster,” he said.

Markets have rallied for three months straight, since bottoming March 9. In that time, the Dow has gained just over 34%, the S&P 500 40% and the Nasdaq 47%, as of Friday’s close. Bets that the pace of the recession is waning have helped fuel the advance.

But stocks have struggled this week as rising Treasury yields and higher commodity prices have fueled worries that inflation could choke off any early signs of recovery. And economic reports that meet expectations may no longer be enough to further stock gains.

“When stocks are up 40%, just meeting estimates is no longer going to be enough,” he said. “I think we’ll see a little downturn through the summer unless we get some really good news.

Bonds: On Friday, Treasury prices rose, lowering the corresponding yields. The yield on the benchmark 10-year note fell to 3.79% from 3.85% Thursday. The yield hit 4% during Wednesday’s session for the first time since October.

Economy: Consumer sentiment was little changed in early June, falling just shy of forecasts. The University of Michigan’s consumer sentiment index rose to 69 from 68.7, versus forecasts for a rise to 69.5.

Import prices jumped 1.3% in May, in line with forecasts. It was the largest monthly increase since last July, according to a Labor Department report released Friday morning. The increase was due largely to a jump in petroleum prices. Prices rose 1.1% in April.

Year-over-year import prices fell 17.6%, suggesting that inflation fears are not yet being realized.

Export prices rose 0.6% in May versus forecasts for a gain of 0.4%. Prices rose 0.4% in April.

Companies: BlackRock (BLK, Fortune 500) is buying BGI, the investment unit of British bank Barclays (BCS), in a $13.5 billion cash-and-stock-deal that will create the world’s largest money manager. BlackRock shares fell 3.3% and Barclays fell 3.2%.

Other markets: In global trading, most Asian markets ended higher and European markets ended lower.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for July delivery settled down 64 cents to $72.04 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery fell $21.30 to settle at $940.70 an ounce.

Market breadth was negative and volume was light for the fifth session in a row. On the New York Stock Exchange, losers beat winners eight to seven on volume of 860 million shares. On the Nasdaq, decliners topped advancers seven to six on volume of 2.06 billion shares.

A server issue at the New York Stock Exchange briefly interrupted the flow of orders for about 200 stocks in the late morning, including Dow components General Electric (GE, Fortune 500), Merck (MRK, Fortune 500) and Exxon Mobil (XOM, Fortune 500), the NYSE said. The stocks continued to trade electronically and outside the NYSE, but were temporarily halted on the exchange. Trading resumed at 12:10 p.m. ET.

First Published: June 12, 2009: 9:46 AM ET

Cisco Systems joins the elite circle of 30 blue-chip businesses that make up the Dow Jones Index , a move that may make it easier for the San Jose company to attract investors — at least initially.

Plus, in joining Intel and Hewlett-Packard on the list, Cisco is sure to get a boost in prestige.

But more than anything, experts say, the decision to replace General Motors with Cisco is recognition that technology is a primary innovator and spark plug of the nation’s economy. And that trend is turning heads everywhere from Wall Street to Washington.

“It signals the ascendancy of Silicon Valley and high tech,” said Stephen Levy of the Center for Continuing Study of the California Economy. “We’re seeing older industries and companies be replaced by a sector that has substantial long-term growth prospects.”

Technology already has the attention of President Barack Obama, who is actively promoting such ideas as smarter electricity grids and computerized health records. And now, with Cisco, HP and Intel on the fabled stock index, along with IBM and Microsoft, elected officials may listen even more closely to the needs of Bay Area businesses, said Jim Wunderman, CEO of the Bay Area Council.

“It certainly cements the tech industry in Silicon Valley as an integral part of the American economy,” he said. “From a public policy basis, it has some impact. I think it makes a stronger case in Washington and maybe in

the state capitals.”

Since its debut in 1896, the Dow Jones Index has predominately featured so-called smokestack industries, from U.S. Rubber and Bethlehem Steel to Standard Oil and American Smelting. However, reflecting a major shift in the nation’s economy, those types of businesses have gradually given ground to firms offering products centered on computers, software and communications technology.

Officials with the federal Bureau of Economic Analysis say it’s hard to say how much of the gross domestic product is represented by sales of such technology to consumers and the government. But business purchases alone of such goods represented about 3 percent of the GDP in 2008, compared with less than 1 percent in 1968. And one of the biggest up-and-comers in the tech field is Cisco, which was founded in 1984 and earned $8 billion on sales of nearly $40 billion during its most recent fiscal year.

Since the June 1 announcement that Cisco will replace GM, a part of the index for 83 years, the Internet-networking equipment maker’s stock price has risen more? than 7 percent, closing Friday at $19.87.

That kind of increase is common after companies are first selected for the list, in part because some big institutions invest heavily in firms that are on such indexes, said Sybille Reitz, a Dow Jones spokeswoman.

“It certainly does increase your visibility in the market,” she said. “You’re included among the bluest of the blue-chip companies in the United States.”

But the share-price bump frequently is temporary, she said, adding, “at the end of the day, it doesn’t mean anything to their business or to their long-term stock price.”

Although HP executives declined to discuss how they’ve been affected by being placed on the list in 1997, Intel, which got on two years later, hasn’t seen much of an impact, according to spokesman Chuck Mulloy.

“By and large, it’s more prestige than anything substantive,” he said.

John Roberts, director of Stanford’s Center for Global Business and the Economy, also expressed skepticism that being on the index would mean significantly more business for Cisco or Silicon Valley. After all, he said, “very few people can tell you whether a given company is in the DJ30. I certainly cannot.”

Still, in a prepared statement, Cisco officials said they are pleased at their inclusion.

Noting that today marks “the first time in nearly 10 years that a technology company has been added to the Dow Jones Index ,” the company said, “We are honored with this recognition of our continued strong performance.”

[by Steve Johnson]

CYCLICALS LEAD S&P 500 HIGHER… The stock market is starting the week on a strong note. Chart 1 shows the S&P 500 trading 2% higher and reaching the highest level in four months. Even more impressive is the action in the Morgan Stanley Cyclicals Index (CYC). Chart 2 shows that measure of economically-sensitive stocks having already cleared its January peak and in the process of testing its 200-day moving average. Its relative strength line (below chart) has been rising since early March and has also broken out to the upside. Why that’s encouraging is because stocks in the CYC do better when investors are more optimistic on the stock market and the economy. The MS Consumer Index (CMR) has been a laggard since the March bottom (Chart 3). The CMR is composed of defensive stocks in beverages, food, drug, tobacco, and personal products. It’s also rising, but not as fast as the S&P 500 or the CYC. It’s helpful to compare those two competing indexes directly.

Chart 1 

Chart 2

Chart 3

CYCLICALS TAKE NEW LEAD … Chart 4 plots a ratio of the MS Cyclicals Index versus the MS Consumer Index. The rising blue line from early 2003 to mid-2007 is typical of bull market behavior as investors favor economically-sensitive stocks over defensive ones. The ratio peaked in mid-2007 (red arrow) and correctly signaled a rotation out of cyclicals and into defensive stocks just in time for the start of a bear market. The good news is that the CYC:CMR ratio is rising again. Chart 5 shows the ratio bottoming this March and breaking a down trendline drawn over the highs of last May and September. That’s a good sign for the group and for the market as whole. The fact that investors have started to favor economically-sensitive stocks adds more support to the view that the market has probably hit a major bottom. The market is also hinting that the economy will probably hit bottom sometime during the second half of the year. One note of caution, however. The rally during the spring of 2008 also lasted from March to May before weakening. That’s a subtle warning that it’s usually not a good idea to turn too positive during the month of May when market pullbacks often start. A weaker dollar in Monday trading is also helping push most commodity prices higher and Treasury bonds lower. Leading market groups include economically-sensitive stocks like basic materials, energy, financials, semiconductors, and transports. The real test for the overall market will occur as the S&P 500 nears a test of its January peak.

Chart 4 

Chart 5

 

 

[by John Murphy]

The market continued to edge upward last week after a pause in the previous week. Last week, Materials took the top spot by gaining 4.81%followed by Energy (4.56%), Utilities (3.88%), Industrials (3.63%),Consumer Discretionary (3.07%), Technology (2.7%), Consumer Staples (2.7%), Health Care (0.5%) and Financials (-1.05%).

Financials were the only sector in negative territory last week. This was due to the coming stress test that forced some traders and investor to sell off some of their gains in April. Financials will be in focus again this week and are likely to benefit from the stress test result. (Again, Conrad begs to differ.)

Consumer Discretionary and Technology managed to squeeze out some nice gains last week. Both sectors continue to defy logic to post nice gains week in week out. They should be able to continue this trend for a few more weeks as the market looks for leadership in uncertainty.

When Materials, Energy and Utilities take the top 3 spots during the week, the market will need to be cautious. While they lead the market up in the short term, they are likely to be the catalyst to bring the market down in the future. These 3 sectors are inflation driven and thus will not help the economy to long-term growth in the future. This can be extremely dangerous if they continue to be in the top 3 positions for the next few weeks.

Health Care continues to lag behind the pack amid the ongoing restructuring health care plan by the Obama administration.

In summary, the market is still looking for leadership to bring the economy out of this mess. This is clearly evident in the frequent changes in the position of the sectors every week.

The S&P500 Index closed above 877 last week. This represents a jump of 11 points (1.3%) from the previous week’s close.

The market took some money off the table on Monday and Tuesday due to the news of Chrysler’s Bankruptcy that might implicate businesses linked to the troubled auto maker. The market was actually looking for an excuse to take profit ahead of the Fed Meeting on Wednesday. The market managed to rally back the losses on Wednesday after the Fed indicated that the economy had improved slightly. After Wednesday, the market became very choppy for the rest of the week.

The market price action is starting to look doubtful as the last trading hour for the last few days were very choppy with more selling pressure than buying pressure. On Friday, the market revealed a glimmer of hope and confidence as the last 30 minutes of the trading session saw the bulls manage a fight back against the bears in a pretty close battle.

Looking at weekly candles, the S&P500 Index suggests an upside for the week. This is because last week’s candles managed to establish higher high and high low on previous weekly candles.

Looking at daily candles, the S&P500 Index look like it will have a paused on Monday. It should follow the same pattern as the previous few weeks. The market will test the 882.5 levels and the 850 level for support.

The immediate support levels now are S1: 850, S2: 825 and S3: 800.
 The immediate resistance levels are R1: 875, R2: 900 and R3: 925.

The Dow Jones Industrial Average has been trading in the range of 8000 to 8250 since the beginning of April. Last week the Dow managed to break through the 8250 on 2 occasions without successfully holding to the gain. This coming week, the Dow is likely to test the 8250 level and bidding to hold above that key level. If the Dow manages to close above that key level of 8250 with good buying volumes, the market should break higher to test the 9000 levels.

The Nasdaq Composite has been positive for an 8th consecutive week since March 9th. The Nasdaq just failed to break through its 200 day moving average on Thursday. This coming week, the Nasdaq will continue to test the 200 day moving average and is likely to be positive as it shows little weakness at the moment.

The Dollar Index (DXY) has dropped from 84.7 to 84.5 last week on weekly candles. The dollar index continues to trade around the 84 range. Gold has come down in the last week to close at 888. Oil still remains above the 50 levels.

In summary, this coming week should experience another mild rally as the market seeks clarity. Just remember to be watchful for the sell off as charts are indicating a saturating level for all the 3 indices.

[by Pattern Trader]

The markets have been going through the same scenario week in and week out for the past few weeks. Investors and traders are taking their profit on either Monday or Tuesday, bidding up the market on Wednesday and Thursday and consolidating their positions on Friday, making the market extremely choppy while looking for next week’s direction. This kind of behavior will prevail till the dust from this gusty economy settles down.

Last week, the market continued this familiar saga. The Chrysler Bankruptcy and the uncertainties in the stress test result forced some to take profit prematurely. The better-than-expected (but revised-down) earnings results helped to push the market back into positive territory on Wednesday after Monday’s rough start to the week. On Thursday and Friday, the market was boosted by the better-than-expected employment data and manufacturing data.

The market’s breath remained relatively strong for the week. The bulls are still in control over the bears. However the bears are getting stronger and stronger as lately the bears have threatened to close lower during the last hour of the trading day. On Friday, the market managed to close higher for the week only in the last few minutes. Some big players must have either covered their short positions or they knew something good would be happening the following week and decided to buy into the weekend.

The VIX (a measurement of the market risk/fear) dropped from a high of 39 points to 35 points. The drop in the VIX has been a reason for the market to be bullish. However, the contrarians view it as investors and traders becoming complacent in the market. This means that if Investors have been buying into the market blindly, the market might get into trouble again when supply peaks out and demand wanes.

Major Events

The 19 bank stress test has been delayed and moved to this coming Thursday instead of the scheduled Monday. Bank of America and Citigroup are rumored to be in need of extra capital to boost their balance sheets.
Worldwide, investors will be closely watching the speech from the Sage of Omaha, Warren Buffet, at the annual meeting of Berkshire Hathaway. On the weekend, Warren Buffet mentioned some key points on the economy; Buffet sees potential in housing sector and the housing market stabilizing. He was very bullish on Wells Fargo when it was below 9 dollars. He also sees inflation ahead and he viewed that inflation will be able to pay for the bailout bills. Warren Buffet also said that he would not buy any newspaper company. Instead he praised Google for having a very strong moat that charges companies when people click on their ads.

Economic Data

Economic data will be in the spotlight again this week. Starting on Monday, the market will be looking the Pending Home Sales data. Investors and traders will be looking for any light in the housing market. The housing data is expected to show an improvement in the housing market. On Tuesday, the ISM Non-Manufacturing PMI will be released and Fed Chairman Bernanke will testify on the economic outlook before the Joint Economic Committee of Congress, in Washington DC. All eyes will be on the Fed Chairman, looking for clues into the economic condition.

On Thursday, Fed Chairman Bernanke will deliver a speech on Banking topics and the result of the Bank Stress Test will released. Investors and traders will be very keen on the banking stress test result. The market will end off the week with Non-Farm Payroll and other employment data on Friday. The market should experience greater volatility on Thursday and Friday.

Earnings

This week will be the final peak week into Q2’s earnings season as there will be another 84 S&P500 companies reporting this week, including two components of the Dow Jones Industrial Average.

So far, S&P500 companies overall are expected to have seen first-quarter earnings fall 35.1% from the year earlier quarter, according to Thomson Financial. Those companies that have already reported, 66% have beat expectations, which is slightly better than the average 63% in the recent quarters.

This week several big companies are going to announce earnings. These companies include Kraft Food, Walt Disney, Loews Corps, Tyson Foods, Sprint Nextel, Chesapeake Energy and Beazer Home.

Majority of the companies are expected to beat the low estimate earnings. Attention will be focused on forward guidance and the next quarter’s estimates.

Overall the market should continue to edge upward with the strength of the consumer discretionary, industrials, materials and technology sectors. The market should get a little boost from earnings and a little help from the stress test result. (Conrad believes otherwise. So draw your own conclusions, please.)

I am expecting a very tight rally this week, albeit in an extremely volatile and choppy market that continues to look for excuses to edge higher. Any bad news in next week might just be the catalyst to trigger a sell-off. Thus, look for tell-tale signs that might crush the market in a blink of an eye. Warning! Bumpy road ahead!

[by Pattern Trader]

Today officially begins the trading month of May. And traditionally the worse 6 months in the market. In the April preview, I posted that …

… the acid test will be May. The real stress test will be at the end of Q2 and throughout Q3 (traditionally the worse quarter of any year). 

I am so tempted to follow the crowd of believers that this rally truly has legs. Am I being swayed by the April rally’s effect? Common sense tells me that the rally has been running on empty, pretty much like what has been going on in the Asian Markets today;

• Hang Seng +5.54%,
• STI +5.65%,
• KOSPI +2.09%,
• Aussie ASX200 +3.01%,
• Sensex +6.41%,
• TAIEX +5.64%,
• Shanghai Comp +3.32%

The NIKKEI225 ended the biggest loser by keeping its market closed today. For the record, the S&P Asia Index closed up +5.23% while the MSCI Asia Apex 50 was also higher at +5.43%.

Have I over analyzed the markets? Am I missing something? There was nothing on the cards to justify this rally today or does a little bit of good news overshadow all the bad stuff in today’s market? Maybe bad news has reached saturation point and nothing affects the markets anymore. Maybe we’re so numb to negativity that we son’t give a s**t anymore.

Whatever the reason, I am still confused about all this. Here’s my most likely analysis … the market is PRICING IN a mega drop by rallying as much as it can while it still can. If that holds true, by golly, we’re in for a stinker-tanker this May.

Christmas Wish #1 Update

After all that bearish talk in recent months, I am glad to bring you this update on my Christmas 2008 Wishlist.

First criteria to become less Bearish:
1. Uncle Ben to stop bailing & stimulating
2. A Beautiful Curve that’s not too steep on the T-Bond Yields
3. Manufacturing & Production to stop falling
4. Consumer Expectation to start recovering
Target: 2nd Quarter 2009
Reaction: Market Bottom
Time: 3 to 6 months later

In my April 2009 In Preview post, I wrote:

Right now, wish #2 is granted and it would seem that Uncles Ben and Obama are beginning to grant me wish #1 as they tighten up the TARP and readily reject calls for more taxpayer monies … As for wishes #3 and #4 for Q2, we’re going to have to wait till we’re midway through Q2 to see if we do get them. Yesterday’s Consumer Expectations showed an improvement over February’s numbers but still came in under expectations … in a sense, better than feared. So maybe, wish #4 may be happening …

Wish number #4 came in last week when Consumer Confidence beat expectations that were revised UP (39.2 vs 29.7 consensus). Wish #3 has a myriad of numbers that broadly indicate that numbers are generally in-line and slightly better-than-feared with a couple of slightly negative returns on insigificant data. 

Wish #2 has been a constant …

 … now that’s a nice curve.

Wish #1 is the latest update … on Friday 1 May 2009, Preseident Obama said that “the economy didn’t need any more stimulus.”  Now that’s the best news I’ve heard in a long time.

With that, Wish List #1 is complete (I hope) and we should see a market bottom by October 2009 at the soonest or April 2010 at the latest, according to my First Criteria to become less Bearish.

Now I can look forward to ticking off some of the wishes on Wish List #2;

Next criteria to consider being Bullish:

1. A drop or stall in Job Cuts and Foreclosures
   
2. Consecutive increases in Non-Farm Payrolls into Positives
   
3. Technology Companies to start producing
   
4. Financials & HMOs to start stabalizing

Target: End of 4th Quarter 2009
Reaction:

• Tech Market Leadership
• Financials Recovering
• Strength In Housing/Construction

Time: 4 to 5 months later

So where does that leave us in relation to where May will go? Honestly, I don’t know. If candlesticks are anything to go by, we’ll get a third candle reversal on Monthly candles which means May should finish down. If technicals hold true, the DOW will have a lot of resistance to break between 8,200 to 9,500. If cycles stay reliable, May will suck.

In the middle of all that, I am still holding out for that proverbial drop that will get the DOW to unbelievable depths.

Till then, I am upgrading my trading status to Conservative from Bearish.

Cheers! and Happy Hunting!

[by Conrad Lim]

Everyone found a reason to be bullish as they made great gains from the April rally. But as expected, now that the honeymoon draws to a close, everyone is finding an excuse not to believe the bearish implications of May. Funny how no one ever asks me if I am sure or queries my analysis about a bull run. But when I call for a bear run, the response is always, “Are you sure?” .. “How do you justify that?” .. “What makes you think …”

Rather than focus on reasons to be bullish for which there are few, I’d rather focus on reasons to be conservative for which there are more. 

Unlike most analysts/economists out there, I am not so bullish about the current run in the market for many reasons. While they hype up the few reasons to buy, I find that there are way more reasons not to buy yet. Having said that, know that “reasons not to buy” does not equate to “Sell“.

With all the reports available to the public and what is written in them, it is too easy to see why this rally may continue its run. And it might. But who is to really know? My objective is to play it defensively until there is little or no doubt about the sustainability of this rally. There is currently too much doubt in the market and insufficient evidence to suggest otherwise, contrary to what the news would have us believe. Thus, to jump into this now is to anticipate and to anticipate anything is speculation and I do not gamble.

In life, the truth only comes to light after the fact. It is no different in trading and investing. That is why most investors don’t bother with market bottoms and traders are always too late to catch that elusive bottom. But that is for the attack-minded retailer. My defensive attitude to this is to wait and see. I am not bothered about missing the bottom as long as I get most of the ride up to the top. (The top – another topic for another day). And I am only interested in that ride up when there is no doubt and when the market is fully committed to the cause – when 3 trillion dollars of sidelined monies come flooding back into the market.

Between April and October of 2007, I became “unbullish” because there were obvious signs that the market and the American economy was starting to hurt. Today, I am becoming less bearish but still remain unbullish. This means that for the interim, I’m taking the market in short term trends and will take the ride where ever it goes. 

So here are my reasons for staying Bear, or at best, unbullish … 

H1N1 Pandemic

Since the start of the swine flu outbreak, there have been no less than 4 reports that I’ve read where various governments and the WHO had claimed that this thing was under control. And a few days after a report like that appears, the outbreak worsens.

The latest in the saga has been that Mexico is not recording any more new cases (for now). Yet in Asia, the damn thing is almost everywhere in single numbers now. History has proven that all it takes is a start in single numbers for those numbers to grow exponentially. In Europe and North America, those numbers have not stabilized as a previous report had claimed. Canada, Ireland and England have confirmed increasing numbers of cases. So while the news writes up no new cases in some countries, more cases are quietly emerging in more countries worldwide.

This is not something that is going to slow down yet. Not until very drastic measures come to the fore. The Avian Flu outbreak has taught us that. To take this pandemic lightly is the worse thing the world can do. 

Stress Test Delay

The delay in the results of the Stress Test by a week can’t be because of good reasons. If the results were good or even too good to believe, it would have been published. 

This leads me to believe that something has gone terribly wrong. To delay the results by a week, by requiring that much more time to come to a consensus, means that the ends are not meeting or that there are more inherent problems than initially perceived.

Whatever the reasons, a delay is never because the reasons are good. This, to me, is cause for concern.

Fed’s bond effort backfiring

The U.S. central bank has been buying U.S. Treasurys in an effort to keep long-term rates low. But yields are higher now than where they were before the purchases began. This effort, along with many other efforts to jump-start the economy, has been blowing up the government’s face. Yet they continue to plug away. Why do they continue with such desperate measures?

The issue is not about the “why” but more significantly, if the American economy and financial markets are truly on a rebound (as many analysts claim it is) then what are all these “jump start” efforts about? If the market is rallying on real belief, then why would the government still bother with all these failed exercises?

Earnings – Better than expected on worse expectations

Earnings have been a saving grace for the market. But the not-so-obvious big picture is that companies have been beating expectations that have been revised down drastically, some as much as 75% lower than their December/January guidance. So while the market reads into what they want to believe, the big picture is that earnings suck. Let’s not even get into discussing their revenues.

Now here is the real problem … forward guidance Q/Q and Y/Y is worse. Let’s just randomly pick the DOW stocks that announced their numbers this season:

• Inline: PG, BA, DD, IBM, JNJ, WMT, MMM.
• Downside: CAT
• No Guidance: INTC, AA, AXP, BAC (confused everyone with their report).
• Upside: None.

I don’t know about expert analysis but common sense tells me that when a company says that its future looks anything but rosy, it is not a reason to buy.

And while reports are writing up the “recovery” or stabilization of the housing sector, housing and construction companies have been largely providing downside forward guidance Q/Q and Y/Y.

With more DOW components on the line this week (C, DIS, KFT) together with some very significant large cap companies, I am expecting more of the same – better than expected on lowered estimates with no or poor forward guidance – and the market will continue to ignore the obvious and buy into the rumor.

A “W” is a more likely recovery but too soon in my opinion. Logically speaking, with as much obstacles in the way as we’ve seen, it’s rather unrealistic to expect a W-shaped recovery. (Don’t forget that years ending with “0? have an outstanding bearish record that is more than just a self-fulfilling prophecy).

How about an Inverted Head and Shoulders?

In figure A, it would seem that DOW already completed the left shoulder and head of the pattern. Now all that remains is the dip (right shoulder) that could complete the Inverted Head and Shoulders pattern and lead the market to eventual recovery. (The red line is my speculative peek).

Figure B is another perspective and one that I favor. The March low was the left shoulder and we should get a head going into May and the worse quarter (Q3) should see the completion of the right shoulder.

Whichever pattern you decide is the more likely, even if you consider the “W”, you can’t deny that the market will re-visit its March low before any talk of recovery can be taken seriously.

Patterns are a direct translation of attitudes. As long as attitudes don’t change, those patterns remain reliable. I like things this way because like Jesse Livermore said,

Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.

 

[by Conrad Lim]