Bill Cara: Week #30 (2005-07-30) in Review

« How to read the market, Part 2, Fri., July 29, 2005, 1:05 PM | Main | Work status, Sun. July 31, 2005, 8:54 AM »

July 30, 2005

Week #30 (2005-07-30) in Review

Before sailing a boat away from the dock, you need to know the direction of the wind, so you look to the flags rather than listen to the words of those around you.

This week, traders were caught up in the soothing embrace of the sell-side, but one look at the indexes tells you the market is directionless.

To see that, after a week, the Dow 30 is down -0.09 pct and the S&P500 is up +0.04 pct, you have to wonder what all the fuss is about. If you have been listening to the Talking Heads on Financial Entertainment TV, you could be excused for thinking there was a double rocket launch from the U.S. east coast this week.

To the contrary, we sailors would call the experience one of being "locked in irons".

Bill's Portfolio:

This week I got into the Altera (NDQ: ALTR) kafuffle with Wall Street analyst Tad LaFountain. I added my words to those of others who found the actions of management (e.g., cutting access to corporate info to one high-rated industry analyst) to be reprehensible. Thankfully, the Company did the right thing, and apologized (eight hours after my article was published).

In the interim, I recommended buying a put, and writing a call, on ALTR. Given that this week I was quite negative on the prospects for the semiconductor industry, buying the put might have been acceptable under the circumstances. I say "might have" because it is my policy to only buy puts after the stock has hit the skids.

In terms of the idealized Point of Cycle model (see below), I typically don't buy a put until the Hourly and Daily price data indicate that a Point 7 on the graph has been reached. In the case of ALTR, I am a bit early, so my actions were somewhat of a "reaction" you might say. And that is not what I preach, so I have a duty to point it out.

Moreover, I never advise the naked writing of call options, but I did this time with ALTR. Clearly it was an over-reaction on my part. I could laugh it off and say, "that's ok; I'm Italian!," or "it shows I'm alive and kicking", but I won't. Writing naked call options, even if it is to cover off the cost of a put purchase is, in a word, "stupid". Don't do it.

Naked call writing exposes the trader to an unacceptable risk/reward condition.

On the other hand, writing a call that is "covered" by stock in your portfolio, as part of a distribution strategy, which lowers your cost base in that stock, is perfectly acceptable at times. However, I'm guessing that 99 pct of the readers here have no long position in ALTR, so I was clearly acting out of character.

Here's what I wrote at the time (July 28 before the open).

"I looked over the ALTR charts, and the financials, and now advise readers that this is a potential pig of a stock in more ways than one. The short sellers I believe are going to outperform.

Altera (NDQ: ALTR $22.12) has a Dec-05 22.50 put option that last traded at $1.50.

There is also a Dec-05 22.50 call option that last traded at $1.45.

I'd write the call, and buy the put, for a net cost of 5 cents plus commissions. That might be an emotional reaction, but I'd be surprised if I'm home alone.

I'd wait to see how strong the Nasdaq and NYSE opens today -- equity futures indicate a strong opening -- before entering my order. I'd try to catch any market strength at its peak.

In a couple weeks, or say after ALTR hits the skids, following this kafuffle and a pull-back in equity markets generally, I'd close out the call-write, and apply the proceeds to the cost of the put.

If the stock happens to move higher this summer, I'd buy another put at the higher price because I believe that ALTR is ultimately headed south.

Here is the Daily and Weekly data charts for ALTR, which indicates that the stock ought to be sold here. You will also recall that I have indicated my negative opinion recently on the industry group."

Note that the RSI values had turned negative on the Daily chart but not the Weekly chart. If I'm going to buy puts, my comfort zone is enhanced when RSI goes negative for all the Hourly-Daily-Weekly data series.

After that, when the Hourly turns positive, but the Daily and Weekly stay negative, daytraders might close the trade, but I hang in with my short because I happen to be an Intra-Month and Intra-Week Trader.

The Intra-Day Trader would exit a short position as soon as technical indicators like RSI turn positive on the Hourly, 30-Minute, and 15-Minute data charts. Personally, I don't have the interest to follow markets that closely, mainly, I suppose, because computers can do it better.

To fill in the ALTR picture, here is the interactive Daily data chart, plus a snapshot two trading sessions later.

Note, on the current charts, that the new RSI values for the Hourly data are even more negative, which confirms that momentum ("Mo") is working for me, and not against me. The Hourly chart RSI values are also now much more negative, but the Weekly RSI, while weakening, is still positive.

Ok, so now I have made the trade, how do I get out of it? Or better still, how do I manage it?

Seasoned pros would ask a simple question, "Would you rather take a small loss on a single trade, or have your head handed to you on a platter?" That's not to suggest the worst-case scenario could happen with a small trade like this one, but it's the principle that counts.

It always pays in the long run to do the right thing in the short run.

The right thing in this case is to buy back the short call option. On the other hand, because the put trade may have been a little early, which is an unknown, I'm prepared to hang in on that trade.

So the Dec-05 22.50 call option that sold at $1.45, I had to buy back at $1.45, costing commissions. The market now is just $1.25 bid, offered $1.35, so if the trade was put on sometime Monday, a small profit could be made.

But, I made a mistake in over-reacting, so I'd be more than happy to get out flat. Thank you.

The Altera (NDQ: ALTR $22.12) has a Dec-05 22.50 put option that I bought at $1.50, is already $1.60 bid, $1.65 offered, so I'm in the money there, and I'm hanging in.

Sector ETF:

Here are the ETF charts for sectors 10 (energy: IYE), 15 (basic materials: IYM), 20 (industrial: IYJ), 25 (consumer discretionary: XLY), 30 (consumer staples: XLP), 35 (healthcare: IYH), 40 (financial: IYG), 45 (technology: IGM, IGV and IGW), 50 (telecom: IYZ) and 55 (utilities: IDU).

For something new this week, I thought it would be good to study the performance of all 10 of these Sector Index Funds in the same type of table I provide for the Dow 30.

This table shows the list, which I sorted by the most active traders, headed by SMH, XLE, XLF, XLB and XLU (for average daily volume).

This table shows the list sorted by performance Week over Week (W/W).

In the past week, the two winners were IYZ (up +2.63 pct) and XLU (up + 1.48 pct). Over the past 52-weeks, the two big winners have been XLE (up +47.23 pct) and XLU (+34.74 pct).

Wouldn't it have been nice had I just recommended XLE and XLU a year ago? I doubt either Kudlow or Cramer saw such high total performance in their personal portfolios.

The two losers W/W were XLF (down "0.73 pct) and XLB (down "0.45 pct). Even the two big losers this past year, XLF (up +6.85 pct) and XLP (up +6.97 pct), were up.

You can do this table yourself by inserting this string into your browser, and then clicking on various links and table headings.

http://www.investertech.com/markets/mkview.asp?qte=ss&ty=tk&qt=XLE XLB XLI XLY XLP IYH XLF SMH IYZ XLU"e=Summaries

This week, eight of the ten equity sector ETF's that I monitor were up, which is a solid performance for the Bulls.

The problem I have with that is that the current rally is hanging onto the fact that 75 pct of corporate earnings have been coming through with upside surprises, but the next quarter guidance has been tempered significantly.

Besides, I still compare actual to actual results, rather than waste my time comparing actual to some vested-interest inspired Wall Street forecast.

At this point, I'm still watching to see what traders are prepared to do with (actual) high energy costs, (actual) rising interest rates (and falling bond prices), and an (actual) lower USD (which is another driver of higher economic costs).

I say that the jury is out, but the prospects of a long-term bear phase in U.S. equity markets have clearly grown.

This is a message you have heard from me before, but when you look at the majority of these charts you will see that current prices are just now returning to former highs, and that the RSI and MACD momentum indicators are topping, or even starting to decline.

Historically, August is typically not a good month for the Bulls, and September and October are relatively bad ones. I'm not one to recommend following history, but I'm mindful of it, and feel the Traders' Almanac does a worthy job.

It's the current situation that concerns me " based on fundamental, quantitative and technical info " which I feel warrants caution.

The technical indicators on the charts are useful tools in your toolkit. If you are long securities, the time to relax (if you ever can) is when the RSI and MACD are in a bottom phase, or just starting to rise, not as they are positioned today, which is in a "danger zone".

Sector 10 (energy: XLE, IYE, VDE, OIH, PBW and IXC)

Here's the XLE Hourly and Daily data charts:

XLE Hourly data:

XLE Daily data:

Business owners and managers see high oil and gas prices as being drivers of inflation. There has been hope on their part that energy prices would start to reverse trend after reaching their all-time highs in the past month. But, crude oil is now above $60, which has taken the $CRB commodity index strongly higher on the week. In addition, the USD has weakened a bit this week again.

Where this is leading, eventually, is wage inflation. That's because as companies have to pay more for needed commodities, they have to pass along the cost increases. Ultimately, the consumer has to pay.

And in order to pay higher prices, they need higher personal incomes. That's a cost-push inflation, and sadly, it's on the way.

Just as serious a situation is that many companies are facing the prospects of no pricing power. They simply cannot raise their prices that would result in top line revenue growth, so rather than accept lower bottom line results, many companies react to higher energy costs by cutting jobs.

It was in June that I thought energy prices would fall back from their highs because the economy was softening I felt (which has turned out to be a correct assumption), and there is plenty of oil and gas inventory to meet today's demand.

In trading the Energy Sector ETF, the XLE, I thought a cycle high would be 46.15. I was maybe overly confident.

Subsequently, earlier-than-usual Caribbean hurricanes, more terror problems in the Middle East (and now in our home cities), and fires at key U.S. refineries this week, have combined to propel oil prices higher.

News reports on Thursday indicate that: " BP (NYSE: BP) suffered a fire in the residual hydrotreating unit of the same Texas City refinery where a explosion in March left 15 people dead. A BP spokesman said the fire is out, and there will be a "minimal" impact for the gasoline market. No injuries were reported in Thursday's fire, he added. The refinery is the U.S.'s third-largest. "This is the time when refinery accidents can and usually do occur," said John Person, president of National Futures Advisory Service. And the "Texas refinery problem adds to speculation that there could be more troubles in other areas of the country," he said. Previously on Thursday, Murphy Oil (NYSE: MUR) shut a diesel hydrotreater at its 120,000 barrel-per-day Meraux, La., refinery because of a fire."

So, Crude Oil for September delivery traded up to $61.05 a barrel, which is a high since July 13. It closed Friday at $60.57, up over +1 pct on the day, substantially above the $57.64 where this contract closed in June. Prices today are close to a record for a benchmark Crude Oil contract, last made July 8, at $61.90, for the August contract.

A month ago I convinced myself that XLE had hit the cycle high of 46.15. Then, traders liked the prospects of higher crude oil prices so much, they bid up XLE from the 44's in June to a new high weekly close this week of 47.60.

This week, XLE closed up +0.42 pct W/W, including a loss of "1.04 pct on Friday. At least that's not much of a weekly gain after the prior week's gain of +4.47 pct.

So, I see that the "Mo" is slowing, at least, for the XLE.

Should it be sold? The problem I have with selling it is that the 40-week Moving Average (M40) is now up to 40.63 from the 38's just six weeks ago. The strength is palpable. Traders like to hang in with their winners.

Hence I remain cautious, but the technical indicators are still positive, so I'll not recommend selling. That is, I already recommended selling, or distributing positions over a period of time, but now I think it is wise to hold onto the remaining positions until the indicators turn south, or Crude Oil declines into the mid-fifties.

Sector 15 (basic materials: IYM, XLB, IGE and VAW)

Here's the XLB Hourly and Daily data charts:

XLB Hourly data:

XLB Daily data:

Last week I said that: " XLB is now nudging up to the M40 resistance line (28.92), and so the rally may not continue for long. Some of the industries in this sector, like the chemicals for example, had a good week, but now may be extended on the upside. Gold, however, still looks good, now that the Pacific Rim currencies are strengthening against the USD, and PPI/CPI inflation numbers are likely to start higher in the U.S. again, as they had been in countries like Malaysia and China that took steps this week to stem the inflationary tide by revaluing their currencies."

I'm happy with that call; XLB was down 0.45 pct W/W to 28.64. I see weakness ahead, even though the golds should remain firm.

Sector 20 (industrial: IYJ, XLI, VIS, and IYT)

Here's the XLI Hourly and Daily data charts:

XLI Hourly data:

XLI Daily data:

The Industrials ETF (XLI) was a bare winner this week. It was up +0.10 pct W/W to 30.53, which is just over the flattening 40-Week Moving average (M40=30.19).

Like XLB, the long-term cycle for XLI appears ready to point down. Last week I said it was already pointing down, but alas that's only in my dreams.

A month ago, I wrote: "Traders in this Industrials sector (and the Basic Materials) have to be closely watching the USD action in the next month. I believe that the over-bought USD will come off, which could help these two sectors."

In the past two weeks, the USD has cooled, off -0.7 pct, and this week the USD is down again by "0.33 pct W/W. So the industrial manufacturers in America have been helped somewhat by that.

U.S. politicians are starting to heat up their talk of protectionism (aka "trade war"), with interesting turns of events over the CAFTA bill. Traders, and most business owners, like to see open borders. But, where there is even the smallest local vested interest, like sugar for example, U.S. politicians know who their "daddy" is.

As I say, traders do not like the undercurrents here. Politicians should take note.

Sector 25 (consumer discretionary: XLY, IYC and VCR)

Here's the XLY Hourly and Daily data charts:

XLY Hourly data:

XLY Daily data:

Consumer Discretionary Spending stocks (XLY) were up again, +0.26 pct W/W, to 34.66. This is not as much as the prior week's gain of +1.35 pct, but it's still well above the M40 (33.49).

I look at XLY as toppy. Hotels, for example, had a good industry rebound in the past couple months, but that now appears to be fizzling out.

Last week, I wrote that: "The RSI for the Weekly data is very extended on the upside. There could still be a small rally here, perhaps 2 to 3 pct at most, but not for long. I feel that after earnings season is over and traders start to focus on lowered corporate guidance for this quarter, plus the prospects of higher prices coming out of Pacific Asia now that the USD is starting to head south, there will be an end to the rally in XLY. "

The yuan revaluation process has officially started, and while it may take a couple years to complete, which will tick off Washington, it's a start to fixing the global forex problems.

As I say, "Foreign made goods will become more expensive. And if the lower and middle classes cannot afford price hikes, there will be a quick pullback in top line and bottom line corporate growth, and hence share prices in this sector."

Sector 30 (consumer staples: XLP, VDC, RTH and IYK)

Here's the XLP Hourly and Daily data charts:

XLP Hourly data:

XLP Daily data:

The most defensive sector for traders, Consumer Staples (XLP), was up +0.86 pct W/W to 23.48, despite being down "0.42 pct on Friday, and down "0.34 pct the prior week. So, the first four days of this week were good ones for XLP.

The current price for XLP sits above the M40 (23.08), but the big decline Friday at the close could mean that this support level could be threatened in the next week or two.

This ETF (XLP) appears to have topped (or if not yet topped, then very close to it) in its intermediate-term price cycle. I'd be looking to sell individual stocks in this sector. Rising energy costs, rising interest rates, rising consumer price inflation (ignoring government data but looking forward to the prospects of a lower USD) are going to take a toll on the consumer staples stocks as well.

Sector 35 (healthcare: IYH, XLV, VHT, IXJ, and IBB)

Here's the IYH Hourly and Daily data charts:

IYH Hourly data:

IYH Daily data:

Last week I wrote: "MRK and PFE had a terrible week. IYH is headed lower."

Well this week, IYH was up +1.03 pct to 62.86, despite a pullback of "0.38 pct on Friday. That's the third best of these ten ETF's that I monitor.

Am I surprised? This ETF is up +20 pct in nine months, and its earnings growth (of key components) is slowing. So, I'd be surprised if the cycle topping process does not unfold through August.

Sector 40 (financial: IYG, IYF, XLF, VFH, IXG, VNQ, RWR, IYR, and ICF)

Here's the XLF Hourly and Daily data charts:

XLF Hourly data:

XLF Daily data:

Recently, I wrote: "I'm surprised the current XLF price can stay above the M40, particularly as interest rates are rising. You want to buy financials when interest rates are falling and avoid them when rates are rising."

Well, this week, XLF was down "0.73 pct W/W after being down "0.72 pct the prior week. Interest rates have trended higher, and when they move up, traders are selling off these stocks. Friday was a real soft close, down on the one day "0.89 pct.

Actually, that's worse than "soft".

The XLF M40 is now at 29.44, which is not much lower than the close this week (29.93). So, my forecast is coming closer to a reality.

Last week I wrote: "Should the U.S. bond market continue to fall in price (and rise in yield), the XLF will continue to come down this coming week. I expect that to be the general market direction for a while, and you ought to know by now that financials and tech are the broad market leaders."

So, now we see that the financials universe is unfolding as I warned, let's see what happened to tech this week?

Sector 45 (technology: IGM, IGV, IGW, XLK, VGT, IYW, IGN, IXN, MTK and SMH)

Here's the SMH Hourly and Daily data charts:

SMH Hourly data:

SMH Daily data:

Prices of the stocks may be rising in the semiconductor sector (SMH), but momentum is slowing. After moving up +4.73 pct over the past two weeks, this week's gain was just +0.38 pct.

SMH is now at 37.36, which is substantially above the M40 (33.25). I think it's topping here.

Here's a look at the leading chip stocks. They bear watching, if you're long.

Sector 50 (telecom: IYZ, VOX and IXP)

Here's the IYZ Hourly and Daily data charts:

IYZ Hourly data:

IYZ Daily data:

A week ago, the Telco Services sector (IYZ) was the biggest ETF loser of the week, being down "1.30 pct W/W, to 23.55. It was at the time sitting barely above the M40 (23.40). But, what a difference a week makes.

A week ago I wrote: "I still see signs of a major showdown in the U.S. coming between traditional telco operators (who are rapidly going into VoIP and mobile) and the CATV companies that figure to extend their TV service with telco."

Well this was a week where new legislation in the U.S. has changed the landscape.

IYZ was up this week on a rocket, up +2.63 pct W/W, to 24.17. Still I think the mid-week action has been over-done. This is a sector index that I believe is topping. I would not chase stocks here, and I still believe that the best values in this sector are found offshore.

Sector 55 (utilities: IDU, XLU, and VPU)

Here's the XLU Hourly and Daily data charts:

XLU Hourly data:

XLU Daily data:

The Utilities (XLU) sector remains stronger than I anticipated. In fact, this is the index fund that has most fooled me in the past year.

Still, I think XLU is extremely over-bought, and too risky to stay long. Traders, however, go with the numbers, and the technical indicators are up.

XLU was the second best performing sector index fund (of my list of ten) this week, being up +1.48 pct W/W, to 32.27. That's well above the M40 (29.17).

A week ago I wrote: "The trend is for bonds to continue lower, which will hurt the utility equity prices increasingly. A lower oil & gas price "reflecting economic slowdown " will also pull down equity prices in this sector. Double whammy " at least for a while. Longer-term, the bond market, based on strong corporate credits, will not likely continue to fall (significantly) unless the USD sharply sells off. That means that utility stocks will not likely fall as fast as I earlier thought. My thinking now is that interest rates will ratchet up slowly, and that China will continue to buy U.S. Treasuries (although not as many), which will hold down the rate of growth in U.S. bond yields and interest rates."

Well, energy prices were hot this week, and rates were basically flat on the week, so my caution, regarding earlier thoughts of a fast-dropping sector index, were accurate to a point " if you can call a weekly price rise of +1.48 pct as "not likely (to) fall as fast as I earlier thought." :-)

Bonds:

Interest rates and bond yields continue to rise, and the yield spread continues to narrow. Neither situation can be ignored by securities traders. But the big move in the bond market this week was on Friday morning, with the sharp sell off in bonds (and rise in yields). Did you see the effect of that on the equity market? It was huge.

Hourly data charts:

Daily data charts:

A week ago I wrote that "At some point " which is called the tipping point " higher interest rates, which are presently knocking down bond prices, will begin to impact stock prices."

I'm starting to think that a 10-year U.S. Treasury Note yielding above 4.60 pct might be that point. Presently, the bond market has backed down in price (and up to a 4.27 yield), and traders are starting to think about what might happen when yields pop up above 4.30 pct. I'm saying they could get up to 4.60 this year, and higher next year.

From the U.S. Fixed Income (Bonds) Yield Table at Yahoo Finance, the 30-year T-Bond is now yielding 4.46 pct, up from 4.43 pct W/W. At the same time, the 3-month T-Bill yield continues to move up. The yield now stands at 3.23, up from 3.08 two weeks ago.

Combine these two actions, and you see the spread between 30-year T-Bonds and 3-month T-Bills presently stands at +123 (basically unchanged on the week, but much, much lower than the level of almost +200 basis points three months ago), and is the lowest for years.

A yield spread of 300 basis points (between the 30-year and 3-month Treasuries) reflects a healthy economy in the U.S.. I have been aware that some TH's are saying this narrow rate gap is the new reality, and that there is nothing to worry about.

But, a yield spread that is zeroing in on +100 bp is rapidly showing that there are things running amok in the economy, contrary to what you are starting to hear from others.

I say the problems in the economy are greater than mundane things like jobs and spending. They are capital markets related. They are international money flow related, which is outside the control of the U.S. Fed.

I have written: "The concern here is that the forex system is electronic and 24 hours long. Changes happen at the speed of light, and private capital pools can move across borders silently and immediately. Before you know it, a nation's currency could be devastated, as in the case of George Soros and the Bank of England several years ago.

Here is the nub of the problem: (1) short rates cannot be held down or else international buyers (like China) will not place future funds in the U.S., (2) U.S. consumers continue to buy foreign goods, which exacerbates the situation, and (3) the U.S. real estate market requires low short rates to continue to sustain growth in residential home buying (which is so important to the economy), and any other strength in the U.S. economy will require corporations (which are at basically full occupancy of plant and equipment) to borrow extensively to expand, which will raise long rates as well as short rates further.

This is a serious problem. The only way for equities to stay strong is to continue to grow earnings at a high rate, but rising interest rates, high energy costs, and inflation-building declines in the USD, all mitigate against it.

It's only a matter of time before interest rates rise enough to tip the balance. Once that point is reached, the forex markets will become the biggest poker game in the world, with every major bank bankrolling their most highly skilled proprietary traders."

I truly believe that electronic capital markets are becoming the nexus for what I call The Trading Wars, i.e., my computers against yours, except that "me" and "you" happens to be Humungous Bank & Broker and colleagues.

The goals in this game are measured in billions, if not trillions.

But, I'm not so sure that the independent directors on the Boards of these mega corporations really understand what's at stake, and they ought to. This is not PlayStation.

How long will it be before U.S. politicians take their focus off Beijing-controlled CNOOC's traders trading in shares of Unocal (NYSE: UCL) and start to worry about other Beijing-employed traders gobbling up the pension plans of hard-working Americans by out-smarting them (and their agents) in the capital markets?

I tell you, as sure as my name is Bill Cara, this dilemma is going to surface.

You see, China is graduating significantly greater numbers of engineers and mathematicians annually, and they are paying them some US$500 monthly. Backed up by USD reserves of some three-quarters of a trillion Dollars, the Beijing authorities have the deepest pockets, and the best pool of human players, in the game.

If you have heard the expression, "never play poker with someone who has deeper pockets and more skill than you" " at least for real money " then you might understand the point, which is that, in some games, you can't win. Strategy is not enough; you get tactically over-run by the opponent's resources.

I am starting to question whether America can win at The Trading Wars; and, the first major battle, if you will, will likely be in the bond market.

And, not to scare all you new homeowners with short fuses on your mortgages, there is more at stake here than you have ever considered. I think there is more than a remote possibility that many of you will find yourself working for Beijing.

I have been pointing out in recent months, as the yield curve flattened moreso over the past months, that traders have become aware of the fact that, rather than "it's the economy, stupid", it is really international money flows that are increasingly needed to keep the U.S. real estate and capital markets game afloat.

As I have been saying, "Should the bond market start to stumble here, it could also dramatically affect the U.S. economy in a negative way, and quickly pull down the equity market."

But the bond market is far from being healthy. The yield curve is almost flat.

You know, of course, that the oil game is huge; but forex and bonds are much, much bigger. There is more at stake. So, a week ago, we started to monitor the crucial interest-rate sensitive securities, and will do so every week forward.

US Bond Funds -- Weekly Data Charts

US Bond Funds -- Daily Data Charts

Canadian Bond Funds -- Weekly Data Charts

Canadian Bond Funds -- Daily Data Charts

Consumer Finance -USA -- Weekly Data Charts

Consumer Finance -USA -- Daily Data Charts

A week ago I wrote, "You can see that rising interest rates caused a topping out of these securities in June and a serious decline starting at the start of July. Should this one facet of the capital markets continue to worsen over the next month, there will be a serious decline in the broad equity markets of the U.S. that follows. Now, rising interest rates are going to rise even faster if commodity prices continue to rise. So, let's look at the picture for commodities, which are costs that burden most sectors of the economy " unless you live in countries that are major exporters of commodities, like Canada, Australia, Brazil and so forth."

Same story.

Commodities:

A week ago I wrote: "Commodity prices have stayed essentially flat now for four weeks since the time the $CRB index rebounded to move up to 312. If you recall, right at the short-term cycle top, I was concerned that the $CRB index could not sustain its rally to move up to new cycle highs, and it did not. This week, $CRB closed at 304.25, down "1.72 pct W/W. The M40 is 296.30, so the index is still in a rising intermediate-term trend."

This week the price of the leading commodities, crude oil and gold, were up strongly. The $CRB commodity index was up +2.55 pct W/W to 312.00 (once again). That's a powerful move, and is consistent with rising interest rates, lower bonds, and lower USD.

The M40 for $CRB is up to 296.93, and rising.

Inflation is not yet a problem in the U.S., but the trend is positive. If the economy were to heat up later in the year or next, there would be higher energy prices (based on greater demand), plus higher interest rates, and much higher commodity prices.

Gold:

Gold has been in a consolidating phase, with a lot of sideways trading action. That may be coming to an end.

$GOLD, the spot bullion index, is up to 429.70, up +1.11 pct on the week, and now just under the M40 (430.80). A trader's target would be 443.70 and above, which is the prior weekly cycle high.

This interactive chart shows the recent trading for the Gold Bullion index.

The $XAU (Philly gold stocks index) closed this week at 90.76, which is a virtual collapse, and a surprise to me. The index was down "2.60 pct W/W, and is well below the M40 (94.65).

Last week I wrote: "$XAU sits just below the M40. It could be closing in on an upside breakout, or perhaps just pushing up to a resistance level before backing down again. I think the former." Wrong! " at least for this past week.

The Toronto Exchange-listed goldminer iUnits S&P/TSX Capped Gold Index ETF, which trades under the ticker symbol TSE:XGD was also down "3.20 pct W/W to 48.08. That's quite a drop after being up the prior week by +3.59 pct.

As you know, I have been accumulating goldminer shares slowly in anticipation of an upside breakout in 3Q05.

Here is the Hourly data chart for the TSX Goldshares index.

Here too are the interactive charts of the leading goldminers on the board. This week I thought we'd again look at the Hourly data charts because I still feel change in the wind, only this time in an upward direction.

List #1

List #2

List #3

Also, for you goldbugs, here, again, is a neat website that is well organized for research purposes, and whose owner (Bob Johnson) contacted me this week with thanks for the many referrals: www.goldsheetlinks.com

Once again, I feel this is the time to start getting involved in goldminer stock and goldminer stock index accumulation, if you are not already doing so.

Forex:

The U.S. Dollar weakened this week again. The USD closed at 89.35, down "0.33 pct on the week. And on Friday, the USD was absolutely flat on the day.

The $XEU again closed up +0.44 pct this week to 121.26. The (small) trend persists.

Two weeks ago, I wrote: "Charts of the $XEU are looking like a bottoming pattern has completed, which would be a godsend to goldbugs. ;(then a week ago)..The debt issues facing Americans are not going away. Now that the USD is headed south, it could be time for precious metals to take on a little glister." Well, $XEU is up +1.57 pct in three weeks!

It's a long way from the 1.32 I'd like to see, but $XEU is headed in the right direction.

International Equities:

The Canadian equity market remains hot, and the U.K. market was strong this week as well. With Canada, it's been a matter of the oils and the financials, which have been so very strong, and for now staying that way.

Japanese equity market ETF: EWJ

Japan (EWJ) was down "0.19 pct W/W to 10.24, which is just about the same level of the past six weeks.

Two weeks ago, I wrote: "The Japanese equity market has declined modestly for over a year. The operative words are â€˜declined' and â€˜year'. I have said before that if China and the U.S. were not such hot trading partners, this country would not be doing so well. Until I see a pattern of global economic expansion, however, I remain mildly negative. "

I see the Japanese market, in USD, topping out here. The MACD, Stochastic and RSI indicators are not strong.

Monthly Data for EWJ:

U.K. equity market ETF: EWU

The U.K. market (EWU) was up strongly +1.40 pct this week to 18.10. Catching the remaining crew of terrorist bombers will pump some enthusiasm into the market.

Still, I remain mildly negative on EWU. Like EWJ, the technical indicators for EWU are not strong for the Extra-Year Trader. There is plenty of time ahead to accumulate stocks at better prices.

Monthly Data for EWU:

Canadian equity market ETF: EWC

The EWC had another good week, up +0.47 pct W/W to 19.31. It is well up on the M40 (17.36).

Again, this rally was due largely to the energy stocks having yet another rally. Compared to the U.S., I still think the Canadian economy, stock market, and Loonie, are in good shape. The Bank of Canada has a lot of leeway to move rates higher and faster than the U.S. Fed does. In fact, Alan Greenspan must be envious.

Monthly Data for EWC:

For an interactive look, here are the hourly data charts of the various international equity markets as represented by the U.S.-listed and dollar-denominated ETFs:

(Japan, Taiwan, Hong Kong, Singapore)
(U.K., Germany, France, Italy)
(Canada, Mexico, Brazil, Australia).

U.S. Equities:

Here is the 60-minute data chart of the Dow, S&P 500, Nasdaq Composite, and Russell 2000 (small cap) indexes.

Here is the Weekly data chart of the Dow, S&P 500, Nasdaq Composite, and Russell 2000 (small cap) indexes.

For the week, the $DJX (Dow 30) was down "0.09 pct to 10,640.91. A week ago, it was up +0.09 pct. The Nasdaq Composite up +0.23 pct to 2184.83, and the $SPY up +0.04 pct to 1234.18. The $RUT up +0.29 pct to 679.75, all pct numbers W/W.

That was another so-so week, except for the Friday broad market smashing, where all markets were down significantly. It will be interesting to see if Monday brings more of the same.

I remain unimpressed with the U.S. equity market, believing it to be trading at too high a risk to potential reward level.

The following charts for the Weekly data series of the broad U.S. equity market indexes indicate that RSI and Stochastic data values (both are similar calculations by the way) are at very high levels, which typifies the topping out of an intermediate-term bull market cycle.

This is not the time to rejoice the words of CNBC Talking Heads like Robert Froehlich, Jim Cramer and Larry Kudlow, and their friends. These people have vested interests in seeing the continuation of bull markets.

Bull markets rise on the basis of drivers like future earnings growth, lower interest rates, and so forth. Earnings growth is slowing, rates are rising, and equity prices have made substantial moves since 4Q02. So, be ultra cautious here.

Some of the dialogue has moved from the sublime to the ridiculous.

The day before Friday's Commerce Department report on 2Q05 GDP, which followed a strong 1Q05 report, which had been reported as up +3.8 pct, and was widely touted to be in the same range, there was Mr. Froehlich on CNBC giving his top 10 reasons why the U.S. equity market was in great shape.

Reason number one, he said, was that the GDP (to be announced the following day) would be up by +4.0 pct " above consensus estimates " which was surprising, but maybe on second thought, not so surprising.

The actual 2Q05 GDP number released Friday was up +3.4 pct, clearly a sign of slowing. That won't stop Froehlich, however. Pick a number " any number " and he'll embellish it, and create a sales pitch. That's what he does for a living.

On July 14, his company published his Top Ten list, at this link. He forecasted an S&P500 that will close the year 10 pct to 12 pct higher. That happens to be a 22 pct to 26 pct annual rate of growth in price, which together with dividends, would result in an average annual return on invested capital, in equities, for the balance of this year, of about +25 pct.

I say that's ridiculous.

What happens if he's wrong? Does the man have any covenant? I say, let's see his personal portfolio if he's going to carry on like that, in such an important job.

Do you think for a moment that Froehlich cares a whit about being wrong, about misleading the audience? I hardly think so; it's part of his act. The man's a clown, in my view, and I say that after every single appearance he makes, regardless of whatever employer he is promoting, or high-falutin title they give him.

Actually, seeing Froehlich do his Vaudeville act on Financial Entertainment TV is, in my eyes, akin to watching the traveling medicinal fraud-wagon in a "B" western movie.

The fact is, he's always bullish because he's paid to be bullish. What the small independent buy-side trader needs, however, is objective analysis. It's our job to protect capital, first and foremost. Then, when the risks are down, we try to increase our capital.

I intend to write an article reviewing each of the Froehlich Top Ten, looking into the risks he exposes traders to. And maybe he'll think I'm a clown too. That's what makes markets.

It would be nice, however, to see CNBC present the serious views of strictly independent traders, rather than kow-tow to the sell-side advertisers who constantly ring the network's cash register.

Geopolitically, I think that nerves are tightening, and oil prices are starting to rally again. I believe that present tensions will help a couple equity market sectors in the U.S., plus a wider swath of the equity markets in Canada and Brazil, but it is not a good omen for the broad equity markets of the U.S., Europe and Japan.

In the current environment, I see that risk premiums will rise and take interest rates higher. Commodity prices will move up too, which is also bad for stocks and bonds.

So, I continue to warn that the end of the bull cycle is getting closer, and that readers ought to be taking steps to protect their portfolios.

There are many ways you can do that, such as:

Â· Selling stocks that have given you exceptional profits, or are up significantly since 1Q03

Â· Buying put options against core portfolio stocks you don't want to sell but would if you believed they were to fall say 7 to 10 pct at the start of a bear market. That way, if the market does rally, you keep the stock, but your cost base rises by the cost of the puts.

Â· Buying counter-cyclical stocks that have already had a major bear phase or those that appear ready to start a new bull. Gold stocks would be in that category.

The following table shows the weekly price performance of the Dow 30 stocks, which I sorted by 1-week price change. Note that the Net column represents the Daily change, which this week was extreme. The "1W %Net" column, however, represents the W/W performance.

Two weeks ago, there were 26 Dow components up and just four down. A week later, it was: 19 down and 11 up. This week it was: 13 up, 16 down, and one flat.

Do you see a trend?

The five biggest winners this week: SBC, up +3.08 pct; CAT, up +2.86 pct; HON, up +2.83 pct; HPQ, up +1.82 pct; and GM, up +1.57 pct.

HON was up +4.47 pct the week earlier, as was CAT, up +3.43 pct, so it's been a hot streak for both.

For the five Dow losers this week, DD led the pack, down "3.44 pct despite a huge up-day Friday against the flow of the market. Then there was C, again, down "2.07 pct, after being down "4.31 pct the prior week, and AA down "1.96 pct, GE down "1.63 pct, and JPM down "1.29 pct.

With C and JPM being off so much, and interest rates on the rise, the financials were not showing any leadership, except going south.

What I am noting is that in the absence of U.S. legislative help, or pork, or huge job cuts, or share buy-back plans, there is not much going for these Dow 30 component stocks.

You can do this table yourself by copying the following list of the Dow 30 stocks and entering them in the window for "Summaries" at Investertech.com.

AA AIG AXP BA C CAT DD DIS GE GM HD HON HPQ IBM INTC JNJ JPM KO MCD MMM MO MRK MSFT PFE PG SBC UTX VZ WMT XOM

After you bring up the list, click on the Performance tab. To sort for the relative price performance for any recent period, you just need to click on the column header of the period that interests you.

Here are the Dow charts from Investertech.com that I broke into groups of ten, which you can add technical indicators for as well. (list one) (list two) (list three)

(AA) (AA) (Here is the Jul. 22 Value Line report on AA: next one is due Oct. 21)

(AIG) (AIG) (Here is the May 27 Value Line report on AIG: next one is due Aug. 26)

(AXP) (AXP) (Here is the May 27 Value Line report on AXP: next one is due Aug. 26)

(BA) (BA) (Here is the Jun. 24 Value Line report on BA: next one is due Sep. 23)

(CAT) (CAT) (Here is the Jul. 29 Value Line report on CAT: next one is due Oct. 28)

(DD) (DD) (Here is the Jul. 22 Value Line report on DD: next one is due Oct. 21)

(DIS) (DIS) (Here is the May 20 Value Line report on DIS: next one is due Aug. 19)

(GE) (GE) (Here is the July 15 Value Line report on GE: next one is due Oct 14)

(GM) (GM) Here is the Jun. 3 Value Line report on GM: next one is due Sep. 3)

(HD) (HD) (Here is the July 8 Value Line report on HD: next one is due Oct 7)

(HON) (HON) (Here is the Jul. 29 Value Line report on HON: next one is due Oct. 28)

(HPQ) (HPQ) (Here is the July 15 Value Line report on HPQ: next one is due Oct 14)

(IBM) (IBM) (Here is the July 15 Value Line report on IBM: next one is due Oct 14)

(INTC) (INTC) (Here is the July 15 Value Line report on INTC: next one is due Oct 14)

(JNJ) (JNJ) Here is the Jun. 3 Value Line report on JNJ: next one is due Sep. 3)

(JPM) (JPM) (Here is the May 27 Value Line report on JPM: next one is due Aug. 26)

(KO) (KO) (Here is the May 6 Value Line report on KO: next one is due Aug 5)

(MCD) (MCD) (Here is the Jun 10 Value Line report on MCD: next one is due Sep. 10)

(MMM) (MMM) (Here is the May 20 Value Line report on MMM: next one is due Aug 19)

(MO) (MO) (Here is the May 6 Value Line report on MO: next one is due Aug 5)

(MRK) (MRK) (Here is the Jul. 22 Value Line report on MRK: next one is due Oct. 21)

(MSFT) (MSFT) (Here is the May 27 Value Line report on MSFT: next one is due Aug. 26)

(PFE) (PFE) (Here is the Jul. 22 Value Line report on PFE: next one is due Oct. 21)

(PG) (PG) (Here is the July 8 Value Line report on PG: next one is due Oct 7)

(SBC) (SBC) (Here is the July 1 Value Line report on SBC: next one is due Sept 30)

(UTX) (UTX) (Here is the Jul. 29 Value Line report on UTX: next one is due Oct. 28)

(VZ) (VZ) (Here is the July 1 Value Line report on VZ: next one is due Sept 30)

(WMT) (WMT) (Here is the May 13 Value Line report on WMT: next one is due Aug. 12)

(XOM) (XOM) (Here is the Jun. 17 Value Line report on XOM: next one is due Sep. 16)

The new reports this week were on HON, CAT and UTX. Happy reading.

Posted by Posted by Bill Cara on July 30, 2005 03:50:38 PM | Category: Cara Week in Review

Discourse

Bill,
Regarding Altera, I am invested in one of its smaller competitors, Quicklogic (QUIK). I think QUIK's recent conference call may explain why Altera management was so testy. QUIK's CEO said that the field-programmable gate array (FPGA) technology that Altera and Xilinx use is falling behind in key areas like power consumption. Perhaps Altera and Xilinx are looking at the tail end of the product cycles for that technology? Altera and Xilinx charts suggest that storm clouds are on the horizon, especially relative to the semi sector in general or non-FPGA competitors like QUIK. Obviously, this is just background and cannot justify Altera's behavior.

Posted by: josh at July 30, 2005 5:13 PM [link]