Monthly Archives: May 2008

Oil watching and wage inflation’s impact on corporate profits

Oil dropped off today below $129, apparently on demand concerns. What a load of rubbish!!! As I have written time and again before this market is exhibiting classic signals of a technical bull run. I really do think that we could see the $150 level challenged before the year end. However, in the meantime a pullback is looking likely. Prices peaked at just over $135 and volume flow into the market was massive.Since this move momentum has stalled and we have seen a gradual overall retreat, characterised by a lot of volatility.

I have been wondering over the last few weeks, whether or not the end of May would be a good time to short oil. In very basic terms this view sort of makes sense as the holiday season is around the corner. Why would a trader load up on more positions at this stage? Equally the temptation to reduce exposure and take profits, in light of the upcoming break, must also be a strong motivation. Ignoring the fundamentals of demand, I do think these two points make a fairly compelling argument for a likely pullback.

How far will oil drop?

According to the system there are three potential entry points. These are 12401:12421, 11692:11714 and 10813:10829.

As I have written before the first of these has a very short-term base, stretching back a month or so. This might be a decent place to get in on a very short term basis, but I am likely to wait for the price to pull-back to one of the other two levels.

I know that the Strategic Petroleum Reserve Announcement stated that they will only start buying oil at $75; I think this is an unlikely occurrence this year. Equally I don’t really think that oil will go back below $100 before challenging $150. Assuming the price does get down to 11692:11714, I will probably load up on long positions at this point. Of course timing will play a factor and my optimal entry point will probably be towards the end of August.

Moving back over to stocks and the prospects of the economy, I had a very interesting conversation today about the likely impact of wage inflation on corporate profitability. Inflation has been a theme I have covered and is a real concern to me. Inflationary pressures are rampant all over the world (the oil price being one of the most obvious manifestations of this).

One of the BBC’s main news programmes ran a telling feature a few weeks ago, which helped frame today’s conversation. The basic assertion was that families across the UK are really starting to feel the pressure of rising prices, too much debt and falling house prices. OK so there are no great shocks there, but I do think this gives us a real insight into developing a medium/long term trading strategy.

So far corporate profits have not come under too much undue pressure. The banking sector apart, last earnings season was broadly in line with expectations, if not erring on the upside.

There is likely to come a point though, when employees start to demand more in their pay packets to cover the costs of living. If this does start to happen (and here in the UK we have seen the first signs of growing discontent in different labour forces), then this is likely to have a serious impact on corporate profits, which will translate into lower share prices. For most companies, one of the largest cost bases is the wage bill.

Slowing growth is certainly a major macro challenge facing companies, but I have not really picked up on any commentary pointing out wage inflation as a serious threat.

I have to be honest and admit I am not too familiar with the wage stats that are released in the US and UK, but starting next week I am going to start to pay far more attention to these data sets. If I am right on this point then I could seriously revisit my Dow 11000 prediction (if not worse!)

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The bear striking back and a missed oil opportunity

Calling tops and bottoms of markets is generally a fool’s game. However occasionally you will get lucky and not only call the top of the market but also trade it!

After Monday’s blog I was mildly concerned about my entry point on the Dow at 13050, as it put on about another 90 points above this. However since that point the market has tanked on BIG volume. This is in stark contrast to the light volume seen during the most recent rises.

As bearish signals go, the last two days’ action is at the higher end. Coupled with a one day reversal yesterday things are not looking good for stocks.

Taking the view of the system the Dow has value zones at 12096:12111 and 12543:12555. Obviously the former has a longer term base (October 2005), whilst the latter’s base is the January 2008 low. The Dow’s upper retraction zone is 12798:12809. The ceiling of this occurred at the October 2007 high.

Given the relative positions (and with summer approaching) I took all my profits on this trade. I do however think we could see the 12550 level tested this week and might even see the 12100 tested in the coming weeks.

In terms of long term direction of the market I am still sticking to my Dow 11000 prediction. I have written all along that I have viewed the latest market moves as a bear rally. This theory is being tested now and if markets do move lower, we could see deeper falls. The Fed is no longer in a position to support the market as they have done nearly all they can.

The one powerful factor I can see is the Presidential elections later in the year. Normally a regime change is positive for stocks. However such is the extent of the structural problems facing the US economy (and society) I think any respite will be short lived.

On another note Oil has been powering ahead in recent weeks. The bullish sentiment is so high, that yesterday’s huge move on news of a drop in the Strategic Petroleum Reserve. To be honest this was reasonably predictable. An announcement was made that the SPR will not buy oil at current price levels and is seeking to reenter at $75. A drop this week was therefore not overly surprising and nor was the reaction given the current sentiment.

I missed this, but I am keeping a close eye out for the next serious pullback in oil. At this point it will be time to load up!

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Nerve going on Palladium; the state of UK consumers; US indices topping?

Frankly, my bottle went last Thursday on Palladium. I had a great position, but I rushed to lock in a relatively small profit, when the price had fallen. In doing so I missed a massive move on Friday, which saw Palladium top out at about $455 (in otherworld rally 5%). You can guess my reaction!

In terms of Palladium’s direction now if it manages to stay above $440, then expect to see it rise another 10% in the coming months. I am glad Tim is still in and didn’t mirror my trade, but I am equally disappointed in myself. This really was an excellent opportunity that I have wasted. Life goes on…..

Over the weekend and this morning I have seen several reports, which have caused me quite a lot of concern, but have not been massive surprises. First off we saw reports on Sunday that more people in “affluent” areas are seeking debt counseling and advice, as they are struggling to manage their debts.

The root causes of this have been generically attributed to “the Credit Crisis”, but I want to be a bit more specific than that.

News of credit woes in areas like Surrey and Suffolk as opposed to Southwark or Southend has apparently come as a surprise to Government planners, who dedicated most of the £55 million spent on 500 new debt counselors to inner-city disadvantaged communities. When this initiative was announced, I did think at the time that this was quite a patronising policy response that was pitched at the wrong area.

Here’s why….

I wrote a few months ago that one likely impact of the Credit Crisis would be that people, who had grown used to taking advantage of balance transfers at “introductory” 0% rates, rather than paying off the principal of their credit cards, would be amongst the first to suffer a serious backlash. This was a terrible financial habit to get into and one that would more than likely be extremely difficult to break. Worse still is it seems to have been an indiscriminate problem, which has affected people from all walks of life. People, who really should have known better, had become used to a standard of living, based almost entirely on the premise of indefinite free credit. This situation was never going to last forever.

A common theme amongst such consumers was the general expectation that they had a failsafe, in their rising house prices, which would enable them to release equity and pay off the debt, in the event of the 0% deals coming to an end. Unsurprisingly this plan has gone up in smoke.

Now we are almost certainly seeing the vanguard of over-extended consumers, whose last 0% introductory deal has come to an end and is now living up to the frightening reality of £X thousand pounds worth of debt growing at an annual rate of +14% a year.

Of course it has taken some time for these symptoms to manifest into a visible economic problem, but I believe it will not be long, before we start to hear about a “Credit Card Crisis”.

This has serious implications for the health of the UK economy, especially given the significance of consumer spending.

The second bit of bad news came across the wires this morning. The Royal Institute of Chartered Surveyors could fall by as much as 40% this year. This comes a week after Caroline Flint, a junior housing minister, inadvertently showed her briefing notes on the subject to the press photographers, outside Downing Street. “We don’t know how bad it will get” was my favourite quote.

It must be a near certainty that the UK housing market now follows the US one down the toilet.

Over-taxed UK consumers, already feeling the pinch from rising inflation and heavily burdened with expensive loans, are now likely to watch a large portion of their personal wealth ebb away as house prices fall. Well at least the stock market is going up……

….. for now at least. Jumping over the pond, there are some cautionary signals on that front too.

Looking at the DJI and S&P 500, both indices appear to have put in respectable performances in recent weeks. At first glance that is. Deeper analysis reveals that the latest stage of the rally appears to be built on sand. Last week the volume on the NYSE Composite Index, which moved 2%, was the lowest in 5 years. The volume on the rally from March (12%) is lower than the volume from the January lows.

The Dow’s higher retraction zone stands at 12790:12801, the S&P’s at 1403:1408. Although both indices are trading well above those levels, I am now going to short the Dow. My entry price is 13050. I recognise this is a very risky position to take, but volume stats are really not to be ignored.

If the US does take a dive, expect to see the same over here. For my money, if the FTSE does hit 6400 I am going to go short then. While this is not a system trade, it looks like a decent point to test my trading strategy.

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Closed palladium and long Barclays?

As I mentioned the other day I am not happy with the movement of Palladium in the last few days. I think we are likely to see a test of the 416:422 value zone, if not a test of 400 again (which seems to be a key level). I have decided to take profits on this on this one and watch for a buy in at a lower level.

Taking an extremely short term view, Palladium has a retraction zone at 444:448, which it reversed off. Admittedly the base of this was only formed on March 14th, but a reversal off this could prove to be significant. I am going to keep watching this closely and will update on any further moves.

Barclays announced £1billion in write downs and the share price is at 413 as of writing. This is below the 458:462 primary value zone, whose base is 1992. Recent lows have seen the price drop below 400. There might be further downwards pressure on this stock, but I am think now is a good time to get in, with a long term view.

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Palladium looking toppy

In the last few days Palladium has encountered resistance at about the 440 mark. It hovered around this level for a few days and has now retreated slightly. I am looking for a decent breakout move in the next few days or this is looking like one to ditch. As a precaution I have tightened my stops, so as to lock in at least some profit. I am considering closing out half of my position, thereby securing more, but equally I am tempted to let this one run.

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Watching Oil

I read a ridiculous headline today explaining yesterday’s rally in equity markets. Apparently the fall in the oil price abated investors’ fears about inflation!!!! What a load of nonsense.

I have written before about the total rubbish that is written in a lot of commentary about moves in the oil market. For the record oil fell about $2 yesterday to about $123.50, which is about 3 Bucks short of the all time high set not long ago.

You will remember that the latest rally off $100 started back in early April. The system called this perfectly, but I took the decision at the time not to trade it. Looking back now, this was a real mistake on my part. This is made even more galling by the fact that oil has since surged $26 from where I identified the trade.

Looking at the charts oil is in an exceptionally entrenched technical bull trend. Since January 2007 it has formed and rallied off 5 consecutive value zones. Normally I wouldn’t trade beyond an outer value zone (the 4th). However I think I am going to break this pattern, on oil’s next pullback.Currently the system shows value zones at 11095:11104 and 10462:10474. The former’s base is relatively short lived, dating back to April 1st. The latter’s base is February 6th.

At some point a correction will occur, but I am fairly certain this will not be the end of oil’s unstoppable march higher. Headlines last week announced that oil could peak between $150 and $200. Of course such a prediction is not overly helpful in terms of formulating a trading strategy, but I do agree that we could well see $150 oil before the end of the year.

I just hope to catch some of that ride!

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Barclays and BT – long term buys

I had a look through the components of the FTSE100 today and came across two stocks, which look like excellent long term buys.

I have written before about BT. BT’s primary value zone, dating back to March 2003 is now at 221:226. It has held a fairly steady course along this value zone since early February. While it has not been a stock that has benefited from the parallel rise in the FTSE, it is encouraging that it seems to have found something of a base. Encouragingly volume flow has reversed in recent weeks, which indicates that underlying buying is starting to increase. BT has generally been an old faithful of many UK pension funds. If you are taking a long term view on the market, then I am sure this stock represents good value at this price. I am assessing what to invest my ISA in this year and I am fairly certain BT is going to be one of my key components.

Moving onto Barclays this stock is at a very interesting point. While rumours abound that the bank is going to announce severe write downs next Thursday, the stock is trading just below its primary value zone of 462:469. What is most significant about this level is that its base is September 1992. Such a long term value zone is always extremely significant and usually tends to represent a fantastic buying opportunity.

This particular value zone has been tested twice. The first time was in October 1998 and the second in March 2003. The first of these tests coincided with the Russian default, the collapse of LTCM and the Asian financial crisis. The second coincided with the start of the latest Bull Run and final unraveling of the dotcom collapse. The main difference between current conditions and previous ones is that this time the price has both breached and held the value zone over a three month period. In 1998 and 2003 the price rallied strongly off this level, after slight, short-lived breaches. While the absence of a strong rally is not so positive, this stock should still represent excellent long term value, assuming next week’s announcement isn’t too disastrous. Buying ahead of the announcement will not be for the feint hearted, but the current price (451.5) is tempting. Again this is one for buying and holding in the long run.

Finally I took advantage of a price drop in Palladium today to double my exposure. I was quite lucky and bought on a dip and the new position was in profit by the market-close. I have set limits at 488, which is in the middle of the commodity’s retraction zone and is likely to be a point of resistance. Even if it goes higher, I will be more than happy to take an exceptional profit at that level. I am going to manage very tight stops on this over the coming weeks.

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S&P500, DJI at critical levels; Palladium update

Yesterday saw heavy pullbacks on heavy volume for both the Dow and the S&P500. It is no secret that I am still highly bearish at the moment, but I have not shorted either index. Here’s why…

Following both tickers in the last few 6 weeks has shown relatively bullish moves and surprising robustness in the markets. While economic data continues to be bad people are still buying stocks. The affects of the Fed rate cuts and other interventions are certainly starting to be felt, as the increased liquidity in the system is put to use.

On a fundamental level I do not believe this solves the structural problems facing economies, but a temporary respite from these is likely. We must remember that one of the root causes of the credit crisis was free availability of cheap credit in response to the dotcom meltdown. Although repossessions in the States and UK are on the up and house prices are falling, so far this hasn’t translated into a collapse in consumer spending. Consumer confidence is at very low levels, but the twin impacts of this being a Presidential election year (and a new sense of optimism in the new regime) and the US tax rebates are further boons to an ailing economy.

Getting back to the charts, the S&P reversed off its higher retraction zone (1402:1408) to close at 1392 and the Dow pulled back to 12814, which is just above its higher retraction zone (12786:12797). I have written in the past that retraction zones can turn into a form of support for a market, which there is some uncertainty about as to which direction it is going. Current conditions are a classic example of that. While bad news abounds, there is still quite a lot of positive sentiment out there.

I know I have been sitting on the fence for a while with the indices, but I really haven’t had the courage of my convictions to go heavily short.

The more I look at it the more I wonder if I am wrong.If a pull back does occur it is worth noting that the system shows the Dow’s next value zone at 12390:12401 and the S&P 500’s is at 1348:1354. I really cannot believe I am going to say this, but if these levels are tested, I really might seriously consider going long…
… but I really will have to see about that.

On a more positive note, Palladium has performed extremely nicely since I traded last Friday. The US$ has rallied pretty strongly, but this has not knocked the price. I am sitting on a reasonable profit, but I intend to see this one much higher. At the moment I am looking for a move back to the 500 level in the next few months.

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Wrong footed by indices & long Palladium

This has not been a good week for me trading indices. I really thought I was on the money after Wednesday’s post-Fed announcement. I took that sell off as an extremely bearish sign. I expected a worse US payroll number today, but even so have been extremely surprised at the market’s immediate reaction. The labour market contracted for a fourth consecutive month in April but indices spiked across the world.

I traded with far too tight stops and got wiped out instantly.

Moving on from the obvious bitter feelings of losing money the rest of the day in the US saw pretty much all gains reverse. 13,000 for the Dow is a key psychological level and is also above the higher retraction zone. With continued economic downturn I really cannot see why people are buying stocks at the moment. I need to be extremely careful of this mindset as the surest way to lose a great deal of money is to convince oneself that one’s position is right and it is the market which is wrong. This said I am still medium term bearish. We are fast approaching the summer and then a US Presidential election (if the Democratic Primaries ever finish!).

Not much data comes out next week and earnings season is pretty much over, so what is going to move markets in either direction in the next few months? Unless there is another Bear Stearns out there or the next twist in the Credit Crisis strikes it is hard to see what is going to impact stocks negatively. Of course low volume in the summer could make things interesting, but there does seem to be a lot of positive sentiment out there.

Reading this week’s FT was like reading the pamphlet of an American self-help guru. Apparently everything is fine!

One interesting point which I came across last week was the record levels of short interest in the US market. I forget the figures (and helpfully, can’t find them) but the implications of this are clear. For people going short to make money they need markets to fall. OK so this is trading 1.01, but markets haven’t fallen in recent weeks. The more they go up (or refuse to fall) then the more pressure short sellers will be under to cover their positions or even close out. Given the levels talked about, this could provide a massive short term boost to markets. I really need to see if I can find this article and verify it.

My view (as has been the case a lot recently) is that I am going to get back on the fence and see how things pan out next week.

On another note the system has thrown up an extremely interesting trade in the last few days.

Palladium has pulled back to its secondary value zone (418:424). I have gone long.

Admittedly I don’t know much about Palladium, but this really is a clear technical buy in a trending market. I got in at about 415, but it had tested 400 earlier in the day.

Looking back at historical charts 400 seems to have been a critical level for Palladium. It took a long time for the metal to break through it, but when it did, it soared. The price has pulled back sharply in the last 2 months, but this has not been reflected in negative volume flow.

As with other commodities, the price of Palladium is likely to be highly sensitive to the US$ strengthening. As such I have traded with tight stops. As of writing the price of Palladium has continued to rise though and I am already nearly breaking even. I will keep you updated as to how this pans out.

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