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Sunday, August 07, 2005
Market Recap
The economy looks to be in super shape and good news continues to flow into the market in the form of great earnings reports and the economic news of late. Friday, the payroll report came out and was well above the street estimate, gaining over 200K jobs last month. Also, the job numbers have been revised upward for the last four months in a row. This is very good news and shows an economy steaming ahead. Unfortunately for the stock market, this news ensures that the Fed will continue on their interest rate raising tear. They have raised rates for 10 consecutive FOMC meetings by .25 basis points and next week they meet again and will keep their streak alive with an 11th straight increase.
The problem with these great economic numbers is that the fear of inflation comes into play. With these strong numbers, the Fed has plenty of ammunition as to why they should keep raising rates and will continue to do so. The stock market was hoping for the Fed to cool off but it is not going to happen anytime soon and for that reason, stocks started a decline on Thursday with follow through selling on Friday. The DOW was down 52 points, the NASDAQ lost 13 points and the S&P lost 9 points. We would like to remain bullish but do advise caution, considering the latest developments. We would like to believe that this is just a correction in a strong bull market after breaking out to four year highs but, given the breadth of the sell off Friday when decliners swamped advancers, we have to raise the caution flag.
Warning Signs
There are some warning signs that are not conducive to rising stock prices that we must be pay attention to. One of them is the action in the 10 year bond. The yields continue to climb and the strong payroll numbers applied more upward pressure to long bond yields. When the yields in bonds are rising, it normally results in a stock market sell off. Another red flag is in the housing sector stocks. They got slammed all week and Friday they really bit the dust because of the action in the 10 year bond. When a stock market leader rolls over, that in itself is a warning sign. Retailers have also been a market leader but disappointing same store sales on Thursday morning rolled this group over as well. Financial stocks normally do well in bull markets but with rising bond yields, financial stocks are better short positions than long and if financial stocks are going down and being shorted, I find it hard to imagine the overall market going higher. Bank stocks will suffer from a flattening yield curve because it limits their profitability. If the Fed continues to raise rates, and the short-term rate gets closer to the long term rate, this will flatten the yield curve. Banks pay mostly short-term rates to depositors while charging long-term rates to borrowers. If the yield is flat, they break even and cannot make a profit, presenting an ideal short position in bank stocks.
Three More Rate Hikes
Last week, I stated that I thought the Fed would be done raising rates by the end of the year and would only raise rates 2 more times. It looks as though with the strong jobs report out Friday that this prediction will be wrong. As of Friday, the Fed funds futures are pricing in 4.25% short-term rates by early 2006, this of course means three more hikes. I do not know if our Bull market can take three more rate hikes. It is sure going to slow things down for stocks, should this occur. Small cap stocks are especially vulnerably if interest rates continue to rise since the cost of borrowing money to grow their businesses will cost them much more. We are not turning bearish just yet, the charts of the indices still look good, but we cannot ignore the early signs that could result in a stalled bull market ahead.
What You See, Not What You Hear
These are definitely uncertain times and we must be ready to change direction on a dime if need be. We must be in sync with the market, in the flow constantly. It is impossible to make money fighting the direction of the market. Like a flock of birds or a school of fish that all turn direction at the same time, we must turn with the market simultaneously. Right now, we do not know if this is just a pullback in a bull market or the beginning of a downturn. All we can do is be ready to act on what we see happening. Listening to the pundits on TV is a waste of time when they always have two on at the same time disagreeing with each other. They will each have an opinion and who is to say which one is correct? You have an opinion also and chances are, your opinion is the one that counts because it is your money on the line. Your opinion, like mine, should be determined by the formation of the charts. Acting on what you see, not what you hear, is always the best course of action.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
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