Quite a lengthy Lance Lewis tonight
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Heehaw Is Forced To Have A Bull vs Bull Debate Due To A Shortage Of Bears
Buckle up. This is going to be a long one...
Asia began the day mostly higher overnight but closed down. Japan fell a touch, and China’s Shanghai Comp fell over a percent. Europe was off about half a percent this morning, and the US futures were (you guessed it…) higher. Or at least it was until GE guided down (more on that below), although even after that, the futures weren’t down that much. The June PPI was a yawn, so there’s no point in really discussing it.
We opened flat in the S&Ps and then slowly worked our way back down to Thursday’s high, which finally filled yesterday’s opening gap around noontime. The afternoon was then spent walking back up to the morning’s highs, where we finally peaked out just ahead of the last hour. The rest of the session was spent slowly sliding back to virtually unchanged on the day, which was where we closed. Excited yet? And all of that was within a 6 point S&P range mind you. Basically, it was a quiet expiration where absolutely nothing happened. Volume dropped off quite a bit (1.3 bil on the NYSE and 1.5 bil on the NASDAQ). Breadth was barely positive on both exchanges.
The chips were mixed, but hung around in the plus or minus a percent area. The equips were similarly mixed and also hung in the plus or minus a percent area. The SOX was off a freckle.
The rest of tech was mixed and rather unremarkable, although I suppose it’s somewhat of a miracle that GOOG has gone nearly 3 weeks now without making a new high. GOOG was up just a hair.
The financials were mixed. The BKX rose a touch, and the XBD was flat. GS fell a hair. The derivative king rose half a percent. BAC was up a touch, and C fell a hair. GE guided below the consensus this morning for Q3 and was initially down over a percent, although it recovered to end down just a touch. You can probably thank the expiration for that recovery, but it is what it is. GM fell a percent.
AIG rose a percent. MBI was flat, and ABK rose half a percent. The mortgage lenders were mostly up a touch or so. FRE fell a hair, and FNM fell half a percent.
Retailers were mixed, with the RTH ending up just a touch.
The homies fired back from yesterday’s losses and were mostly up 2 to 3 percent, but didn’t make new highs. We also got another “touchy feely” sign that the froth in the housing market is likely reaching some sort of peak. The TLC channel apparently just started a new show called “million dollar agents” which is a reality show about hotshot real estate agents (this is on top of their other show, “Property Ladder”, which is about how to renovate an old house and “flip it” and has been on the air since early this year). You can check it out here.
A friend also pointed out a great link to a site that collects all of the different news stories about the US housing bubble, which I thought was pretty useful. You can check it out here.
Trucking company JBHT missed the “numbah” and guided lower this morning, citing a slowing of the general freight economy (which is what the TRAN average’s weakness has obviously been telling us for some time). JBHT fell 5 percent, and fellow trucker YELL fell just over a percent. The TRAN fell half a percent.
Crude oil bounced back 29 cents to $58.09 but ended near its lows of the week. The XOI, XNG, and OSX, however, all fell about half a percent. Like Superman, there is probably only one thing that can bring down crude at the moment. Oil’s “kryptonite” is a fear of slowing demand due to deteriorating economic conditions all over globe outside of the US (we have our housing bubble keeping us still strong, remember?), but if that is truly what is hitting crude at the moment, then the stock market should begin to suffer next week as well. The CRB rose a touch but also ended near its lows for the week. The XLB fell just a touch.
Gold opened down about a dollar or so in the US this morning and slipped to as low as $418.20 and another new low for the move but not quite down to its June low at $415. A last hour recovery, however, brought the metal back and took it out near its high for the day, up $1.10 to $421.30.
The COT report revealed that the net spec long position had fallen to111,000 contracts by Tuesday’s close, or down about 30,000 from the prior week, which is about what we expected. That spec position should be even smaller now since the metal has sold off since Tuesday.
Unfortunately, it’s highly unlikely that the spec position has fallen down to the 50,000 level that typically marks lows (and did mark each of the prior two lows this year in February and late May), and that raises the probability that gold will make a new low for the year and lock in an 8-month top, which could bring on a good deal of technical selling. Again, I also fear such a breakdown might encourage specs to go net short for the first time since 2001 as well, which could potentially push us below $400. I don’t know if that will happen or not, but it is a risk I think.
The HUI fell over a percent despite the metal’s recovery, which is never good to see. Again, I worry that the outperformance of the gold shares in the face of a weaker metal of late was more related to the general bid in the equity market than anything else. Thus, if stocks now surprise people and begin to weaken again, the HUI could be in for some serious rough sledding. In the meantime, we should count on some sort of correction in the gold shares at minimum if the metal continues lower like I fear it will.
The US dollar index rose half a percent to a new high for the week. The yen rose a hair, and the euro fell a touch. The rest of the major currencies were also lower and mostly off by about half a percent or so, including the Canadian dollar. Is the ongoing squeeze in dollar about to accelerate to the upside? That’s what it looks like to me, and like the yen’s surprise rally in the Summer of 1998, I think it could potentially cause a lot of unintended problems in the financial world because the herd is still basically positioned against it in one form or another.
Treasuries were flat, with the yield on the 10yr slipping slightly to 4.16 percent, which is just off the high for the week. The 2-10 spread narrowed a touch to 31 bps.
The 10yr junk spread to treasuries narrowed 5 bps to a new low for the move and has now slipped all the way back to just above its 200 dma. Technically, this is probably a good spot for junk spreads to begin widening again, which fits with stocks beginning to have problems again soon.
The equity put/call ratio rose slightly to .54, while the 10 dma of the equity put/call was steady at .5. By the way, I mentioned yesterday that this .5 reading in the 10 dma of the equity put/call ratio was very close to the low back in January of 2004, which was the lowest put/call 10 dma reading since 2000. I said that low in January 2004 was “.52”, which is clearly not “lower” than the .5 that we scored yesterday. What I meant to say was that the low in 2004 was “.48”. I apologize for the error, but hopefully readers knew what I was trying to say. The point here is obviously that we are seeing levels of optimism that are truly off the charts.
Along those same lines, Decision Point put out a great chart today of Investor’s Intelligence bulls/ bears which can be found here. The chart is self explanatory but points out graphically what we have been noting here for the past couple weeks, namely that the current levels of bullishness have always resulted in some sort of near-term peak, at minimum, since the bear market rally began back in 2003.
While we’re on sentiment indicators, I should also mention that we had a trifecta of volatility collapses today, as the VIX, VXN, and VXO all made new multiyear lows. The VXO was even a single digit midget for most of the day but managed to close just barley over 10 by the end of the day.
In the big picture department: The FT cited unnamed sources within the US Treasury today as saying that the US expects China to revalue in August. Now, here’s the real kicker. These sources also say that the US Treasury has explained to the Chinese that they need to revalue by at least 10 percent in order to prevent protectionist legislation in Congress. Nobody that I am aware of has expected a revaluation by anywhere near that much.
If this story is true, it will obviously mean a rise in the renminbi and potentially some other Asian currencies that are pegged to the dollar as well, but the effect on other non-Asian currencies (including Japan) is likely to be to weaken them against the dollar even further. Let me explain…
First, a revaluation of 10 percent or more will be a huge shock to China’s economy and likely trigger a hard landing if one hasn’t already started anyway (see the still crashing Baltic Freight index). And that hard landing would absolutely crush commodity prices, which are already inflated to a degree due to all the investor/speculators that have been buying them up for the past year or so.
At the same time, if China revalues, then China obviously won’t have to buy as many dollars as it has in the past to hold down its currency. Thus, China won’t be buying as many US treasuries going forward, and the market will have to discount China’s lessened presence in the treasury market,as well as the lessened presence of other Asian countries that allow their fixed currencies to rise. As a consequence, US interest rates will rise.
Most foreign central banks own the short end of the curve, but it would likely put some upward pressure on the long end as well. This rise in US interest rates would likely make the dollar even more attractive against the rest of the currency world and trigger further unwinding of dollar carry trades and the unwinding of dollar hedges by corporations in the major G7 currencies. Of course, those higher interest rates will also put more pressure on the US housing bubble too, which is what supports the US economy. So, such a move by the Chinese, in theory anyway, has the potential to trigger synchronized downturns in both the US and Chinese economies, which basically means the world turns down.
Who knows how exactly it will play out or even if the Chinese will move, but it sounds like a recipe for a disaster to me. The irony of it all is that the White House will have triggered it. This is something we will definitely want to keep an eye on.
As for today’s trading, it was your typical option expiration, where most everything hung around strike prices and the market essentially went nowhere. I was, however, struck by the fact that both the SML and MID ended near their lows for the week, giving them potentially “key reversal” weeks. Recall that these two averages have led the latest rally by making new highs while most of the other averages have merely bounced form lower levels. If the MID and SML now turn down, the rest of the market (which is just bouncing) is likely to fail as well.
I was also struck by the near universal bullishness on Heehaw today. Believe it or not, I was bored enough today (in other words, I was really bored) to watch a bit of Heehaw. Near the end of the day, they were supposed to have a bull vs. bear debate, which apparently had been a recurring segment for the past month or so, but today, there were no bears to be found? So, Heehaw was forced to have a bull vs. bull debate over how high we were going.
Folks, when there are no bears around, you’ve hit an important turning point. Throw in the fact that long-time bear Michael Metz turned bullish earlier this week, plus the extremely low put/call ratios, plus the absolute collapse the volatility measures, plus the off the charts bullishness that we are seeing in many of the surveys, and it all adds up to signal that we may be at a significant turning point.
Throw in the fact that most indices have merely bounced while a select few have made new highs, and you have all the sort of divergences that are present at important tops. I’ve said this before, but the more I look at the current environment, the more it reminds me of 1998. Back then you saw a similar push to a new high in mid July, and you also saw all of these important divergences, as only a few indices made new highs. Back then, it was the Dow, SPX, and NASDAQ that made new highs, while the TRAN, small caps, midcaps, cyclicals, and others all put in failing rallies. What followed was a violent market collapse.
This time around, it’s the midcaps and small caps that have made the new highs and have been joined by a very marginal new high this week in the S&Ps, while the Dow, TRAN, OEX, cyclicals, NASDAQ, and most every other major index is merely putting in a failing rally. Also like in 1998, this is a purely professional’s market. The public is not involved for the most part. They are off playing in the real estate bubble. So wherever the music stops, the trap doors are likely to open in the stock market extremely fast.
If we are going to fail and now turn back down, we should probably start to see some pretty heavy selling early next week now that we’re past the option expiration, and that selling should occur regardless of the fact that INTC and the rest of chips are going to have happy things to say.
As we get into earnings season, many companies (especially multinationals) will be reminding investors that earnings growth is slowing dramatically and that the rally in the dollar is making that slowdown in earnings growth even worse for anyone who sells abroad. So, we should expect some lowered guidance in many sectors, including a big chunk of technology. Personally, I plan on buying a large stack of October-December puts early next week... |
