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Sunday, April 03, 2005
Market Recap
The big rally up on Wednesday was indeed a one day wonder as there was no follow through buying on Thursday. On Friday, the first trading day of the new quarter, the DOW tumbles 100 points, the NASDAQ slides another 14 points and the S&P drops 7 points. I was skeptical of the rally on Wednesday because the volume was not convincing. It turned out to be a head fake as the market gave back that whole rally over the next two days. The jobs report released on Friday showed only 110,000 new jobs and the consensus was double that number. Nevertheless, the futures shrugged off the disappointing news and were way up before the bell. The thought being that if the jobs report was so bad, it may discourage further rate increases by the Federal Reserve, which would be considered good news for stocks.
The Market opened to the upside but it did not last long as sellers began an onslaught after the first 30 minutes. The daily charts of the indices looked more like a down hill skiing event, sloping down for the rest of the day. If there is any good news from these job numbers, it is that they will almost virtually wipe out a .50 basis point rate hike that some are expecting from the Fed in the next couple of meetings.
Oil at All Time Highs
Oil hit a record high on Friday touching $57.70 at one point in the day. For all those talking heads on TV that keep saying oil is finished its run, I have got news for you. It was another record high on Friday. Higher highs for oil confirm the uptrend and I see no stopping oil anytime soon. The Goldman Sacks analyst that called for $105 oil in the future may be a little extreme but certainly not out of the question over time. My prediction of $70 a barrel for oil, before the end of the year does not seem that far off at this point. If we are right about oil, then energy stocks still have plenty of run left to the upside. In my opinion, Oil refinery stocks are where the big moves will be made. Although these stocks move slowly, we cannot ignore them if oil prices continue to rise. I looked at many energy and oil stocks this weekend and most of them are showing a “three white soldiers” pattern. That is to say that they have had a three day run with some gap ups. These stocks had been beaten down a little when oil dropped to near $50 a barrel earlier in the week but with oil back up to near its highs, these stocks have mounted an impressive comeback. As usual, the down turn they took was obviously a shake out.
Directional Commitment
I think it is safe to say that $50 a barrel for oil is no longer an issue for the stock market. The market realizes that oil will not be going back to $30 a barrel for a long time, if ever. Oil seems to be volatile lately, fluctuating between $50 and $57 rather rapidly. Oil was down on Thursday with the news that the US reserves were much higher than expected. It rose significantly on Friday with the news that gas reserves were much lower than expected. Oil prices and interest rates are going to be the key factors to watch for this summer. If we do see oil on the move in this "super spike" as Goldman Sacks is calling for, we will likely see a strong bear market. Bear markets are fine with me; at least we will know the direction of the market and can position ourselves short to profit from it. It is the flat, directionless market we do not want to have because that is the toughest market to try and trade. If the market can commit to a specific direction, down or up, we can profit from the move either way but we need a commitment in either direction.
Looking Ahead
With Oil near all time highs and just a couple of dollars away from hitting $60 a barrel, it is no wonder the market is spinning its wheels. We have said it before and we will say it again, it is almost impossible for stock prices to advance when oil and interest rates are rising. On Friday, I bought some stocks because I thought the market was near a bottom. Normally, when stocks do not go down on bad news, it usually signals a bottom. When the market opened up on the bad job numbers, I thought the market was shrugging off the news and signaling a bottom. Little did I know that oil would jump up over $2.00 that same day, turning the market to the down side.
I also shorted a couple of stocks on Friday as a hedge because, even though I like some stocks long here, we cannot ignore what the indices are telling us. Shorting is our insurance in case the markets slide below their 200 SMA lines. As you know, this line is the bearish point on the charts. Friday, the NASDAQ closed below its 200 SMA (1992) and that is very bearish. The 200 SMA on the DOW is 10378 and the low for the DOW Friday was 10381, just three points away. It is still above the 200 SMA line but just hanging on at this point. The S&P's 200 SMA is 1151 and it closed at 1172 on Friday, still 21 points above this bearish line. As long as these two indices remain above these averages, we cannot go completely bearish. Buying stocks with the best looking charts is the way to go as we near the 200 SMA's on the DOW and S&P. This could be a nice area to enter some long positions for a big bounce however; stops should be placed just in case there is no rally off the 200 SMA. Any close below the 200 SMA on these indexes is a sell signal for sure.
My recommendation right now is to start taking some long positions but do not load the boat. Just wet your feet a little and do not be afraid to short a few stocks as well. At this point, you should be short at least a few stocks because I think the DOW will close below its 200 SMA this week, leaving the S&P the only index above this key level. I have added some new stocks to the short watch list tonight in preparation for the bear market that may be coming. At this point, we do not know if we will get a big rally off of the 200 SMA or a complete collapse below that level but we do know something has to give soon.
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