Stocks opened higher spurred in part by a stronger dollar after the Commerce Department said the current account deficit widened to a record $225.6 billion in the third quarter, which was slightly less than economists' forecast for a deficit of $228.0 billion.
The current account, also known as the balance of payments, is the broadest measure of international flows of goods, services and capital in and out of the U.S. In other words, the current account measures just how much Americans need to get in investment and lending from abroad to fund their consumption and investment.
A look inside the numbers from July thru September showed the deficit on goods and services trade increased to $200.3 billion from $193.1 billion. Meanwhile, the deficit on goods alone rose to $218.6 billion from $210.6 billion as goods imports totaled $480.7 billion compared to goods exports of $262.1 billion.
While goods were running a deficit, services ran a surplus, with the surplus increasing to $18.3 billion from $17.5 billion.
The Commerce Department also noted a deficit on income, which increased to a record $3.8 billion from $2.2 billion as U.S. investment income from assets owned abroad rose to $160.01 billion from $155.3 billion, while foreign investment income from assets owned in the U.S. rose to $162.2 billion from $155.8 billion.
The Commerce Department said foreign acquisition of U.S. assets increased by $400.2 billion after falling to $364.6 billion in the second quarter. Foreign acquisitions hit a record $527.5 billion in the first quarter.
Foreign accounts were net buyers of Treasuries, purchasing $138.8 billion of U.S. paper, which was up from $127.3 billion in the second quarter. On the equity front, foreigners bought $22.4 billion in U.S equities after selling $1.4 billion in Q2. Purchases of corporate bonds fell to $90.7 billion from $100.6 billion, while purchases of agency bonds edged lower to $25.7 billion from $28 billion.
Additional data showed foreign direct investment in the U.S. increased $44.1 billion compared to $45.8 billion in the second quarter, while U.S. acquisitions of foreign assets increased by $223.8 billion.
Current-Account Balance and Its Components - 1998 - current
Reading the Commerce Department's quarterly current account balance report would likely put most to sleep, if not have our eyes glazing over. However, the above graph does a very good job in my opinion of giving investors a view of what goes into the current account balance. As you can see, the DEFICIT is created largely by the U.S.'s appetite for GOODS, while foreigners' appetite for SERVICES offered here in the U.S. runs a surplus.
One of the "economic concerns" that has been mentioned for years, not just for the U.S., but on a global level, is the DEFICIT currently represented by the balance of goods.
Few economists believe a current account deficit of 6.8% GDP is sustainable, and global economic policymakers have said the U.S. current account deficit (and corresponding surpluses in China) represent a major threat to global growth.
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And it is for this reason, that I (Jeff Bailey) believe there will be great focus on talks between the U.S. economic delegation and China, where the U.S. is "gently prodding" Chinese leaders to take further steps toward that country's economic reforms. One item of focus has been China maintaining a close link between the yuan and the dollar. To maintain the link, China must intervene in foreign exchange markets to buy dollars with their yuan.
To date, China has been able to avoid increases in domestic money supply through sterilization, selling bonds for yuan, but Mr. Bernanke has warned "if it continues to use this strategy it will eventually encounter problems."
Sometimes, I (Jeff Bailey) feel that Mr. Bernanke's words of caution are taken as the U.S. trying to flex its muscle on world monetary systems, but when the realization sets in that U.S. demand for global goods and services may also be at risk, then the global economy is at risk.
U.S. Market Watch - 12/18/06 Close
The U.S. Dollar Index (CEC:DXY) has risen notably (+1.10%) since last Monday, and while it finished Monday's session relatively flat with Friday's close, early morning gains to 84.22 were the best level for the dollar-weighted index since 11/24/06.
Additional economic data released today had the National Association of Home Builders' index of builder confidence for sales of new homes slips one point in December to 32, near its lowest level in 15 years. However, expectations for sales in next six months rose three points to 48.
Last week, the Mortgage Bankers Association said its purchases index rose to its highest level since January 2006, increasing 8.7% for the week ended 12/08/06 to 463.8.
Merger news also gave a morning lift with $90 billion worth of deals announced today. With only 13 days left in the year, announced deals have already amounted to almost $4 trillion worldwide, beating out $3.33 trillion set in 2000.
Some of the bigger deals had Express Scripts (NASDAQ:ESRX) $69.97 +1.90% launching a bid to buy Caremark Rx (NYSE:CMX) $55.58 +10.49% for $26 billion in cash and stock, an offer Express Script says represents a 15% premium over CVS Corp's (NYSE:CVS) $30.01 -1.67% all-stock offer from early November. Analysts say CVS could still sweeten its offer.
Harrah's Entertainment (NYSE:HET) $82.18 +3.37%, the world's largest casino company, also agreed to a $16.7 billion buyout offer from two private equity groups, said a person with knowledge of the negotiations. The deal reportedly values Harrah's at $90.00 a share.
Realogy Corp. (NYSE:H) $30.40 +19.21%, which owns the Caldwell Banker real estate franchise, said it agreed to be acquired by private equity firm Apollo Group for about $6.65 billion.
Health care equipment manufacturer Biomet (NASDAQ:BMET) $41.59 -0.97% said it agreed to be acquired by Blackstone, Goldman Sachs Capital and KKR for $44 a share. Shares of European rival Smith & Nephew (NYSE:SNN) $50.58 +7.27%, which had been a suitor of Biomet rose sharply.
So what happened to the rally? Upgrades, downgrades and Google.
Large caps seemed to be the focus of broker upgrades and downgrades, where energy names Exxon/Mobil (NYSE:XOM) $75.51
Weakness in the energy complex didn't help the Oil Service HOLDRs (AMEX:OIH) $143.94 -3.78%, or the CBOE Oil Index (OIX.X) 650.46 -2.59% which gave back the bulk of last week's gains and then some. Warmer temperatures across much of the nation had January Natural Gas futures (January Crude Oil (cl07f) settling down $0.334, or -4.51% to $7.07 and a new multi-year low. January Heating Oil futures (ho07f) settled down $0.061, or -3.42% at $1.7207. January Crude Oil futures (cl07f) ended its 3-day winning streak, settling down $1.22, or -1.92% at $62.21.
Meanwhile, Citigroup (NYSE:C) $55.44 +2.53% and General Electric (NYSE:GE) $38.00 +1.71% built on recent gains and positive comments from brokers.
Internet search giant Google, Inc. (NASDAQ:GOOG) $462.80 -3.64% fell $17.50/share, its biggest drop in more than a month after The Wall Street Journal Analysts reported that analysts remained concerned that the company cannot maintain the kind of earnings power it has seen in prior quarters.
Have bears cried "wolf" one-too-many times?
For months, some may have been hearing words of caution and predictions that each new high was the last and a major decline was soon to be found.
Often time, the continued bearish calls, which see higher highs and higher lows, eventually lead to bullish complacency.
Yes, the very bullish complacency that bears have been warning about since early September soon becomes a "cry wolf" call.
However, there is one sign that some weakness, or internal damage is starting to evolve, and it is among 4 and 5-lettered stocks.
In Tuesday evening's Market Monitor at OptionInvestor.com, I was reviewing some of the market's internals, where Stockcharts.com's NASDAQ Summation Index ($NASI) on a 10-point box chart gave its first "sell signal" at +210 at the conclusion of that day's trade. Its first "sell signal" since giving a "buy signal" at
What is this NASDAQ Summation Index? In simple terms, it is a way of measuring the advance/decline line, where recent measures suggest to me that on a broader scale, internals are starting to weaken.
Now, you've certainly heard the term "bullish complacency" for a couple of months. And you've seen the major indices, including the NASDAQ Composite march to new 52-week highs, if not all-time highs.
Due to vertical limitations, I can't fully capture a picture of the $NASI's 10-point box here, but if you want to actually see what this supply/demand chart looks like, and the "buy signal" back in August (after red 8) and recent "sell signal" at the 210 measure, then here is the http://stockcharts.com/webcgi/Pnf.asp?S=$NASI&Y=U&B=10&N=C&C=2
Now I'm going to increase the $NASI's chart to 20-point box size (that's the scale on the left) where here I can capture the vertical picture.
NASDAQ Summation Index ($NASI) - 20-point box
Looking at the "internals" is just as important, if not more important than looking at the EXTERNALS, where the externals represent the PRICE of an index.
But a market technician, like a good doctor won't just look at his/her patient and diagnose them. If a patient doesn't "feel well" then a good doctor my run some tests, take a blood sample, and see if anything comes back "negative."
Hopefully, the above chart will give you three important observations.
The first is the "sell signal" back in early May, just after the "red 5." That may have been interpreted by the "good doctor" as a warning sign that the patient (NASDAQ Composite) wasn't feeling too well.
The second is the "buy signal" in early-to-mid August, after the "red 8" where the $NASI rises, and the column of X (demand) surpasses a prior column of X at 580. Here the "good doctor" might well observe that the patient is showing signs of life again, and starting to strengthen.
And now, the "sell signal" just witnessed. Here the "good doctor" is saying the lab tests show something might be wrong and the internals of this patient once again weakening.
Now that we recognize some HISTORICAL signs of internal weakness and strength from the $NASI's point and figure style of charting, let's take a look at the patient itself.
Here's a 20-point box chart of the NASDAQ Composite ($COMPQ) from Stockcharts.com. The NASDAQ Comp. was down 21.63 points today and closed at 2,435.57.
NASDAQ Composite ($COMPQ) - 20-point box chart
When comparing the "internals" of the $NASI against the "externals" of the NASDAQ Composite ($COMPQ) directly above, the term "bearish divergence" would be used. That is, the recent deterioration of the $NASI and its "sell signal" at measure 200 suggests to me that there is pending weakness in the $COMPQ itself and a $COMPQ trade at 2,380 on the $COMPQ would then "confirm" the internal weakening.
At this point in time, I could NOT recommend that bears get aggressive, BUT, if you're a bull, that has been "cried wolf" to, too many times, then I need your attention!
Don't be complacent. Get OFF long margin, and as the saying goes, don't be a "hog and get slaughtered" should the $COMPQ give a PRICE "sell signal" with a trade at 2,380.
Once, or IF the $COMPQ gives a "sell signal" at 2,380, THEN a bear could initiate some partial short positions. PUT options are a better way to control risk, if looking to play the BEARISH side. Just don't over leverage your account.
Asside from the NASDAQ Summation Index ($NASI), another EXCELLENT, yet slower moving supply/demand measure that I STRONGLY SUGGEST traders and investors monitor is the NASDAQ Composite Bullish % ($BPCOMPQ) from Stockcharts.com. This bullish % SHOULD BE VIEWED on a conventional 2%-point box size chart.
Here is a http://stockcharts.com/webcgi/Pnf.asp?S=$BPCOMPQ to the NASDAQ Composite Bullish % ($BPCOMPQ). Imagine you were charting roughly 3,000 stocks that were listed on the NASDAQ Composite, not just the advance/decline line of those 3,000 stocks, but the actual supply/demand charts of those stocks.
As of tonight's close, approximately 58.69% (1,761) of the stocks listed at the NASDAQ still had a point and figure "buy signal" associated with their chart. That means, approximately 1,761 of the 3,000 charts still showed a supply/demand "buy signal" still intact. For further sign of weakness, this very broad measure of market strength/weakness would need a reversing lower reading of 52%.
Intuitive Surg. - ISRG - cls: 102.05 change: -1.82 stop: 107.51
Why We Like It:
BUY PUT JAN 105.00 AXQ-MA open interest=1110 current ask $5.20
BUY PUT FEB 105.00 AXQ-NA open interest= 0 current ask $9.50
Picked on December 18 at $102.05
Potash - POT - close: 134.67 change: -3.18 stop: 140.01
Why We Like It:
BUY PUT JAN 140.00 PVZ-MH open interest= 531 current ask $8.00
Picked on December 18 at $134.67
Baker Hughes - BHI - close: 75.87 change: -2.38 stop: 73.95*new*
Warning - bearish reversal alert! Crude oil lost over a dollar today and the oil stocks sank. The OIX oil index fell 2.59% while the OSX oil services index plunged 3.8%. It looks like investors are starting to lock in profits ahead of the yearend. BHI was actually upgraded this morning to a "buy" but that failed to save the stock price. Shares produced a bearish reversal in the form of a bearish engulfing candlestick pattern. There is a chance that BHI will bounce from support near $75.00 or its 200-dma near $74.00 so we're going to raise our stop loss to $73.95. However, more conservative traders may just want to exit early right now and cut their losses. We're not suggesting new positions at this time.
Picked on December 14 at $ 76.90
Infosys - INFY - close: 53.64 change: -1.10 stop: 52.99
Warning! Technology stocks were hardest hit on Monday. The NASDAQ Composite lost 0.88% and the GSO software sector fell 1.5%. Shares of INFY under performed them both with a 2% decline. INFY is nearing what should be support at $53 and its rising 50-dma (currently near $52.94). If we don't see a decent bounce in INFY tomorrow we'll either be stopped out or we'll close the play early. Aggressive traders may want to buy a rebound from here while more conservative traders can wait for a new relative high over $55.50.
Picked on December 14 at $ 55.20
Lockheed Martin - LMT - cls: 90.18 change: +0.14 stop: 88.99
We do not see any changes from our previous updates on LMT. We remain defensive here especially with the weakness in the defense indices today. Thus far LMT is holding on to support at the $90.00 level but it would not take much to push shares lower. More conservative traders may want to exit early right now to avoid further losses. A rebound from here could be used as a new entry point but it might make sense to wait for a new rise past $90.75 or $91.00 before opening new plays. We have two targets. Our conservative target is the $94.85-95.00 range. Our more aggressive target is in the $99-100 range.
Picked on November 29 at $ 90.62
NII Holdings - NIHD - close: 66.64 chg: -1.82 stop: 66.99
NIHD suffered some profit taking on Monday with a 2.6% decline. Volume was pretty strong on the drop, which is not a good sign for the bulls. Neither was the decline under the $67.50-67.00 level. Fortunately, we're still sitting on the sidelines waiting for a breakout over the $70 level. If we don't see a rebound soon we'll drop NIHD as a potential bullish candidate. Currently we're suggesting a trigger to buy calls at $70.25. If triggered our target is the $74.50-75.00 range. Aggressive traders may want to aim higher.
Picked on December xx at $ xx.xx <-- see TRIGGER
Sepracor - SEPR - close: 57.47 chg: +0.63 stop: 55.99
After two weeks of consolidating sideways it looks like SEPR is finally starting to show some strength. The stock rose 1.1% and looks poised to challenge short-term resistance at the $58.00 level. We're not suggesting new positions at this time. Our target for SEPR is the $59.50-60.00 range.
Picked on November 19 at $ 54.69
MEMC Electronic - WFR - close: 42.28 change: -1.27 stop: 39.95
We need to usher some words of caution regarding WFR. The semiconductor sector bucked the trend in technology stocks today by posting a gain. Yet WFR under performed its peers today with a 2.9% loss and a failed rally at $44.00 followed by a breakdown under its 10-dma. The decline today is contributing to the deteriorating technicals. WFR's weakness might have been influenced by news this morning that a Taiwan solar-cell material plant suffered an explosion that killed two and will disrupt the plant's output. According to a Reuters article WFR had sub-contracted with the plant to make various wafer components. Odds are good that WFR could see a dip toward $41.00 or the $40 level, which should be support. We'd wait for a show of strength before considering new call positions. Our target is the $47.50-50.00 range. The P&F chart is bullish with a $48 target.
Picked on December 10 at $ 42.40
Expeditors Intl.- EXPD - close: 42.21 chg: -1.12 stop: 45.05
Transportation stocks continued to sink in spite of a pull back in crude oil prices on Monday. Shares of EXPD under performed the market and its peers with a 2.58% decline. Our short-term target is the $40.15-40.00 range. More aggressive traders may want to aim for the August lows.
Picked on December 10 at $ 43.68
Mohawk Industries - MHK - cls: 76.04 chg: +0.02 stop: 79.01
It looks like bulls tried to buy the dip in MHK on Monday morning. The stock rebounded sharply at the open but quickly ran out of gas near its 10-dma overhead. The failed rally today looks like another entry point to buy puts. We are suggesting puts with MHK under $76.65, which is a short-term support/resistance level that shares just broke. We'll try and keep our risk to a minimum with a stop above Thursday's high. We would consider this a relatively higher-risk, aggressive play because MHK might have support at its 200-dma near $75 and at the late November dip near $74.00. Our target is the $70.75-70.00 range.
Picked on December 17 at $ 76.02
3M Co. - MMM - close: 78.35 change: +0.04 stop: 80.01
We were expecting more of a follow through lower after MMM produced a failed rally and bearish engulfing candlestick pattern on Friday. Today's session isn't necessarily anything to be worried about. MMM produced a brief failed rally near $79 and its 50-dma. We are suggesting puts with the stock under $79.00 while more conservative traders can look for a decline under $78.00 or the 200-dma near $77.35 (or just wait for a drop under $77.00) before initiating plays. We would label this an aggressive, higher-risk entry point because MMM does have support at its 200-dma, which is also near the top of its October gap higher. The $75.00 level also offers a challenge for the bears since it to will probably be support. Our target is going to be the $72.50-70.00 range. The P&F chart is more bearish with a $47 target.
Picked on December 17 at $ 78.31
NewMarket - NEU - close: 57.97 change: -1.54 stop: 62.01
NEU continues to show relative weakness. The stock lost 2.5% and produced another failed rally under its 10-dma, 100-dma and the $60 level today. We would use this as another entry point to buy puts. Our target is the $54.00-53.50 range. FYI: The P&F chart points to a $51 target. Plus, short-interest is about 7% of the 14.8 million-share float, which is probably enough to raise the risk of a short squeeze if NEU abruptly turns higher.
Picked on December 14 at $ 59.11
Yahoo! Inc. - YHOO - close: 26.30 chg: -0.60 stop: 27.05
YHOO suddenly looks vulnerable again. The Internet sector hit some profit taking led by a $17.50 drop in shares of Google. YHOO slipped 2.2% and is testing support near $26.00 and its 50-dma. Currently we are suggesting a trigger to buy puts at $25.85. If triggered our target is the $22.65 level near the October low. More aggressive traders may want to aim lower. FYI: It might be worth noting that short interest is about 6.9% of YHOO's 1.2 billion share float.
Picked on December xx at $ xx.xx <-- see TRIGGER
YUM Brands - YUM - close: 58.50 change: -0.18 stop: 60.51
We do not see any changes from our weekend update on YUM. The stock looks poised to move lower but we need to allow room for any oversold bounce to reach what should be resistance near $60.00. Our target is the $55.75-55.00 range.
Picked on December 12 at $ 58.49
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Blue Nile - NILE - cls: 34.58 chg: -0.80 stop: n/a
NILE is turning lower again. Shares lost 2.2% after failing to breakout over the $36 level last week. We are not suggesting new strangle positions at this time. Keep in mind that we only have about five weeks before January options expire. More conservative traders may want to think about an early exit to salvage some capital if NILE doesn't begin to move soon. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).
Picked on October 29 at $ 38.92
B.P.Prudhoe Bay - BPT - close: 75.00 chg: -1.00 stop: 73.75
We are choosing an early exit to cut our losses on BPT. Oil stocks reversed sharply lower on Monday and BPT dropped back toward support at the $75.00 level. There is still a chance that BPT will bounce from $75.00 but we don't want to risk it any more.
Picked on November 29 at $ 75.25
Centex - CTX - close: 55.60 change: -0.65 stop: 54.95
We have been waiting for a dip and bounce near support around the $55 level for days. We've seen the upward momentum in CTX and the housing stocks evaporate. Now after a less than inspiring report this morning about the sector's health we're choosing to exit early and cut our losses now. More aggressive traders may want to keep the play open since CTX may yet rebound from the $55 region. However, keep in mind that the technical picture has turned bearish, at least for the short-term and intermediate indicators.
Picked on December 03 at $ 55.89
Enerplus - ERF - close: 46.24 change: -0.34 stop: 44.95
We are calling it quits on ERF. Our long-term view of the energy sector is bullish but short-term the group has become a big target for profit taking. We have been wary of ERF since the December 5th failed rally. The stock's upward momentum has vanished and some of the technical indicators are suggesting a consolidation lower. More aggressive traders may want to keep the play open as the stock still has a chance to bounce from the $46.00 or $45.00 levels.
Picked on November 29 at $ 46.01
KB Home - KBH - close: 50.89 change: -0.84 stop: 49.95
We are choosing an early exit out of the homebuilders. The homebuilder confidence numbers came out today. The industry experts are bullish on a recovery in the second half of 2007. Short-term the sector is still poised for weakness. Shares of KBH under performed many of its peers today with a 1.6% decline. We've been warning readers for days with the lack of bullish momentum and the bearish turnaround in the technical indicators. More aggressive traders may want to stick to our plan and look for a bounce from what should be support near $50.00 and its 200-dma. A rebound past the $53.00 level would certainly be encouraging.
Picked on December 03 at $ 52.04
L-3 Comm. - LLL - close: 79.00 change: -4.72 stop: 79.99
We have been stopped out of LLL at $79.99. The company issued an earnings warning this morning after announced that it lost a multi-billion army contract for translators and linguistics. Shares gapped open lower at $80.20 and dropped intraday to $78.00.
Picked on December 04 at $ 83.81
Suncor Energy - SU - close: 78.29 change: -2.61 stop: 77.69
Oil stocks under performed the markets on Monday following a sharp decline in crude oil futures. Shares of SU under performed most of its peers with a 3.2% decline and a drop back under its 10-dma and the $80.00 level. There is still a chance that SU will bounce from the $78.00 level and its simple 200-dma. However, given the sharp turnaround in the oil stocks we don't want to risk it so we're suggesting an early exit.
Picked on December 14 at $ 81.63
Valero Energy - VLO - close: 53.33 change: -1.79 stop: 53.99
We have been stopped out of VLO at $53.99. We have been cautious on the stock for several days now and today's sell-off in crude oil and the energy sector was too much for VLO and any support it had at the $54.00 level. Shares of VLO lost 3.2% and dropped toward its simple 50-dma.
Picked on December 03 at $ 55.85
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