As I discussed in this week’s edition of Market Strategies:
“As noted here and in my daily updates I have become more bullish, while still expecting a tradable pullback into the support. Technically, the longer the market consolidates above its breakout to new highs, the more likely the move continues. The problem here is that there is another school of thought that says, “Flat tops bring drops.” And for 10 of the last 12 days we have had a pattern of up today down tomorrow with internals also alternating day by day. Also, there are more than a few big names that look tentative at best. I know that after the July run-up some sideways movement is in order, but there were some spectacular moves up on earnings. However, many of them petered out and closed midrange. Some of the biggest names and dividend payers are dramatically overbought and the trades are very crowded.”
The issue seemed to be coming to a head with the Tuesday action. There are several cross-currents the most puzzling being the renewed correlation of oil and the stock market. With the strong downside action in the US$ we got what we expected from the gold and silver markets, but it has not put any upward pressure on the oil. The only way to explain the oil action is to classify the problem as an issue of supply. While the GDP numbers last week showed that consumer spending increased 2.8%, by far the best performance of any of the internal statistics.
The XRT (retail ETF) has had a move in the past 5 weeks from below $40 to over $45. That is a very meaningful move over that short period of time. Is no one putting gas in their cars to go to the mall or to “fast-casual dining? What happened to the AAA projections of auto usage as the chosen mode of transportation for the summer vacations (or staycations).
Clearly part of the problem is that oil is a “cheaters” market. As prices rise the main players pump just a little bit more everyday as long as it doesn’t upset the balance of the spot, or cash market. It is a very unruly crowd and while they may agree that moderation is the key to steady prices, as soon as they see any weakness, they all rush in so as to not be the last one selling. The best analogy is either the auto or the airline business. As soon as one airline lowered their price, there was a price war. For 10 years before GM went bankrupt whenever Ford or Chrysler offered incentives, GM followed with bigger incentives. The downward spiral only accelerated. Historically, this was the reason that the futures markets came to be effective for the farmers; they all didn’t have to run their produce or materials for sale at harvest. They could pre-sell and store until delivery.
So, for tomorrow, I would think a bit about a different group, Biotech. Not to chase the ones that had news today (BiiB) but some of the ones who have value and might fit the characteristics of good solid financials (GILD) or have strong balance sheets. We have already bought a small position in PRGO from the Sunday letter. My main thought is that the politicians are so embroiled in the “beat the other guy bloody” that they have stopped bad mouthing the group. My other choice would be the IBB since it seems to have put in a nice triple bottom since its fall from yearend @ 340 to a low @ 240. I wouldn’t chase it here but if we get overall weakness in the market, the 9/310 calls anywhere near $3.10 would interest me.CAM
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