The markets took time off from the two weeks of selling and the results were rewarding but not very exciting. Given the strength and speed of the decline the rebound was almost lackluster but we will take anything we can get. The rebound from the nearly -600 point Dow slide to 11030 took two days as it rambled lazily for +250 points from Wednesday's low. There was no hurry, no panic short covering and no excitement. However, the internals were very strong despite the lack of volume. The imbalance to the buy side without any excitement could prove more than anything that it was simply a pause for sellers to reload rather than rampant bullishness. Retail traders saw the storm clouds dissipate and went bottom fishing.
SPX chart - Daily
Dow Chart - Daily
Nasdaq Chart - Daily
As the selling progressed to the Wednesday lows the volume increased to hit 6.536 billion shares on that final dip. Interestingly it was almost perfectly split between advancing and declining showing an equal number of bottom fishers absorbing all the sellers could dish out. After ten days of selling I believe it may have been simply a matter of seller exhaustion rather than a reversal of fortunes. On Thursday and Friday volume slowed significantly ahead of the long holiday weekend but more importantly the ratios of up volume to down volume saw a really strong reversal. On Thursday up volume was 5.6 times down volume and that continued with a 3:1 pace on Friday despite the holiday weekend risk. Also important was the lack of any late day selling on either day. The recent pattern of daily selling after 2:PM was broken.
Two Week Table of Market Internals
I have been showing the following graphic for the last two weeks as a track record of the selling and a snapshot of where we could see turning points. After updating to show the new lows for last week you can see how many critical components have already completed a normal -10% correction dip. The key metrics for me are the Nasdaq indexes, Russell-2000 and the NYSE Composite. The NYSE Composite did not quite reach the -10% level but it did drop a monster -677 points in only 11 days. It has since rebounded +3.3% or +267 points in only two days. This is a dramatic rebound and I view it as confirmation of broad based market strength. Most investors don't focus on the NYSE Composite and that makes it somewhat of a stealth indicator. Rebounding even more but in a less spectacular manner was the Russell-2000 with a +4.8% rebound (+33 points) from Wednesday's 696 low. The NYSE Composite represents 2231 stocks and the Russell has 2000 stocks with many duplicates across both. Both are missing the large cap tech stocks like MSFT, Dell, QCOM, ORCL, CSCO and Intel. This gives them a broader market bias and removes the impact of big tech. These indexes represent a sentiment indicator of market strength since they mostly represent the small and midcap sectors but still have a representation by the large and diverse NYSE stocks. Russell takes the top 3000 stocks by market cap and then splits off the top 1000 and bottom 2000 to create two indexes that represent the broader market. Basically it breaks down to the big guys and those that want to be big. I know I am boring you with this discussion but the point I want to make is that money came back in volume into the middle to lower portion of the market. This is a very strong indication that funds are putting money back to work. They would NOT be doing this if they felt there was more trouble ahead. With many of the global indexes taking hits of -15% to -18% the week before it suggests that some of that money is rotating back into the U.S. markets. Also a strong market positive was the rebound in the commodity stocks. Profit taking appears to be over and despite a hiccup in global growth expectations analysts still agree that commodity demand is still very strong and increasing.
Snapshot of market drop by index
The TV reporters blamed the Fed and inflation for much of drop but I think the analyst blame game was over rated. On Friday Bear Stearns said the blow to Bernanke's credibility was so severe that he would have to hike again in June AND they thought he might go for +50 points to produce some rate shock. With the market generally expecting the Fed to pause they felt Bernanke would have to produce a shock to put volatility back into rates. Bank America also said on Friday they were expecting at least a 25-point hike in June. There were other comments suggesting further hikes on Thursday but the market rose both days despite rising inflation pressures. This contradiction of events suggests the hike is already priced in and is no longer a factor.
The key economic report on Friday was Personal Income, which rose +0.5%. However the core PCE inflation gauge rose +2.1% and the highest monthly gain since March 2005. This brings year over year core inflation also to +2.1% and right on the upper edge of what the Fed can tolerate. Spending also rose +0.6% and the savings rate fell -1.6% and the 11th consecutive monthly decline. Wage income also posted the biggest gain in nine months. This report was very Fed negative and is just another reason the Fed's data dependency is going to get us in trouble. The economic cycle picks up again next week with a full slate of reports led by the NAPM, Chicago PMI and FOMC minutes on Wednesday. Thursday is overload day with three employment reports, Productivity, Construction Spending, ISM, Chain Store Sales and Vehicle Sales. Friday closes out the week with the May Non Farm Payrolls and Factory orders. Those reports weighing most heavily on the market will be the FOMC Minutes, ISM and Friday's payroll report.
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The commodity sector is experiencing a significant rebound from those very oversold levels we saw last week. After a week of extreme volatility at the bottom of the dip we may be seeing some of that emerging market cash being put back to work buying the commodity dip. Oil prices bottomed at $68.50 last Monday but were unable to break back through resistance at $72 despite this weekend being the start of the summer driving season. The Iran problem is cooling in the news despite saber rattling by Iran on Friday. Iran warned again it would retaliate in the event of a US strike. Iran's Foreign Minister said "In the event that America launches a strike from any place, Iran will retaliate by targeting that place." Essentially any country giving aid to America, say through supplying a staging area or allowing planes to fuel before heading into Iraq, could then find themselves under attack by Iran. I actually thought this was a shrewd move by Iran. Not only did they put themselves back into the news headlines but they probably caused any other nations likely to aid the US to feel a cold shiver up their spine. For Iran to get the maximum amount of concessions from its current nuclear gambit it has to keep itself in the headlines and be seen as way out on the edge in terms of rationality. The more psychotic President Mahmoud Ahmadinejad seems the more fear he strikes in the leaders of civilized countries and the more willing they will be to buy a settlement.
Hugo Chavez got his hand slapped by OPEC in advance of their meeting in Venezuela next week. Multiple OPEC figures claimed there would not be any cut in production as a result of the meeting. Chavez had been begging for a production cut and he was snubbed in several high profile sound bites. Actually I was relieved oil prices did not implode on the excess production quotes. But, we need to always remember there is no excess production in the light sweet crude needed by most refiners only excess heavy sour crude. Next week will be a key week for oil. The gasoline demand numbers for the holiday weekend will be dissected for evidence of demand destruction caused by pain at the pump. If demand remains strong and inventories decline as expected then prices should rise over that $72 resistance.
Crude Oil Chart - Daily
Gasoline demand chart for last week
A Harris Interactive survey last week showed that 44% of drivers with incomes over $75,000 were cutting spending to offset higher gas prices. Given the income level of the respondents I was very surprised to hear that many people (44%) were suffering. The difference between $3.15 gasoline and $2.50 gas assuming a generous 40 gallons per week is only $24 and I doubt many of those respondents burn that much gas in their late model cars. Of those reducing expenses 29% were driving less by combining trips or shopping closer to home. Another 29% were dining out less and another 24% were cutting back on groceries. What that tells me is that families with more than $75K annual income are living on the ragged edge with more debt than they can carry. The extra $24 a week is a nominal amount of money for someone in the over $75K income bracket. Gasoline is not to blame for the restriction in spending but it will be blamed as a convenient scapegoat. The gasoline demand number for last week was lower than the same week in 2005 but due to calendar fluctuations we should not get too excited until a chain of weakness appears. The next two weeks should see a sharp rebound. The keyword there is "should."
Next week the markets are facing a critical test. The sharp drop in selling late last week was too sudden for many traders. That may account for the lack of any excitement in the rebound. Granted the Russell and NYSE Composite posted some strong numbers but there was no urgency in how they moved higher. This is prompting many traders to withhold buying in anticipation of a retest of the May lows again next week. On the surface I can understand that thought process and I do agree there is plenty of suspicion lurking in my brain this weekend.
Last Tuesday I said I expected the S&P to rebound to 1275 and the first potential point for a failed rally. We hit that level on Friday and there was no material selling. This surprised me but most institutional traders were probably either away for the holiday or were simply waiting for next week to begin selling again. Volume was nearly nonexistent after Friday's open and the few stray program trades swatted the indexes around like a fly at a picnic. I believe that is the key we are looking for. If institutional traders are still waiting to unload stock then Thursday and especially Friday were not the days to do it. The extremely thin volume would have magnified the impact and they would have gotten terrible fills and lost money on the trades. If they still need to sell then the right plan would be to let the markets breathe again and allow the thin volume to work for them ahead of the holidays. Without selling pressure the indexes rose and bullish sentiment began to return. Now they need to strategically place a couple small buy programs at Tuesday's or maybe Wednesday's open to stimulate the bulls one more time. Once all the retail traders start buying the bounce you then pull the rug out from under them.
With the SPX just over 1275 I could easily see that scenario coming to pass. However, there is at least one flaw in the scheme. The sectors and market caps seeing the most buying late in the week were the small/mid caps and exactly where funds would be placing money ahead of a halt in rate hikes. Oh, but the Fed is almost guaranteed to hike again in June. There is that short-term mindset again. After the May dip and the flurry of Fedspeak it appears the market has already priced in the June hike. There may not be any downside there unless something changes drastically. Assuming that quite a few traders held off taking any material positions before the weekend and are expecting to buy the retest dip next then a surprise rally could send everybody back into the market chasing prices. Some of the best rallies I can remember were denial rallies. Traders waiting for a pullback were in denial that stocks were going up instead of down. They kept shorting the pauses and were forced to cover over and over again. Everyone just knew a retest of the lows was due. Everyone except the market. Some of those rallies ran for weeks with traders on the sidelines still in denial it was real. I know the feeling well since I stood with them on several occasions.
Obviously nobody knows exactly what will happen next week. That leaves us with only one option. We have to trade what the market gives us but be fully conscious of the potential events. The SPX did close over the first level resistance at 1275 but only by +5 points. No harm, no foul but it is a critical point in the bulls favor. The Dow also closed over two levels of resistance at 11200 and 11250. That gives it some breathing room before major resistance returns around 11400. The Nasdaq, the weaker of the major indexes, came to a dead stop at resistance at 2210. It traded in a very narrow five-point range all day on Friday between 2205-2210 but could not make the break.
Here is the setup as I see it. If we do get a bounce on Tuesday it would trigger additional short covering and some additional bargain hunting but volume will still be light. If we do get a bullish bias then the Dow and SPX could move even farther away from those resistance levels mentioned above. That would setup a major resistance test on Wednesday at SPX 1295, Dow 11400 and Nasdaq 2240. This is where we find out if the selling is really over. The trigger for any Wednesday decline could be the 2:PM FOMC minutes. Once those are released traders will have much greater insight into future Fed actions. If we see that many of the voting committee were urging restraint then traders could breathe easier. If we see an increase in inflation fears and the potential for continued hikes that could be the signal to go defensive once again.
Fortunately we don't have to balance all those factors when making our trading
decisions on Tuesday. The two numbers we need for direction are SPX 1275 and
1295. If we get a decline that moves below 1275 that will be the new short
signal. The summer doldrums are just ahead and we need to keep that fact in
focus. Summer rallies are rare but they do sometimes
occur. If the current rally
continues then 1295 becomes the target and time to snug up the stops. A move
over 1295 could trigger a strong rally but the odds are much higher that it will
become our failure point. Since Monday is a market holiday and I will get to
update this outlook again on Tuesday night I am going to keep this commentary
short. Just remember, don't get married to your positions and be ready for some
volatility at 2:PM Wednesday when the FOMC minutes are released.
Peabody Energy - BTU - close: 61.00 chg: +1.50 stop: 54.90
Why We Like It:
BUY CALL JUL 60.00 BTU-GL open interest=1157 current ask $5.60
on May 28 at $ 61.00
Cons Energy - CNX - close: 87.80 chg: +2.33 stop: 82.49
Why We Like It:
BUY CALL JUL 85.00 CNX-GQ open interest=7643 current ask $7.10
Picked on May 28 at $ 87.80
Cemex Sa - CX - close: 60.53 change: +0.93 stop: 57.22
Why We Like It:
BUY CALL JUL 60.00 CX-GL open interest= 275 current ask $4.00
Picked on May 28 at $ 60.53
Phelps Dodge - PD - close: 88.26 chg: +2.08 stop: 82.45
Why We Like It:
BUY CALL JUL 85.00 DPB-GQ open interest= 6140 current ask $8.50
Picked on May 28 at $ 88.26
VF Corp. - VFC - close: 63.08 change: +0.54 stop: 61.84
Why We Like It:
BUY CALL JUL 60.00 VFC-CL open interest= 50 current ask $4.00
Picked on May xx at $ xx.xx <-- see TRIGGER
Goldman Sachs - GS - close: 152.94 chg: +5.62 stop: 146.75*new*
Looks like we weren't the only ones who thought GS made a tempting bullish candidate. Before the opening bell UBS upgraded the stock to a "buy" and raised their price target $5 to $180. The market responded by sending GS to a 3.8% gain, which fueled another strong day of gains for the XBD broker-dealer index. Shares of GS closed right at their highs for the session, which is normally a bullish sign for the next day of trading. We are not suggesting new positions since our target is the $153.50-154.00 range. More aggressive traders may want to aim higher. The 50-dma makes a potential target near $157. Please note we're raising our stop loss to $146.75.
Picked on May 25 at $147.32
Halliburton - HAL - close: 73.65 chg: -0.15 stop: 68.65
The rebound in HAL took a vacation on Friday. Shares churned sideways in a $1.15 range. As expected the intraday move over $74.00 produced a new P&F chart buy signal, which now points to an $85 target. We do not see any changes from our Thursday night play description so we're reposting it here:
We are going to try again with the oil stocks. The OIX oil index is bouncing from technical support near its rising 200-dma. The OSX oil services index never fell much past its 100-dma and it appears to be turning around. Lending strength to the group is a rally in crude oil back to $71.00 a barrel. HAL is one of the biggest oil service companies in the world so if the oil stocks catch fire again HAL should be leading the charge. Currently shares of HAL are bouncing after spending four days consolidating above support at its rising 200-dma. Should the stock trade over $74.00 it will produce a new Point & Figure chart buy signal. We are going to target a move back into the $80.00-82.00 range. Please note that HAL is due to split 2-for-1 on July 17th.
BUY CALL JUN 70.00 HAL-FN open interest=2361
current ask $4.80
BUY CALL JUL 70.00 HAL-GN open interest=13737 current ask $6.40
Picked on May 25 at $ 73.80
Holly Corp. - HOC - close: 81.44 chg: +0.24 stop: 75.95
Friday's session saw HOC's MACD indicator produce a new buy signal and the Point & Figure chart target has risen from $96 to $99. Other than those two items we do not see any changes from our new play description from Thursday night so we're reposing it here:
HOC is another oil stock we're adding to the play list as a call candidate. What makes HOC interesting is that shares held up better than a lot of its peers during the oil-sector profit taking over the last few weeks. Now that the market and the oil sectors are bouncing shares of HOC are breaking out over resistance at its trendline of lower highs. The MACD is near a new buy signal and short-term technicals look positive. The P&F chart points to a $96.00 target. The one item that concerns us is HOC's upcoming stock split. Shares are due to split 2-for-1 on June 2nd. Now in the past stocks tend to rise into their split and then see a post-split depression. Plus, stocks tend to be less volatile post-split and that's not great for our options. We're going to go forward with HOC as a candidate but keep these things in mind. Our target will be the $89.00-90.00 range or 44.50-45.00 post-split.
BUY CALL JUN 80.00 HOC-FP open interest=606 current ask $3.90
BUY CALL JUL 80.00 HOC-GP open interest= 99 current ask $6.20
Picked on May 25 at $ 81.20
iShares Global Energy - IXC - cls: 104.66 chg: +0.99 stop: 99.49
The IXC continued to rebound on Friday adding almost 1%. If you prefer to buy a dip then look for a pull back toward $102.50-102.00. We are expecting some resistance in the gap from May 15th so the $106.50-107.75 region could see some volatility. Overall we don't see any changes from our new play description from Thursday night so we're reposting it here:
Instead of considering a call position on one individual energy stock we're going to suggest calls on the global energy iShares (IXC). This will protect us from any individual stock news from killing the position and give us exposure to any rebound in the sector. While we're not excited about the extremely low volume or the low option volume it's worth considering as a candidate. Technically the IXC has consistently found support at its rising 200-dma in the past and shares are bouncing from the 200-dma again. Short-term technicals are turning positive. We are going to suggest calls with the IXC above $102.00. More conservative traders may want to wait for a move over $104.50 or $105.00 before initiating positions. Our target will be the $110.00-112.00 range.
BUY CALL JUN 100.00 IXC-FT open interest=30 current ask $6.00
CALL JUL 100.00 IXC-GT open interest= 0 current ask $7.50
Picked on May 25 at $103.67
Komag - KOMG - close: 43.21 chg: -0.03 stop: 41.99
We find it interesting that shares of KOMG are not participating in the market rebound. Instead the stock has been consolidating sideways in a narrowing range. It is the narrowing range or coiling pattern that suggests we'll see a breakout (either direction) soon. For the moment we're going to keep KOMG on the play list as a call candidate with our trigger to buy calls at $46.11. This would require KOMG to breakout past resistance at the 50-dma (45.32), the 100-dma (45.77) and the $46.00 level. If triggered at $46.11 our target will be the $49.75-50.00 range. The P&F chart points to a $57 target but appears to have produced a bull trap pattern, which is another reason we want to use a trigger.
Picked on May xx at $ xx.xx <-- see TRIGGER
Omnicom - OMC - close: 94.02 chg: -0.06 stop: 90.64
OMC's relative strength may have temporarily run out of steam. The stock spiked higher this morning but ended up producing a failed rally under round-number, psychological resistance at the $95.00 level. If OMC produces any sort of follow through on this failed rally (a.k.a. short-term bearish reversal) then we'd expect shares to dip back toward the $92.00-91.00 region before attempting a bounce. Therefore we're not suggesting new call plays at this time but readers can be on the look out for a pull back and bounce. The Point & Figure chart points to a $119.00 target. We are aiming for the $97-98 range. More aggressive traders may want to aim for $100.00.
Picked on May 15 at $ 92.05
Priceline.com - PCLN - close: 31.40 chg: +0.73 stop: 29.25
Friday saw PCLN spike to $32.16 before paring its gains and closing with a 2.3% gain on the session. Volume was about three times the daily average, which is bullish. The move higher pushed the Point & Figure chart target from $50.00 to $53.00. Internet stocks produced a big breakout on Thursday and that's what helped PCLN breakout past the $30.00 level. We are suggesting calls with PCLN above $30.00. Our target will be the $34.50-35.00 range.
BUY CALL JUL 30.00 PUZ-GF open interest=1429 current ask $2.50
Picked on May 25 at $ 30.67
Amgen Inc. - AMGN - close: 68.81 chg: +0.65 stop: 70.01
It was a bullish day for biotech stocks on Friday. The BTK biotech index added 2% and marked its third big gain in a row. Instead of leading, shares of AMGN followed the sector index higher with a 0.9% gain. The big bounce in the BTK index does concern us but the index is just now testing one of its trendlines of resistance (lower highs). The real test of strength will be next week. More conservative traders may want to exit AMGN as a bearish play anyway but we're not going to give up just yet. Shares have been under performing its peers and the stock remains under its long-term trend of lower highs. Plus, there is overhead resistance at the simple 50-dma (currently 69.47). We are not suggesting new positions at this time. The Point & Figure chart still points to a $60 target.
Picked on May 23 at $ 66.85
Apollo Group - APOL - close: 51.38 chg: +0.11 stop: 54.45
Shares of APOL are still trying to bounce from the $50 level. A week ago shares broke down under support near $52.00, which was the neckline to its bearish head-and-shoulders pattern. We warned readers to expect a bounce from $50 potentially back to the $52 level, which should now act as overhead resistance. APOL is still rebounding and we expect it to trade near $52 before fading lower again. If APOL can trade under $50.00 again it will produce a new Point & Figure chart sell signal. Our target is the $47.75-47.50 range near its early March lows.
Picked on May 17 at $ 51.75
Franklin Res. - BEN - close: 90.39 chg: +1.62 close: 92.55
An upgrade for GS helped fuel another bounce in the investment-related stocks and the XBD index rose 2%. Shares of BEN followed with a 1.8% gain although volume came in relatively low. We have been warning readers to expect a rebound into the $90.00-92.00 range and it is occurring now. While we expected the bounce that does not make it any less painful if you're holding put positions. Short-term technicals are turning bullish and we do expect shares to challenge the 200-dma (91.86) and potentially the $92.00-92.50 region. BEN should find resistance in the $92.00-92.50 zone near the top of its descending channel (see chart). More conservative traders may want to consider an early exit right now to minimize any losses. One can always re-enter a bearish position on a failed rally.
Picked on May 14 at $ 89.30
3M Co. - MMM - close: 83.26 chg: -0.56 stop: 85.01
MMM's downward momentum has stalled with the market's two-day bounce. While MMM has been consolidating sideways, sort of an under performance compared to its peers, we are not suggesting new bearish positions at this time. We're going to leave our stop loss at $85.01 for now but more conservative traders may want to consider a tighter stop (maybe 84.26).
Picked on May 23 at $ 83.44
SanDisk - SNDK - close: 59.64 chg: +0.80 stop: 63.05
The technology-rich NASDAQ index may be bouncing from its lows but the index's strength is not having much affect on SNDK, at least not yet. Shares of SNDK have been under performing and remain under minor resistance at the $60 level for now. The technical pattern remains bearish and the P&F chart continues to point to a $53 target. If SNDK does bounce we'd look for a rise into the $61.00-61.50 region. However, we would only consider put positions with SNDK under $60.00 but considering the bounce in the major averages we'd hesitate to open new put positions right now. Our target remains the $53.00-52.50 range. We do expect an initial bounce at the $55.00 level. Next week could be some news. SNDK is due to present at a semiconductor company conference on June 1st.
Picked on May 23 at $ 58.98
Burlington NorSantaFe - BNI - close: 77.44 chg: +0.99 stop: 77.51
Volume has been light on the recent bounce but that did not stop shares of BNI from hitting our stop loss at $77.51 on Friday morning. We would keep an eye on BNI for a failed rally near $80.00 as a potential entry point for new puts. A breakout over $80 could be used as an entry for call positions.
Picked on May 23 at $ 75.06
IDEXX Labs - IDXX - close: 76.51 chg: +0.54 stop: 77.05
IDXX is trying to bounce and another strong day for the biotech index on Friday helped push IDXX to short-term resistance at its 10-dma. Studying the intraday chart shares of IDXX look poised to move higher next week. While the stock remains under the 10-dma shares produced a bullish engulfing candlestick on Friday so we're suggesting that readers exit early right now. We would keep an eye on IDXX for future plays if the stock fails to breakout over the $80 level.
Picked on May 11 at $ 77.93
Ipsco Inc. - IPS - close: 94.70 chg: +1.50 stop: 97.55
We are going to cut our losses in IPS right here. The stock added another 1.6% and broke out over the simple 10-dma. The stock does appear to have some resistance near $96.00 and again at the 100-dma (97.42) and the $100 level but we don't want to endure that kind of bounce holding puts. We can always consider re-entering bearish plays if IPS produces a failed rally near $100. What concerns us is the weekly chart's "hammer" candlestick, which is typically seen as a bullish reversal.
Picked on May 18
at $ 93.95
Has the globalization of the world's economy caught your interest? You may want to invest in a foreign company, but that doesn't mean that you want to deal with currency conversions or another country's trading rules. Your desire to invest in a foreign company may not mean that you want to hunt down a brokerage in that company's home country, either.
ADRs or American Depository Receipts offer U.S. investors a vehicle for participating in growth opportunities in a foreign company through their regular brokerage accounts, collecting dividends and capital gains in U.S. dollars rather than in the foreign currency. The process works this way: first a foreign company decides that rather than list on the U.S. exchange in addition to its home exchange, it will sell a certain number of its shares to a foreign branch of a U.S. depository bank such as JP Morgan. That bank holds or stores those shares, satisfies the SEC by issuing required documentation, and then prints and issues representative certificates. The bank is said to be sponsoring the ADR program. Each ADR may represent one, a fraction of, or several shares of the foreign company's stock, and that relationship is referred to as the ADR ratio. One ADR with which I'm familiar represents five ordinary shares of a U.K. based company's stock, for example.
In the next step in the process, ADRs must then be listed on a U.S. exchange such as the NYSE or AMEX, or quoted for trading on the Nasdaq. Some are also placed privately or traded over the counter. For the ones listed on NYSE, AMEX or the Nasdaq, U.S. investors can buy as they would any share. Limit orders can be placed just as they would be with any U.S. stock. The ADRs can be held at the brokerage in book-entry form or issued to the investor in certificate form.
One recent day when I put in an order to sell some ADRs, I was reminded of one of their shortcomings, however: the low average daily volume on many. I wanted to sell more, but average daily volume for this one was only 27,000. Selling more than a few hundred at a time likely would have depressed prices. Even putting in a limit price required some guesswork as to how much that sell order would depress the bid. Those used to trading a liquid U.S. equity or futures contract must be aware of the pitfalls of trading a less liquid security.
Other risks include geopolitical ones. Holders of Yukos ADRs filed suit in October 2005. They had suffered massive losses when Yukos' Mikhail Khodorkovsky was imprisoned and the company's main production unit was sold in a shakeup that some termed a covert bid to nationalize the company. In addition, although traders don't have to worry about currency conversions when buying an ADR, that doesn't mean that currency issues won't affect the price of the ADR. Weakness in the dollar may inflate the ADR's price while strength might deflate it, so that ADR traders must keep potential currency moves in mind. An additional obvious risk is the difficulty in doing research on some foreign companies. Also, some ADRs are not sponsored by U.S. depository banks, and, although SEC rules appear to be changing, may not have met as stringent of guidelines as others.
Still interested? ADRs are now offered on more than 2,000 foreign companies. Where can you find lists of ADRs? The issuing banks such as JPMorgan, Citibank, The Bank of New York and others offer lists. At The Bank of New York's http://adrbny.com/dr_directory.jsp site, you can select the home country, industry, region, U.S. exchange traded, U.S. depository and sponsored or unsponsored categories, among others to search for an ADR. A search for a mobile telephone companies in China, with a sponsored ADR traded on the Nasdaq, produced three ADRs, for example: China Grentech Corporation Limited (GRRF), Hurray! Holding Company Ltd. (HRAY) and Linktone Ltd. (LTON). (This was a demonstration of how the search engine works and not advice to buy these ADRs that I have not researched.) An Internet search turns up other lists.
Investing in ADRs offers another way to diversify a portfolio, but also offers
even more risk than investing in U.S. companies. I only occasionally hold an ADR
in my and my husband's portfolio but hope that this summary provides you with an
overview of risks and benefits if you're considering doing so.
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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