Stock Tiger Update

For Monday November 20, 2006  

Close Friday

Dow +36.74 at 12342.56, Nasdaq -3.20 at 2445.86, S&P +1.44 at 1401.20

The market continued its advance this week as money managers and mutual fund managers it seems are wanting super year end bonuses so they are buying for performance and moving up prices. Who will be the first ones out the door when they stop?

Some rambling ahead:

This first paragraph if from Alan Farley and I agreed so much will post it here:

" NYSE/Euronext merger: Frankly, this one scares the hell out of me, because it's the next step to 24-hour trading. The NYSE already does a great job screwing traders and investors at the opening bell, with phantom quotes that cut through stop-losses like a hot knife cuts through butter. Imagine what it can do while you're asleep."

About the market rise - In the long run fundamentals have to improve for stock prices to stay at good levels but in the shorter term it is not so important. What is more important is the market mood. Every year or two there is a period of at least three months when a ton of stocks shoot up 100-150%. Unfortunately each time it usually is a different set of stocks. Some go up because of real developments like FRPT that has gone up 600% since May. (We recently mentioned how this is one of the OTC stocks that has a real business and real contracts and growing fast) They plan to move to the Nasdaq and with that news and a partnership with General Dynamics the stock again was a big winner but now is trading above the top Bollinger band so set your stops.

Other stocks though go up only on speculation during times when the market is in rally mode. Last June I asked a respected friend what he thought the reason for a election year rally would be this time sine by then it was clear that housing was on the decline. He said that it would likely be just PE expansion. Good way to put it. That is when nothing is greatly changing but the stock prices rise so their Price to Earnings rises as folks are willing to pay more is all. A good thing to remember for the next time the market looks awful and no one wants to buy. It always goes back and forth and you do not need to hold to the very top or get in at the very bottom but being cautious at both places and riding a large part of the move works well. It seems we are in a cautious time now even though the season is good for advances. More a bit later on this.

I checked to see what the current average PE is of the 30 Dow stock now (here) and it is at 22 so this means 22 times the earnings of the past 12 months. INTC earned about $1 and is trading at $22 and so is at the average PE 22. BA is the highest now at about a PE of 41 and AA the lowest at 11. We cannot really make a conclusion about this but wanted to look so pass it along.

The Average DOW (PE) was (20.0) for the (5 yrs) from 1996 to 2000 while in a Bull Market.

The Average (PE) was (15.9) for the (20 yrs) from 1981 to 2000 while in a Bull Market. Earnings were improving in each of these years EXCEPT 1982, 1983 and 1990, 1991.

The Highest (PE) in (80 years) since 1920, for the (DOW) was (31.4) in 1991.

The (2^nd) highest was (30.7) in September, 2001 when the (Dow’s) high was (11,350).

The Lowest (PE) in (80 years) since 1920,  for the (Dow) was (5.8) in 1974. You can see more (here)

This weeks FOMC minutes suggested that the housing activity was to remain a drag on economic growth over the next few quarters. I guess everyone knows that so was not too concerned though maybe the investing crowd figures they can worry about that later though the bond market does not agree as they are still predicating a recession. The  Commerce Department this week showed that housing starts were lower than expected dropping 14.6% in October to 1.49 million units.  Economists had expected housing starts to fall to a 1.675 million unit rate. That is a six year low and the lowest level since July 2000.  Building Permits fell 6.3% to an annual rate of 1.54 million units, the lowest level since December 1997. Here is a year-over-year and month-over-month chart of the housing starts. At some point this will show up in decreased consumer spending and lower corporate profits.
 

chart RTTNews

This chart shows the Median Home Price and the Consumer Price Index and shows how bizarre it became as home prices increased so rapidly. They need to pullback and the question is how much. If it is only an additional 5-8% maybe not a huge problem but many think they may need to pullback 20% or more to bring them more in line. If they went that far it would be a huge problem as so many people would have mortgages to pay that were more then the value of their home. I saw a graph that showed that many people now are paying as much as 40% of their income on their home payments. (I remember a long standing common sense rule that one should not spend more then 25% of the income on housing) Just some information to be aware of.

Chart from Gary Shilling

So as mentioned above, the market mood has been a buying one for over 3 months and it was not just earnings but the "timing" that got things going.

This now is a time of year though that have had many pretty decent sell offs like in December after solid moves in the Autumn. There are signs we will show to suggest a pullback is coming up.

For the start of the week we could get a post options sell off since they could not bring them down at all toward Max Pain on Friday. This however is a short week and historically it ends well so Wednesday and Friday are expected to be ok.

The Dow weekly chart shows how the candle is pretty far from the 9-week EMA and at a minimum will have to consolidate to let the 9-week catch up. The stochastics did not make a new high so that may be another clue of a pending correction though MACD has not yet crossed over.

The weekly Nasdaq is a pretty chart. It is also short term extended but the RSI not yet over 70 and that would be a bigger warning of a top.

We have expected the BPCOMP to reach the former high from May and think it will prove resistance. It is almost there.

This the monthly S&P 500 as it closed above 1400 - a mental more then a technical resistance. RSI is above 70 but you can see in the past it can stay there for many months. The 20-month EMA has been support for 3 years. A pullback to it or that range for a while could propel it up to its past high next year.

The Russell 2000 daily broke out and so far only pulled back to the break out line.

IMO one of the nicest looking chart is the Value Line weekly. It made a springtime correction and now has broken out to new highs. As long as 2100 holds the uptrend is fine.

Oil dropped this week again but did not make a new low. The MACD is about to cross over so wil watch it and support.

However the USA Oil Fund did make a new recent low and closed below the 200-day and the 50% retracement. This makes it much more likely that is will go the the 62% retrace. That $50.60 would have to be broken first. It seems rather amazing how well the big caps have done with oil dropping. For a couple of years the broad market doubled as oil also doubled. They were in sync as if oil were dragging up the stock market with it. This big drop also points our how the price of oil is not simply controlled by supply and demand as the big oil CEOs were telling everyone in defense of the high prices. If I am wrong then please point it out but if the price is a supply/demand based one then  either a 30% increase in supply or 30% decrease in demand has happened  since July as oil prices have dropped 30%.

Other commodities in the CRB ran into the 50% line and have started to pull back again.

Gold did exactly the same and its stochastics dropped back below 80.

The XAU/Gold buy signal was never given as the cross did not occur and actually the trend line was not even touched so any gold stock purchases are on a case by case basis as there are always a few who buck the trend.

This is a multiple chart showing the major indexes. I guess it does not need too much in explanation. It is just a visual to show that at this point the moves up above the 50-day EMA are very close to the highest above it they have been in the last 2 1/2 years at least. So without any elegant Fibonacci lines or Elliot Wave ABC 123 i ii iv etc you can tell at a glance that the risk is high. For short term trades this is not so important but for time frames where you hold for several months this shows a reason for tighter stops or a least closer attention to your holding for a pullback to come. It is better to miss the last drops of upside profit then to give much of it back during a pullback. If you need to hold for long term tax reasons then you have the option of using options or short ETFs to counteract any pullbacks. So see what your eyes suggest when looking at the chart here. Looking like a top forming in many indexes to me.

The VIX is based on a selection of put and call options of S&P 500 stocks and is a measure of volatility. In as much its numbers are not an absolute but serve as a guide to  investors expectations on future market volatility. Relative high VIX values are associated with a large amount of volatility and investor fear or uncertainty, while low ones generally correspond to  complacent and bullish times in the markets. The range was higher during the late nineties and early this century but now back to levels like in early 1990s. As a guide to the markets it is often a good predictor when it gets to extremes. It is now at levels not often seen so as it swings back into a more "normal" range we will see market volatility pick up and this is suggested to be down.

We have not looked at the ProFunds Ultrashort Small-cap in several months so will just take a peek. This one moves up in inverse relation to the small cap index but at about 2X the percentage. This is the weekly chart and you may rember us looking at it in the early summer for any break out above the 50-day but it never happened. It is now under 80 stochastics and back at its lows. It is not a buy yet but one to watch. At some point in the next year it may be a very good long term buy.

The next Bradley model market turn date is November 28 and there is a solar storm warning for December 7. Both of these are noted on our Moon Page  Either one may be the start of the pullback we are expecting.

I looked at all the sector charts and none are very compelling. There are some that have broken out or are about to but many are over extended indicating not the best entry time.

We mentioned chemicals in the past as an upward moving sector and it continues in a pretty well defined channel so for this it is simple to watch the support line. If it breaks then leave the sector.

This health care index chart shows how quickly a break down can happen and wipe out months of gains. If you have some long term holdings with solid gains then pay attention to the trend lines or other areas of support as there are a lot of people with a high amount of gains to protect and they cannot all get out the same time. Notice how this acted in a extremely common way. It broke the trend line then found support at the 50-day they rallied back up to the broken trend line where it was a sitting target for short entries. This is the textbook area to short. (and a good place to get out if you got trapped being long)