Bill Cara: Cara’s Friday Report, Sept. 28, 2007, 9:29 AM

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September 28, 2007

Cara’s Friday Report, Sept. 28, 2007, 9:29 AM

Market Chat

Traders are caught between having confidence in global economic growth and losing it over worries that the next shoe to drop in the Financial sector could be a devastating blow. They lie awake at night thinking about the Fed’s next move.

Yesterday, the Fed added $38 billion of liquid reserves in four operations, following several days of smaller additions. That helped the Financials (XLF +0.86 pct) on the day.

One longer-term picture traders ought to focus on is the XLF (Financial Select Sector SPDR that trades on the AMEX).

There is a Point & Figure price objective of just 26 for the XLF (presently 34.46). Technicians will say that if the XLF drops below 31.28, the US equity market (and undoubtedly the UK/Europe/Japanese markets too) will be doomed to a Bear market cycle of immense proportions.

So the Bulls have placed their trust in Prof. Bernanke, which even for a Bull can’t be the most inspiring notion.

Yesterday, the Bullish momentum was held in check somewhat by the US Housing report that showed New Home sales is at its lowest level in 7 years, down -8.3 pct in August and -21.2 pct for the year, to a seasonally adjusted annual rate of 795,000. Median sales prices dropped -7.5 pct to $225,700 Y/Y.

The jobless claims dropped 15,000 on a seasonally-adjusted basis to 298,000 in the week ended Sept. 22. This suggests that maybe the labor market may not be cooling as fast as last month’s weak US Jobs Report indicated.

The DJIA (+34.8 +0.25 pct), S&P 500 (+6.0 +0.39 pct), and Nasdaq Composite (+10.6 +0.39 pct) were modestly higher with Energy (XLE +1.30 pct), Basic Materials (XLB +1.17 pct) and Financials (XLF +1.17 pct) leading the market. Utilities (XLU -0.71 pct) and Consumer Discretionary (XLY -0.49 pct) were the losers.

Home builder KB Home (KBH) recorded a 3Q net loss despite the $807.2 million sale of its 49 pct stake in its French operations.

FL Group is urging AMR Corp (AMR) the parent of American Airlines to consider spinning off AAdvantage (frequent-flier program) to boost the share price that has plunged almost -50 pct ($41 to $22.02) since January.

Microsoft said its hot new video game, Halo 3, had ~$170 million in US sales, a record first day release for the games industry.

Crude Oil soared +3.21 pct to 82.88 while Natural Gas fell sharply on a build in inventory as reported by the Department of Energy.

Treasury prices were very strong as yields on the 30-year and 10-year dropped -1.14 pct to 4.837 and -1.02 pct to 4.573 respectively.

The dollar rallied against the yen but dropped on a trade-weighted basis ($USD 78.41 -0.16 pct).

Asian stocks closed significantly higher, setting new records, before European markets closed modestly higher. This morning the European markets are quite soft again due to credit market concerns as financial institutions are working through the process of marking to market (rather than to book value) the collateralized debt obligations (CDO’s) and residential mortgage-backed securities (RMBS) they hold. Globally, this is a trillion dollar problem that needs time for restructuring.

Without help from central banks and agreements from within the banking community there could be a melt-down in that market, causing some major banks and near-bank financial institutions to fail. I recommend that all traders who still hold portfolio positions in the Financial sector check the relative price performance of each stock against the sector (XLF for the US market). The weakest performers are the ones that insiders and major (best informed) traders have been selling off.

In the words of Louise Yamada, “Over-sold is empirical evidence of selling. You don’t want to go back (long) into that market until that condition is alleviated.” That is a reason why I do not have a Buy Alert until the respective RSI-7 value that dipped below 30 rises above it. In other words, if I am short-term swing trading, I wait until the Daily RSI-7 jumps back across the 30 line, and if I am an intermediate-term trader, I wait until the Weekly RSI-7 moves above 30. If I am managing a long-term oriented portfolio, I wait until the Monthly RSI-7 moves up through the 30 level. In fact, I try to time trades that combine all three time horizons whenever committing the full amount to any trade.

Believe me, there will be a lot of water under the bridge before the fiasco in the global credit market returns to normal. In the interim, I think there will be a primary Bear cycle in the US, UK/Europe and Japan’s equity markets, causing capital to flow (for one intermediate-term cycle at least) to Emerging Economies, particularly China, India and Brazil, and commodity-based markets like Canada and Australia (and Brazil). As central bankers rush to plug the holes in the dike, commodity prices will have to rise against the declining value of fiat money.

If you can avoid the periodic moves by central bankers, finance ministers and HB&B against the gold and silver market, that’s the one place you can be assured (as best markets can give assurance to anybody) of portfolio gains.

International Economics Review

US Economic Calendar

Today we are told that US consumer spending is flourishing and that consumers are experiencing a tiny core inflation rate of +1.8 pct Y/Y. Hmmm.

The updated Econoday report for August data will be available soon. US Personal Income and Outlays Report of Econoday.

The Cara Global 100 Stockwatch

Here are the Thursday session Cara 100 gainers.

Here are Cara 100 losers from Thursday.

Here are the Cara 100 stocks that hit 52-week intra-day highs or lows in the Thursday session. The New Highs list is growing. Watch the Distribution Zone for Sell Alerts. Successful traders sell into strength (and buy into weakness), like any businessperson would do.

Here are the Cara 100 stocks that had extreme volume changes.

There has been a pick-up in trading volume in the US equity market following the FOMC decision to cut rates -50 basis points this month. It pays to watch the price and volume extremes, ie, Money Flow, especially when markets start trending. Note how enthusiastic traders have become, with price increases on huge volume expansions, but some stocks are being sold as heavily well.

Key Stocks plus Cara 100 In Focus

There are various sources for up/down grades by broker-dealers. One is at Briefing.com. Traders ought to check everyday for ratings changes. That website is updated later in the morning.

I am appreciative to the folks at KNOBIAS, Inc for providing the Cara 100 summaries.

Relative Strength Index (RSI) analysis of the Cara 100 company stocks .

RSI > 70 (12 of 40)

RSI < 30 (1)

Here are the Cara 100 stocks that traded Thursday with the highest and lowest RSI-7, sorted by (i) daily and (ii) monthly values:

“Chris,” used BillCara2.com data that is unsmoothed, unlike the data from Worden used by “David”.

US Equity Markets Review

DJIA (interactive) chart

At 13913, the DJIA is running into overhead supply from some traders who believe there will be a double top condition unfold here.

NASDAQ Composite (interactive) chart

The Nasdaq has been moving higher as well. There may be a double top soon, although it’s hard to tell. I think that as long as the $USD falls, the US equity market moves higher because foreign currencies are that much more valuable and traders there are thinking everything in the US is on sale. What I think we’ll see (more of) is that these foreign traders will use their USD to buy their domestic securities that are US-listed.

International Equity Markets Review

Asia-Pacific

The indexes across Asia-Pacific equity markets were mixed today. Shanghai shrugged off bank tightening and powered north, but the Nikkei of Tokyo dropped a bit.

Here is the latest session data for the Asia-Pacific stock exchanges.