Markets On Edge
By Duru
October 10,
2005
(In this piece
I present several strong points of view on the direction of stocks. Click here for my disclaimer).
By the looks
of the selling in housing stocks, it seems the market is finally ready to bet
on the end of the housing boom for this cycle.
I follow a small basket of homebuilder stocks: CTX, PHM, HOV, CTX, TOL,
LEN, and KBH. KB Homes (KBH) was the
last of these to hang onto the 200-day
moving average (DMA) of price for dear life. This line is often treated as a line in the
sand dividing long-term bullishness from long-term bearishness. I suspect that there remain plenty of housing
and real estate enthusiasts out there who will gladly bid these stocks back up
given how "cheap" they have gotten, but I will certainly not be one
of them. Any such rallies will invite better entry
points for shorts.
At the same
time, the oil and gas sector has experienced a harsh and swift correction that
has everyone wondering whether the bull market in energy is also coming to an
end. Since no one has announced any new
refineries, major new oil fields, or major new gas deposits, the only way we
have seen a cyclical top is if the economy is
truly about to slide into recession.
You can place your bets how you wish, but I suspect that the economy
will keep muddling along as it continues to adjust to this higher inflation and
higher interest rate environment (stagflation?!). In the meantime, you might do good to examine
closely for yourself the case against and for energy. One of my favorite authors on this topic,
Chris Edmunds, wrote a timely piece called "Energy's
Pullback Could Be Opportunity."
The more folks are quick to hop on the bandwagon of calling a top
(again) in oil and gas, the more bullish I get.
Compare the sentiment in energy to the sentiment in housing where hope
springs eternal and constant selling still has not convinced a significant
number of people to call a top. I am
currently licking my chops at this current pullback in energy stocks. Many of the stocks I follow in this sector
are resting precariously on the edge of major support levels. If these also get broken, I expect another
strong wave of selling to ensue. I would
still consider this an excellent opportunity to get back into energy stocks for
longer-term holdings, but I would have to study individual stories more
carefully to determine what land mines might be out there. Stocks with high yields get first notice.
For stock enthusiasts and other chart-watchers, you
would also do good to check out the action in the ETFs
for international markets like EWZ, EZA, EWJ, EWC, and EWA. I remain bullish on all of them, especially
the markets like
Retail stocks remain a mixed bag, and I still refuse
to make wholesale bets against the American consumer. We sure know how to spend and seem to come up
with new and creative ways to import more goods and finance even more of
it. So, this remains a place where
individual stories are more important that the overall retail outlook.
Finally, gold has been on an amazing tear. The bears are finally ready to step up and
loudly declare their disapproval with the current economic outlook. I am kicking myself for having sold out of my
own holdings before this recent run. I used to maintain a core
holding and trade around it but a while back decided to just get out altogether. I am crossing my fingers for one more
decent-sized dip to climb back on board that bearish train.
The market is truly on edge, and the Fed helped bring us here on purpose. October is a month that traditionally brings
us to the brink of some sort of selling calamity in the market when times are
getting testy. Earnings are coming up
and folks sitting on any profits might be more inclined to play it safe and
cash in now. Folks who are sitting on
losses might decide to play it safe and get out while they can. The flip side of this drama is that these
sell-offs often prove excellent entry points for going long - even if the ensuing
rally ends up being short-lived.
The Fed better watch out - they might just get what
they want!
Be careful out
there!
(Note that I
have not posted actual stock charts for a while due to a lack of time. I strongly encourage you to pull up
your own stock charts for reviewing anything you decide to sell or buy).