Monthly Archives: June 2008

Dow 11,150

Yes I am still on holiday, but I caught a headline on CNN today that the Dow had fallen 360 points and the S&P 500 was down 38 points.

I wrote earlier in the year (and stuck to the idea) that the Dow was more than likely headed to 11,000, which represented its Primary Value Zone, whose base was back in March 2003 (the start of the last Bull Market). This prediction is looking good now.

I haven’t had much of a chance to read around, but the latest falls were attributed to a variety of reasons, but surprisingly not yesterday’s move by the Fed. Unless I have really misread something, yesterday’s announcement to keep rates on hold was also coupled with a fairly hawkish statement, almost certainly leaving the path clear for rate increases later in the year. Looking at the yesterday’s charts, this was followed by an immediate sell-off.

Today’s follow through selling, while almost certainly exacerbated by other factors (Citi downgrade, Oil at $140, forecast reductions etc.) we must remember that last year’s massive run up was in large part driven by interest rate reduction expectations. Now that rates are likely to start to head up (which they surely must given the rampant inflationary pressures witnessed on all fronts — notably apart from wages, yet), this is sure to have a substantial downward affect on markets.

However (and this is a big ‘HOWEVER’), we are now at, or are approaching, extremely tempting and significant levels at a massively significant political time.

I wrote the other day about the US Presidential election and, while my thoughts on a double bottom look to be well out of the window, it would be unwise to bet against the positive impact this can have on markets. For the record the system puts the Dow’s March 2003 Primary Value Zone at 11133:11154 and the S&P 500’s March 2003 Primary Value Zone at 1256:1262. We are within touching distance of these levels.

Regular readers of this column will know that I am still medium term bearish on the economic outlook, but the significance of these levels really cannot be understated. Given the timing, this is especially the case. The case for going long is a compelling one, but summer volatility is also something to be wary of. Catching falling knives is generally to be avoided, but in this instance I think I am going to have a go…..

Getting some perspective

OK, so blogging on holiday could be viewed as being very sad, but I have had some interesting insights in the last week or so about the direction markets are likely to take.

Before I went away I saw the latest episode of the Andrew Marr series on the history of modern Britain. I actually watched this with my Grandmother, who made the point that living through key periods can skew one’s perspective and it is only looking back that linear courses of events become apparent.

This really got me thinking.

The last eighteen months has been one of the most fascinating periods ever seen in financial markets. The action since last summer has been especially wild and the fallout from the credit crisis is surely going to be viewed as a watershed in the development of the global economy. Historically debt driven booms have never ended well and this one is surely going to be no different. Inflation is an increasingly serious problem and the pressure on the Planet’s natural resources is all too clear. Problems are compounded by slowing economic growth, over-stretched housing markets and increasing geo-political tensions, especially in Iran (where conflict looks increasingly likely). Getting any sense of perspective in this maelstrom, has proven to be extremely challenging.

Having taken some time out now though, there are two dates which really stand out in terms of equity markets in 2008, January 22nd and March 15th/16th. On the former the Fed announced its extraordinary rate cut and averted, what could have turned into a stock market crash (remember that the Dow futures were down 500 points prior to the announcement). The latter dates were when JP Morgan ‘bailed out’ Bear Stearns, with the support of the Fed. Markets rallied strongly after each of these events. On reflection these two points represented excellent short term buying opportunities and I missed both.

However both rallies reversed, the Dow closing below 11850 on Friday, indicating the ongoing structural problems faced by stocks and general nervousness amongst investors. While I called the latest bear rally correctly, I still didn’t profit anywhere near as much as I ought to have done and this is why I am looking to formulate some clear strategies for the rest of 2008.

In the next 6 – 9 months I am now going to look for two things to happen. First I expect stocks to rally strongly in the second half of the year as the Presidential Campaign swings into gear. I can see this rally lasting beyond Polling Day on November 5th and continuing into next year. Second, once this rally runs out of steam (almost certainly below the all time high of 14,078 recorded in October last year), I see the next big move being down, testing the 11,000 level I have written about before.

Of course this prediction is reliant to a great extent on ceteris paribus, but I don’t think it is a fanciful leap of the imagination. By the time these events have unfolded a lot will depend on the new US Administration’s ability to lead us through the economic, political, resource and climactic problems we all face. Until then we cannot know how this is likely to play out, until we find out who the next President is and then see their first moves in office.

In the meantime I am going to seek to trade on what I believe will be the two major moves.

This latest closing price of the Dow is 100 points off the 11740 low set on March 10th and I think this is a critical level. If it holds this level, then it could well form a double bottom, which will form the basis of a rally past 13,264 (the level it closed at on December 31st 2007). Working on the assumption that stocks go up in Presidential election years, then a move past 13,500, before December 31st 2008, could prove likely.

I am glad I have another week or so off, so won’t get the opportunity to track stock prices daily, but I will be really interested to see where the Dow ends up at the end of next week. I am tempted to put an order to open to go long at 11,740, but doubt I will do that (I do at least draw the line at trading on holiday!!!).

Whatever happens in the coming months, I am sure that we are not at the end of historical events and we must all remain ever vigilant for the next turning point, whatever that may be. My only hope is that it is not a pre-emptive strike on Iran

Barclays Bombs, Beige Book Batters and Black Gold Boils

I wrote last month about Barclays being at a reasonable price to buy on a long term buy and hold. It then dropped 25%!

OK so my timing has been well out, but I did suggest waiting until after their next results, but the drop in price in the last month is worrying. This afternoon it closed at 306.5 with a P/E of 4.81. Barclays’ primary value zone is

459:464. Its base is way back in 1992, so the fact that it trades 33% below this level either makes it incredibly cheap or we could be looking at the British Bear Stearns. I know that rumours about HBOS and Bradford & Bingley simply won’t go away but either of these failing, would be nothing in comparison with Barclays going under.

I have been doing some looking around into information on Barclays which might explain this ongoing collapse. Looking at some of its main rivals HSBC has generally been bearing up in spite of huge Subprime losses and Royal Bank of Scotland’s share price has been duly hammered thanks to its need for an additional £12billion from shareholders.

But Barclays is harder to explain. There results were pretty poor, but on the 15th of May their board was adamant they would not need additional capital to shore up their balance sheet. Looking at the daily charts also gives a clue that a bottom might have been reached. I have been watching closely in the last ten days and although the price has continued to fall, significantly larger volume has occurred on up-ticks. This is an indication that someone out there is snapping up this stock at these levels. Watch the action in the next few weeks and you will see what I mean.

First thing in the morning I am buying Barclays stock and am going to stick it in my ISA. The credit crisis is far from over and the economy is still looking in trouble. I will probably get the chance to buy more Barclays stock at a lower price in the next 18 months, but even so I think now is the right time to start averaging in.

Beige Book & Oil

I have been meaning to write this week at the likely reaction to this month’s Beige Book. At the moment this has to be one of the most important regular reports on US prospects. 10 months a year the Fed Chairman has to present to the Capitol the reports from the twelve individual Federal Banks. Each Federal Bank compiles a report on regional economic activity. Unsurprisingly today’s report was pretty awful. Stocks got hammered and so did the Dollar. I really should have shorted both last night, but forgot.

To cap off a great day’s trading I also meant to go long oil. I didn’t this morning, but did in the afternoon. Over the course of the day oil stuck on over 600 points in its intraday chart. I managed to lose money! I opened a position an hour before the US reserves announcement and moved my stops up as the price rose. I foolishly didn’t put limits on to take profits. The reserves were much lower than anticipated and the price shot up, only to fall back very quickly. I got stopped out. I should have gone back in as the price then rallied again for the rest of the day, but in a very volatile manor.

Putting real money on the table always gives you a clear view on the market. Although my losses weren’t so bad today keeping a close eye on the price (and especially the volatility) could be well worth the money. The temptation to go long at the moment is great, but this looks like a chart that is faltering. The failure to make a new high today on extremely bullish news is a signal that the next significant move could be down. I still think $150 oil is probable before the year end and I am sticking to my entry point at about $116.

Still recovering from Friday’s action

I have really loved the roller coaster which has been this year’s financial markets.

Friday was simply brilliant. I took the view that the jobs report in the US was going to be bad, but I certainly didn’t anticipate a full 0.5% jump in the unemployment rate. Quite simply all markets went nuts (another technical term!)

In the morning I had gone short the US$ versus the Euro and made a very good profit. I closed out on Friday evening and took all my profits.

I was helped by Jean Claud Trichet’s surprise announcement on Thursday that Euro-zone interest rates might actually go up as inflation risks continue to grow. I thought this was an odd announcement to make as Dollar weakness has been a significant contributor to rising commodity markets, which in turn have increased inflationary pressure. I wouldn’t be surprised to see Trichet go back on these comments in the next few weeks, but equally a bit of economic saber rattling from Europe is not out of the question in the current political climate.

I am a little suspicious of this jump in the unemployment rate as the Payrolls numbers in the last 5 months have not seen a single month of jobs falling by greater than 100,000. This report has been subject to massive revision in the past and next month’s numbers should make interesting reading.

I still regret not keeping my Dow short positions and should have trusted the system and bought oil on Thursday morning. On Friday the Dow fell a touch under 400 points and oil surged a massive $10, the biggest single daily price move ever. I have written recently that I feel a bit out of sync with the markets at the moment. While my Euro trade was very pleasing, I couldn’t shake the feeling of finding a Penny but losing a Pound. I am off to the States the week after next for a three week road trip up the West Coast. This is going to give me a perfect opportunity to take stock and focus on what to do for the rest of the year.

At the moment I think we will see a second half rally in US equity markets, Oil to hit at least $150 and further bouts of Dollar and Sterling weakness. Above all I think an Obama win in the Presidential Elections could do the world of good for equity markets in the short term, but even this won’t solve the longer term structural problems the World Economy faces.

I am almost certainly not going to trade again before I go away, but I do intend to keep writing.

I am still extremely interested to watch for signs of wage inflation. While Friday’s report did give some signs of this, I think it will still be another 2 quarters before we start to see this start to bite into corporate profits.

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Now there is a lot to write about! Credit Crisis & Lehman; The Fed on the Dollar; Oil

Equities Well the Credit Crisis was well and truly back on yesterday as rumours swirled that Lehman was about to do a Bear Stearns. The general fear in markets at the moment is palpable. The optimism of less than a month ago has been shattered in a very short period of time. Naturally equities got hammered and I am really disappointed that I didn’t let my positions run. I took profit far too quickly and was well ahead of the curve on this one. My performance in the last few months is a bit of a worry, but I am sure I will be out of this slump in the not too distant future so long as I keep making the right moves. My calls, based on the system, have been on the money, I just haven’t traded them that well.For the record the system shows value zones for the Dow and FTSE at 12490:12498 and 5926:5932. Both bases for these can be found in mid-March at the start of the latest rally. The Dow’s value zone has been ploughed through and the way things are looking today we are looking at another 1 day heavy reversal, which as we all know is a very bearish pattern. It will be interesting to see what happens with the FTSE for the rest of the week, but with the US payrolls number out tomorrow I wouldn’t hold my breath.

If momentum continues to gain in the current burst of selling, watch for deeper falls over the rest of the summer. I might take out some short contract ahead of tomorrow’s announcement, but I fear most of the opportunity on this current move has been missed.

The US$ I really loved the news yesterday about Bernanke’s break from tradition in announcing support for the Greenback. Quite why this was a surprise to anyone is beyond me. Absolutely everything about this Fed Chairman has been a break from tradition!

The US$ rallied on this news, but I will take this as an opportunity to go short.

So far Bernanke’s stewardship at the Fed has led to a wanton destruction of an already ailing Dollar. The rates cuts and billions pumped into the system were always going to lead to a significant devaluation of the currency. While this has had the upside of reducing the US trade deficit it has also amplified inflationary pressures. It is really hard to see how the Fed are going to be able to reverse this policy anytime soon, without totally discrediting their original policy. Apparently slowing economic growth was the greatest threat. In spite of the Fed actions the economy has continued to slow and the financial crisis has continued to rumble along.

How can they now withdraw liquidity from the system?

The answer is they can’t and the Dollar’s depreciation is likely to continue. A poor payrolls number tomorrow could well hit it hard.

Oil Moving onto oil there is one main reason I am not going to buy the current falls and that is Cairn Energy is falling. I don’t think I have written about this before, but Cairn has been a wonderful trailing indicator in the current bull-run. Rises or falls in Cairn have preceded similar moves in the oil market by about a week. Now I know this isn’t a terribly scientific way of looking at things, but it does make a reasonable amount of sense. Cairn’s rise to prominence in the last few years (based on their finds in Rajasthan in India), propelled them from being a relatively minor player in the oil market, feeding off the cast offs from the Oil Majors, to a component of the FTSE 100. Of course in the case of Rajasthan Shell’s inability to value a potential site was legendary, but the result of this was a company with a relatively low cost base suddenly controlling comparatively massive reserves. As such their share price is especially sensitive to swings in the price of oil.

Assuming you agree with the basic assertion that the markets are something of a closed club, I think it highly likely that news of a top (or bottom) being reached in oil will filter from the trading pits of the commodity markets to the dealing desks of the equity traders. As such a FTSE100 company like Cairn (with modestly high average daily volume) will be especially sensitive to pullbacks and rallies. For the record Cairn started pulling back on May 21st. Oil reached a peak on May 22nd!

Today Cairn dropped 3.5%, while oil shed another 2 Bucks.Other signs that things aren’t looking so great in the oil market are that we have seen a series of lower lows and lower highs in the last few sessions. Again this is another sign of an instrument pausing for breath before the next surge forward.I think there is little doubt that we will see $150 oil before the year end, but a nice healthy pullback will present a great buying opportunity. Watch out for 11616:11643 and 10838:10856!

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Summer approaching, Oil and US Jobs Report

I don’t really feel like I have much to write about at the moment, as most of what I want to say I already have. As I predicted (but sadly didn’t trade that well) the Dow and the FTSE100 have started to post losses. Weak numbers from the US labour force later this week could set the scene for another volatile summer in equity markets. The next earnings season is also likely to reflect some of the inflationary pressures which are mounting in the wider economy.I am out of markets at the moment, but I am keeping a close eye on Oil. It is trading extremely choppily at the moment. Today is a perfect case in point. This morning Oil was down about 130 points and as of writing it is now up 170!

While there is definitely sill a lot of upward momentum it appears that this is starting to flag. If Oil fails to retake and hold the $130 level, then look for a move to the value zones I identified last week. My optimal entry point is about 11660:11685 at the moment. I do think this level could be reached in the next month as traders unwind positions ahead of the summer break.

I might take a very short term position on Friday ahead of the data. While last month wasn’t so good, sentiment has definitely turned bearish again. A negative number is likely to be seized upon, while positive news might get somewhat drowned out.

I will write more later this week.

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