Monday, July 28, 2003
Issue Contents:
| 06:06 | Good morning... |
| 06:21 | Denial...is not a River in Egypt |
| 06:44 | [Intermarket, Weekly] Dollar, Gold and Bond Yield |
| 07:53 | [Intermarket, Weekly] Dollar |
| 08:06 | [Intermarket, Weekly] Yield, 30-year T Bonds |
| 08:12 | Paul's Intraday Stock Picks |
| 08:27 | U.S. Economic Calendar |
| 08:59 | [Major Indices, Daily] Price Action |
| 09:16 | The Open... |
| 11:52 | Lunch Hour... |
| 11:59 | A Win A Day... |
| 12:40 | [@GC, Daily] Gold |
| 13:22 | Stock Charts... |
| 14:30 | [SP U3, 5M] S&P Futures |
| 15:47 | Bonds Redux |
| 16:12 | Real-Time Trading Group Transcript |
| 16:14 | That's a Wrap! |
| 16:33 | Paul's Intraday Stock Picks |
Good morning. Welcome to our second week of the new format. Mike and Craig are away this week, so it will be Paul, Carlos and yours truly dishing up the dirt on the market.
As you know, our website is still work in progress. We have quite a few more features to implement before the summer is out. With Mike out of town this week, if we have any site glitches, we will have to work around them. I don't know if it's just me, but charts seem to be missing from the previous week's entries.
Let's post a new one, and see I can make a workaround for this week...
...abracadabra, make this the weekly chart of the 30-year Treasury Bond futures!
Denial...is not a River in Egypt
Well, seems like the workaround to get the charts in for this week will be just fine. We'll resurrect the charts for last week when Mike comes back.
One of the most intriging articles I have read in the last long while was on the front page of Wall Street Journal Online edition all weekend long that went: "The big selloff in bonds recently stole the spotlight from the lackluster equities market. But while a steep decline in the Treasurys market might normally indicate improving views on the economy, traders say the recent Treasurys selloff was mostly technical."
When you click through to read the article, the headline is: "Treasury Yields Start to Climb, But Strategists Remain Calm". The article itself goes on to provide a list of reasons why the whole crash is nothing to be concerned about. It was an amazing piece of rationalization, one of those, "You're OK; you're REALLY OK!" sort of things. From my perspective, every time I read this sort of thing and find it to be difficult to reconcile against what I see on the chart, it becomes one of those "The Lady doth protest too much" indicators.
What's even more interesting is another article found in the back pages, showing a chart labelled: "Bubble Trouble: Markets Let the Air Out". The headline there was: "Sudden Impact for Bond Funds, Are Gains in Fixed-Income Mutual Funds Echoes of the 1999 Tech-Stock Drop?"
I guess the idea is to keep 'em calm on page one, while they warn on the inside pages. All in the interest of balanced journalism.
[Intermarket, Weekly] Dollar, Gold and Bond Yield
It's always a good idea to take a step back and look at the big picture. I know it's old-fashioned to look at weekly charts nowadays in the minute-by-minute world, but without a map in hand, one cannot get to the right destination.
What we have here is the Dollar vs. Gold vs. Interest Rates. I feel like a broken record, but here we go again: Stocks and bonds are both financial assets, and in the long run, they are effected by interest rates. These things are all inextricably tied together.
For the last three years, investors have been treating bonds as if they are supposed to move opposite to stocks. And for a while they did, if only fuelled by so-called "flight to quality", reminiscent of the move from real estate to stocks in the early 1980s. Shunning cash, stock market refugees dove into the bond market. I don't have the numbers handy right here, but we know that the amount that has been pumped into the bond market over the past year or so has been a record, kind of like the inflows to equity mutual funds were back in 1999 and 2000.
In terms of sentiment, have you noticed that the reigning diety at CNBC is PIMCO's Bill Gross? If you think about it, he's the only one they trust now, having taken over the mantle from that entire stable of stock bulls led by Abbey Joseph Cohen. You know, maybe its not a good thing to be famous. I still remember that March 1996 "In Greenspan We Trust" Fortune magazine cover...
More interesting WSJ front page stuff, from this morning: "Durable-goods orders rose 2.1% in June, a sign that the U.S. manufacturing sector's long downward spiral may have hit bottom. A survey shows wealthy Americans are increasingly optimistic about the future."
Hmm...less than zero room for error, since everyone on the planet owns bonds now. We're going to need the dustbowls of the 1930s to make these babies levitate more, especially when we see that the yield on the long bond has gone back above the 1998 Asian Crisis low. We anticipated that it would be a fake breakdown, what we call the "pop into the manhole" bear trap on the weekly TYX chart. Since TYX is the bond yield, it must mean that the weekly bond chart must be in a...bull trap?
As for gold, I know all the bugs are hot under the collar, insisting that deflation, weakness in the Dollar and the economy is going to drive it back to $1000 an ounce. I'm trying to imagine what the explanation will be if gold goes up as they expect, but on a recovery! One thing I learned a long time ago is that if you believe in fundamentals, it's cool. If you believe in technicals, it's cool. Just don't try to explain one with the other, as if one can be used to justify the other, and we won't look foolish when one part of the argument goes one way, and the other goes the other way.
Next. In December 2001, we did a couple of e*Trade radio shows, and discussed the Dollar's test the 120 level. We didn't think that it would pass the test and our strategy for the long-term was to shift into gold and the Swiss Franc. It's been a long slide all the way back to just over 90, and we can see that the Dollar is finding sellers here at the 20-week moving average.
Let's take a look at the strategy going forward...
Last week, we saw sellers come out after a four-bar bear flag at resistance in the form of the March 2003 low, which also happened to be the 20EMA on the weekly Dollar chart.
This is going to be a *very* important test of bottom. For all we know, the economy is showing signs of life again. It doesn't have to go back to good times. Just a stop in the downward spiral might be enough to get things moving. So long as things are not getting worse and doing the deflation thing, there is room for rates - and the Dollar - to move up. Fundamentally, one would think that the Dollar would gain some strength in this scenario, since it is a bit more attractive to investors.
In terms of price action, the Dollar has been going down for a year and a half without a single bounce that made it past the 20EMA, so obviously the surprise move now would be a test of bottom that puts in a higher low instead of going to a new low, and any reversal to the upside then guns for the swing high from the week ending July 18.
At this point, if you are short the Dollar, my suggestion is to look at the high of each previous week for guidance as a potential stop loss area. If you're looking to buy the Dollar for a surprise bounce, the buy stop it is in the same place as the stop loss for the shorts, the high of the week ending July 25.
[Intermarket, Weekly] Yield, 30-year T Bonds
Well, that was no surprise that the diabolical market produced a fake breakdown on the weekly chart of yield and then jammed it back up through the 1998 Asian Crisis low. I think it will be a while before the investors notice, as usual, so let's take a look at some targets.
First of all, the 200-day MA has been hit. This is the point where you would think that long term bond fund people would be making the exit, and I think the swiftness of the move down might have been just that. IF there has been an exodus on break of the 200-day MA, THEN there might be room for a little bounce. And the fate of that bounce will tell us a lot more, such as if that was simply a high or if that was THE high.
Looking at the weekly yield the upside target will be the upper edge of the triangle. Right now, it's at around 5.3%.
These are Paul's intraday stock picks for Monday. He will review each setup for the Real-Time Trading Group at around 11AM Eastern.
- CA @ 25.50
- UNH @ 54.20
- AMTD @ 9.87
- UTSI @ 43.85
SELL SHORT:
- S @ 40.09
- STJ @ 51.84
- SINA @ 32.74
WATCHING:
- Looking for continuation on AMAT and SNDK from friday
****
This week starts out light, and ends with fireworks. Again, as earnings trickle off, the focus is back on the economy.
Monday
- 3 p.m. Treasury Announces Borrowing Needs.
Tuesday
- 7:45 a.m. BTM-UBS Warburg Sales Index for July 26 week. Previous: +0.3%.
- 8:55 a.m. Redbook Retail Sales Index for July 26 week. Previous: +1.0%.
- 10 a.m. Conference Board Consumer Confidence for July. Consensus: 85.0. Previous: 83.5.
Wednesday
- 7 a.m. MBA Refinancing Index. Previous: -7.2%.
- 9 a.m. Treasury Refunding Announcement.
- 2 p.m. Federal Reserve Beige Book.
- N/A ABC/Money Consumer Confidence. Previous: -21.
Thursday
- 8:30 a.m. Initial Jobless Claims for July 26 week. Consensus: 400K. Previous: 386K.
- 8:30 a.m. Gross Domestic Product, advance for second quarter. Consensus: +1.6%. Previous: +1.4%.
- 8:30 a.m. Employment Cost Index for second quarter. Consensus: +0.9%. Previous: +1.3%.
- 10 a.m. DJ-BTM Business Barometer for July 19 week. Previous: +1.1%.
- 10 a.m. June Conference Board Help-Wanted Index. Previous: 35.
- 10 a.m. Chicago Purchasing Managers Index. Previous: 52.5.
Friday
- 8:30 a.m. Unemployment Rate for July. Consensus: 6.3%. Previous: 6.4%.
- 8:30 a.m. Nonfarm Payrolls for July. Consensus: +25K. Previous: -30K.
- 8:30 a.m. Personal Income for June. Consensus: Unch. Previous: +0.3%.
- 8:30 a.m. Personal Spending for June. Consensus: +0.4%. Previous: +0.1%.
- 9:40 a.m. July ECRI Inflation Gauge. Previous: 115.2.
- 9:45 a.m. Final University of Michigan Consumer Sentiment for July. Consensus: 90.5. Previous: 89.7, end-June; 90.3, mid-July.
- 10 a.m. Institute of Supply Management Manufacturing Index for July. Consensus: 51.8. Previous: 49.8.
- 10 a.m. Construction Spending for June. Consensus: +0.4%. Previous: -1.7%.
****
[Major Indices, Daily] Price Action
(08:39 AM) Teresa_Lo: Thursday brought the big reversal day on the downside.
(08:39 AM) Teresa_Lo: Friday did a big reversal day on the upside.
(08:40 AM) Teresa_Lo: And on the daily chart, with the two bars like this, I always think of it as a sort of "pipecleaner" action.
(08:40 AM) Teresa_Lo: This is not really a surprise, if we take a look at the daily charts of the major indices.
(08:47 AM) Teresa_Lo: We've had a month-long sideways chop, and at the end before the breakout, there is always going to be some attempts that get repelled.
(08:49 AM) Teresa_Lo: And now, with the bearish candlesticks not confirmed after Thursday's reversal, we have to sit back and wait, since no continuation to the downside took place.
(08:52 AM) Teresa_Lo: I think a lot of traders are starting to try to short this, since $VIX has gone down to what they would term as extreme complacency. Remember that piece I did back in May where we stacked the pros and the cons for the stock market?
(08:52 AM) Teresa_Lo: The list was filled with cons, and only one pro - so lopsided that we knew right there that the surprise move would be up, and that there was room for the VIX to move down to somewhere in the 19 area before it was really stretched.
(08:53 AM) Teresa_Lo: I think the most diabolical scenario for a potential downside reversal here would be a move up on the daily charts to new highs first, to be followed by something interesting.
(08:54 AM) Teresa_Lo: For all we know, the bond bust is going to send some people back to stocks again.
(08:54 AM) Teresa_Lo: It's just hiliarious.
Bond futures testing last Friday's low, while the stock index futures looks to open on test of last Friday's high. Should be interesting if it gets stuck here on the tests instead of having follow-through.
Gone to hold the fort in the Real-Time Trading Group. I'll be back at 11AM Eastern.
****
Coming into lunch, it seems like most of the major indices still can't make up their minds. Continues to hover around last Friday's highs so far, in congestion patterns.
Bonds and notes trading under Friday's low, but seems to be trying to make a stand here intraday on a small timeframe such as the 20-minute chart.
Interesting to see CNBC guests starting to confirm a "turnaround" in the stock market. Wasn't it the age old rule of thumb that the market discounts everything by about six months? Price low in February means everyone clues in ... in August?
Sigh.
...keeps the creditors at bay. In our old age, it's just become easier to make less trades and get 'em done early. In our Investment and Trading Philosophy, we outline the business plan for intraday trading. It's so conservative and boring but it works for us.
This was the play for the morning:
(09:44 AM) Teresa_Lo: **SELL STOP BACK IN THERE AT ES 99600. REMEMBER I ALWAYS USE A STOP LIMIT ORDER TO GET INTO A NEW TRADE.
(09:44 AM) Teresa_Lo: MY STOP ELECTION PRICE AND THE LIMIT PRICE IS USUALLY THE SAME.
(09:45 AM) Teresa_Lo: IF I CAN'T GET FILLED AT A DECENT PRICE, I WOULD RATHER PASS, AND AVOID THE POTENTIAL OF GETTING A BAD FILL.
(09:45 AM) Teresa_Lo: Now...I had to go on this 5M chart because I missed on the 1M and 3M test of top (was reading an email).
(09:45 AM) Teresa_Lo: THRUST DOWN HERE.
(09:45 AM) Teresa_Lo: GET READY TO EXIT FOR ME
(09:46 AM) Teresa_Lo: OK...
(09:46 AM) Teresa_Lo: I AM OUT
(09:46 AM) Teresa_Lo: 99450
(09:46 AM) Teresa_Lo: EXPANDED RANGE BAR ON THE 1M ES WITH A BLAST OF VOLUME. GOOD ENOUGH FOR ME.
(09:46 AM) Teresa_Lo: AND AT 99400 HERE YOU HAVE YOUR TWO POINTS.
Done in two minutes!
This is the daily chart of the gold.
It's back up to the upper edge of the really big triangle. Surely, the gold bugs are getting excited...
Flipping through the lists now, one by one. Seems to be always the same ones that are in play.
My friend Bob is preparing the lists now at ChartScreener.com. Right now, he's got the old Lists 1 - 9 up there, and in a few weeks, we'll start loading it up with more targetted lists.
S&P futures chopping all day so far, inside a well-defined zone between 991.50 and 999.50, as seen on this 5-minute chart. The little red horizontal line is Friday's high, and we can see that it's been up there three times today, and upside action has been repelled by sellers so far.
We made our trade of the day in the first half-hour, and have been watching, waiting and doing homework.
Seems like CNBC has finally noticed the big bond meltdown. In case you missed it, here's our May 19 public service announcement.
Real-Time Trading Group Transcript
It was sort of a long and boring day, but we did our job and lived to fight another one. See you in the morning. More will be posted overnight.
- None
SELL SHORT:
- NXTL @ 18.44
- SNDK @ 55.12
- GILD @ 68.07
- SINA @ 34.17
- S @ 40.59
- LEH @ 62.85