The Suspense Continues

By Dr. Duru written for One-Twenty

February 17, 2008

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The stock market continues to chop and chop. It's looking more and more like the market is content to wait things out until the Fed issues its next interest rate decree in March. The suspense continues as traders still sell the rallies that keep the market from overcoming thick overhead resistance levels. TraderMike shows that the short-term picture has improved slightly, but the market has yet to prove anything against the resistance that remains directly overhead. We had a great example of how rallies get sold when the S&P 500 gave back all the gains from Wednesday's rally. That one-day celebration was supposedly inspired by strong retail sales numbers. But for all the excitement, the retail ETF, the RTH, barely budged (0.4%) on Wednesday, fell over 2% on Thursday, and is now hovering above the lows for the month after Best Buy (BBY) disappointed the market by slightly lowering its guidance for the year (yes, I am staying long). The chart below shows how the S&P 500 has gyrated around the March and August lows of 2007 (shown by the horizontal lines).

S&P 500

However, in between the lines we can find plenty of drama.

Interest rates are still going down over the long-term. But since the 10-year Treasury retested its near 5-year lows, rates have shot back up. Given the sharp downtrend since the false breakout last summer, I suspect this bounce will end soon.

10-year Treasury

Goldman Sachs may have initiated a new round of selling in big-cap tech by removing Intel (INTC) from its "Conviction Buy List." Sellers returned to the stock and the resulting -3.5% drop stopped the recent low-volume rally dead in its tracks. A break of the February lows will confirm the renewed negativity.

Intel short-term

Fluor's story gets more and more intriguing to me. I bailed on my earlier short position as Fluor (FLR) made new 2008 lows. (See my disclaimer here).The timing just happened to be perfect, and a new short triggered as the stock rallied weakly toward the 200 daily moving average (DMA). The stock has stalled out the past two days and UBS's Friday upgrade to buy was faded. Finally, stochastic signals are starting to flash a sell sginal. All this suggests FLR will continue its drift downward from the break of that triangle pattern formed over 4 months. The big wildcard will be earnings on February 28th before the market opens.


I have also recently become intrigued with the story of the dry shippers. 2007 was a monster year for most dry shippers. For example, Dryships (DRYS) soared 7-fold to its peak in October as shipping rates skyrocketed with robust global trading. But when these shipping rates came crashing down, so did the shipping stocks. DRYS cratered 62% from the 2007 highs to the 2008 lows. Now, the big suspense is whether a U.S. slowdown will translate into a global trading slowdown. In a January 27, 2008 Barron's roundtable, Marc Faber called for even lower prices, but that same week, during an industry forum, the executives of these shippers countered that their margins are so high that business will be just fine thank you very much. Time will soon reveal, but I have to think anyone still holding onto their profits in DRYS are being extremely brave. So far, the shipping execs have succeeded in turning sentiment around. DRYS has since broken above its vicious downtrend (see chart below). DRYS reported robust earnings on Thursday night. The market response was initially promising, but the day ended in an ugly fade and a bearish engulfing pattern. I suspect this move marks the end of the recent recovery. If the stock manages to break Friday's highs, I would be a buyer. But for now, I am looking for a retest of the converging 20, 50, and 200 DMAs. A break back below the last downtrend would be exceptionally bearish.


Finally, we cannot do a review of recent action without some mention of the Fed, right? On Thursday, Ben Bernanke spoke before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He spoke on the economy and financial markets. He spent a lot of time reminding us just how bad things look for growth and the unfavorable moves in oil and food prices. Perhaps this helped to grease the skids on the market's fade of the previous day's celebration over the retail sales numbers. But I think even more sobering for the market is that Bernanke noted that it takes time for Fed actions to work their way into the economy - suggesting that the pace of cuts going forward must slow, if not stop altogether. This is not something a market wants to hear when it's addicted to its anticipation over the next rate cut actions:

"A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability and, in particular, whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast. At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt. At the same time, overall consumer price inflation should moderate from its recent rates, and the public's longer-term inflation expectations should remain reasonably well anchored."

I have yet to see anyone from the Fed present a convincing case for a moderation in consumer price inflation. I suppose the premise is that slow growth in the U.S. will do the trick. But this will fail miserably if we start importing inflation, instead of deflation, from China as it seems we are about to do. Anyway, if the Fed does make clear the timing for a pause in the rate-cutting, you can bet the market will be ill-prepared to withstand the suspense of waiting around for the Fed's prognostications to come to fruition.

During Bernanke's testimony, Kentucky Republican Senator Jim Bunning chastised the Fed for not moving faster given that the collapse in the housing market has been developing for several years. I first thought "yeah, easy for you to say now - I bet you were enjoying the housing bubble along with everyone else!" His commentary was particularly humorous because it came without any suggestion as to what the Fed is supposed to do now. But then I checked some of Bunning's record. He has been an outspoken critic of Greenspan, he opposed Bernanke's nomination to replace Greenspan, and he seems to continue to oppose Bernanke. Here are some of the more interesting comments from Bunning's website:
  1. Bunning Blasts Fed For Raising Interest Rates: Says Greenspan Rate Hike Insensitive To Average Americans
  2. Bunning Blasts Bernanke For Downward Spiral In Markets
  3. Subprime, Easy Money and Greenspan's Role
Well, alright then! Go ahead Bunning!

Be careful out there!

DR. DURU®, 2008