Many investors were expected to be grumpy this morning after losing an hour of sleep to daylight savings time, but a sharp decline in China's trade surplus and negative news flows regarding banks and brokers set a negative tone that accelerated into the close with a rise in U.S. wholesale inventories.
Asian markets set a negative tone when mainland China's Shanghia Composite ($SSEC) fell 154 points, or -3.59% to 4,146 after the country's government said its trade surplus plunged 63% in February, to a one-year low, as Chinese exporters experienced weaker demand from the United States and Europe.
China's General Administration of Customs said the country's trade surplus fell to $8.6 billion, about one-quarter of the $23.7 billion surplus recorded in February last year.
According to the breakdown released by the customs agency, China imported $78.8 billion worth of goods and services, 35% more than in the previous year. Exporters, however, only saw a 6.5% growth in shipments, to $87.4 billion.
Economists attributed the 63% drop in the trade surplus not only to evidence of a global economic slowdown, but unusually harsh snowstorms in China that caused shortfalls in electricity generation, forcing some factories to shut their production lines and postpone shipments.
China's trade surplus with the European Union, its biggest trading partner, narrowed by 15% to $10 billion year-on-year, while it surplus with the United States registered a 23% year-on-year decline to $9.4 billion.
Golman Sachs economists Yu Song and Hong Liang told clients they pay more attention to the combined January-February surplus, which remained significant at $28 billion.
Still, the news rocked parts of Asia with the iShares Malaysia (NYSE:IWM) suffering the most, falling $1.36, or -11.37% to $10.60 on heavy volume of 5.6 million shares.
Additional economic data out of China showed consumer inflation rose 7.1% in January, its highest level in 11 years.
The six-month old inflation spike has been limited mostly to food, which monetary policy has difficulty addressing, but wholesale price data released showed costs of industrial raw materials rose 6.6% in February, the fastest rate in more than three years.
Table- Global Equity Indices, Dollar Index, USO and GLD
From the major global equity indexes I follow on a week-to-week basis, and so far this year (2008 YTD) it would be difficult to say if a slowdown in the U.S. is dragging other benchmarks lower, or if we're simply seeing aversion to global equities.
The strong bid for oil persists and continues to perplex traders, investors and would-be economists that look for the black gold's price decline to confirm a global economic slowdown. Some continue to cite China's stocking of its Strategic Petroleum Reserve as bolstering oil's price.
Closing U.S. Market Watch -
Economic data released today had the Commerce Department saying total wholesale inventories for January rose 0.8% from December's 1.1% gain. January's rise was above economists' forecast for a 0.5% gain.
A look inside January's figures had inventories of furniture and home furnishings up 1.9% from December, while inventories of machinery, equipment and supplies rose 0.9%. End-of-month inventories of nondurable goods increased 1.2% from December and were up 14.9% compared to last January. Inventories of farm product raw materials were up 5.7% from last month and inventories of apparel, piece goods, and notions were up 2.1%.
January's inventory/sale ratio fell to 1.07 from a year-ago ratio of 1.16.
The Securities/Broker Dealer Index (XBD.X) 160.91 -4.65% was notably weak again today.
Bear Stearns (NYSE:BSC) $62.50 -10.81% lead the way lower and traded as low as $60.26 on rumors that the investment bank, a big underwriter of mortgage-backed securities, could be facing a liquidity crisis.
Bear Stearns (BSC) - $2 and $1 box chart
Ace Greenberg, chairman of Bear Stearns' executive committee, dismissed the speculation as "totally ridiculous". The ONLY reason I (Jeff Bailey) see a reason to BUY shares of BSC is if a trader/investor is SHORT the shares as it nears ANOTHER bearish vertical count of $60.00 (this time).
On February 21, a bar chart would show BSC traded up to $85 (see column of X from $80 to $85) and on February 22, traded as low as $80.21 (see column of O from $84 to $81) where after the "buy signal" at $85, that would have been a higher low, perhaps a signal that some demand was starting to return for the stock.
However, the eventual rise to $89, and long column of O from $88 to $75, where the sell signal at $80 generated another bearish vertical count continues to suggest to me that the rallies we're seeing in BSC, if not broader financials is formidable short-covering, and when the shorts have bought back some of their positions to lock in gains, and move to the sidelines, the demand from new bulls isn't there. Thus the "buy the dip and sell the rip" remains the mantra.
The S&P Banks Index (BIX.X) 223.87 -2.56% showed even the more regional banks remained under pressure and after closing just above their 01/22/08 intraday low of 228.54 on Friday, negative comments out of Citigroup (C) regarding further write-downs weighed on the group.
S&P Banks Index (BIX.X) - Weekly Intervals
Friday's close wasn't bullish by any means and the inability to hold a close, even on Monday, above 228.54 would have me assessing further downside to the March 2000 low of 212, which gets close to the mathematically derived MONTHLY S2 (support 2) at 213.82.
In this weekend's Market Monitor at OptionInvestor.com I was reviewing some charts of Treasury yields as well as the S&P Depository Receipts (SPY) and I must say I'm wasn't seeing too many signs of any type of "market bottom" developing at Friday's close.
One thing I did mention last week, which I'm showing in the BIX.X chart tonight is where I used conventional retracement on the BIX.X, not from the Oct'07 relative high, but from its all-time high.
Then as if to mark "the bottom" in the BIX.X at its 1/22/08 intraday low, a day where we saw intraday lows in the majors (except for NDX/QQQQ on 1/23/08), I now add a "-19.1%" fibonacci level. What that may reveal near-term is that the BIX.X has some correlative DOWNSIDE to the mathematically derived QUARTERLY S2 of 192.00.
One of the reasons I began using MONTHLY Pivot levels was in the event a stock, or index began violating to the upside, or downside as the case is with the BIX.X some of the more conventional 0% fibonacci levels.
We can see from the BIX.X that indeed some very "old" levels of historical lows like the October 2002 low does find some technical buying, I (Jeff Bailey) think it rather unlikely that there are "old bulls" using an October 2002 low to further liquidate positions they've held dating that far back in time.
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The more "technical nature" of support most likely comes from BEARISH short-covering. In essence ... "if found a bottom there before, and just in case that's the bottom again, I should take some profits."
Then, once that level gets violated on a closing basis, further liquidation comes as does shorting.
For now, I would have to say it would take a FRIDAY, or end of WEEK close back above 264 at a MINIMUM to think bullish the banks.
Now I want to touch on some observations I began making late Friday evening, Saturday morning in the OptionInvestor.com Market Monitor.
What I was actually doing was reviewing some things for MYSELF in order to try and grasp the technicals at hand. Not only for the equity markets, but the interest-rate sensitive markets like Treasury yields themselves.
Due to horizontal width limitations, I'm not able to show some of the charts I displayed in the Market Monitor, but I'll do my best with a MONTHLY Interval chart of the S&P Depository Receipts (SPY) $127.57 -1.64% to give a bar chart "big picture look."
S&P Depository Receipts (SPY) - Monthly Intervals
I was making some historical notes as to Fed rate cuts and then the eventual Fed rate hikes in order to get a feel and observation for how the SPY traded during the last recession and then expansion, and it was rather clear that the "Greenspan Fed" was certainly looking at the economic data and responding to that data as it eased and then hiked rates.
Not surprisingly though, the SPY itself, perhaps a depicter of the U.S. economy turned LOWER before the Fed started seeing sign of economic slowing, and the SPY turned HIGHER before the fed started seeing sign of economic strength, thus raising rates.
Now, even on a MONTHLY interval chart, with 21-pd (21-month), 50-pd (50-month) we see some SIMILARITY today as to the 2001 downturn.
On the above chart I'm only marking as "(A)" a relative low from October 2004 and the week of trade encompassing 09/11/2001, a day that may have changed the world as we knew it, to observe that how even during extreme times of stress and panic, buyers will look at a longer-term inflection point to buy weakness. But once that relative low is taken out, as was the case in July 2002, the break of the relative low can find notable selling declines.
The "dark purple" retracement from $157.52 to $126.00 would be the retracement that I've been showing in several market wraps as the "current near-term range" of decline from the recent October highs to the January 22, 2008 intra-day low.
One observation that I think is important as to the DARK PURPLE and the PINK retracement was the "overlapping" of retracement at the $132.00 level. In my technical opinion, that becomes a BIG HURDLE for bullishness. In essence, it represents a LEVEL OF SUPPORT that was holding for several WEEKS, where now it has been BROKEN TO THE DOWNSIDE, thus a level of FORMIDABLE RESISTANCE.
Now lets "zoom out" a bit and look at a WEEKLY Interval chart, which again, I'm limited by horizontal width, so I'll show a "that was then" chart of the SPY during the last recession, and eventual expansion.
SPY 3/19/2000 to 5/16/2004 - Weekly Intervals
There are several observations a technician can make, but a rather obvious one to me was how the 21-pd and 50-pd "cross-over" points really seemed to mark turning points for decline/contraction and advance/expansion.
What was also notable was that as the SPY fell from "the high" of $155.75 to that 09/16/01 low of $93.80 (PINK retracement), the rally stalled at 38.2% retracement.
Now here's what I'm looking at in the SPY, where the last several weeks we observed some consolidation, where the RESOLUTION to that congestion and attempted base building is to the downside.
SPY - Weekly Intervals
Long-time subscribers would know that if the financials were breaking out to the UPSIDE I'd be saying "buy the SPY" as the financials are probably the "most key" equity sector for the SPY.
However, the financials and BIX.X specifically are BREAKING DOWN further.
And the SPY certainly looks to be FOLLOWING.
With Dorsey/Wright & Associates' S&P 500 Bullish (BPSPX) in "bear confirmed" status at 24.10%, this indicator tells us that only 24.10%, or roughly 120 of the 500 stocks comprising the S&P 500 still show a point and figure buy signal associated with their charts.
In January, this widely followed indicator of internal supply/demand fell to a
low measure of 14.00% on its chart and would currently suggest the SPY's PRICE
lows will are vulnerable to being BROKEN to the DOWNSIDE and a DEFENSIVE market
posture is warranted.
Play Editor's Note: If you missed my comments from the weekend, please go back and read them. My bias is bearish but I'm expecting a bounce near the January intraday lows on the DJIA and the S&P 500. The DJIA has about another 100 points to go while the S&P 500 is pretty much right there near its January lows. At the same time the VIX continues to inch higher and we're seeing more signs that the market could be very close to a short-term bottom. My biggest worry is that we are very close to another capitulation day where the volume is huge and volatility spikes. When this event occurs it is normally a great entry point for bullish positions and our shorts are going to suffer! Think twice about opening new bearish positions. There is no guarantee the washout will happen soon but it's going to happen sooner rather than later.
New Long Plays
New Short Plays
Long Play Updates
Gold Miner ETF - GDX - close: 51.42 change: -2.03 stop: 47.95
The gold miners finally saw some profit taking today and the GDX dropped 2.8%. We are suggesting that readers buy the GDX in the $50.50-50.00 zone. The $50.00 level should be round-number support bolstered by its rising 50-dma. We are listing two targets. Our short-term upside target will be $54.75-55.00. Our second, more aggressive target will be the $58.00-60.00 range. FYI: The Point & Figure chart for the GDX is sporting a bullish triangle breakout with a $79 target.
Picked on March xx at $xx.xx <-- see TRIGGER
Pengrowth Energy Trust - PGH - cls: 18.91 chg: +0.06 stop: 17.89
PGH is not a fast mover but it showed relative strength today. We don't see any changes from our weekend comments. PGH is an oil and natural gas play and the stock should be defensive given the big dividend. This trust has a dividend in excess of 14% a year and pays out every month. The recent March low was $18.04 so we're listing a stop loss at $17.89. We are suggesting new long positions now or on a dip anywhere in the $18.00-19.00 zone. More conservative traders may want to wait for a breakout over $19.50; such a breakout would produce a new Point & Figure chart buy signal. There is potential resistance near $20.00 but we anticipate holding this stock for a while. Our target is the $21.85-22.00 zone.
Picked on March 09 at $18.85
Short Play Updates
Coach Inc. - COH - close: 26.95 chg: -1.51 stop: 31.31
COH continued lower as expected and posted a 5% loss today. However, we want to remind readers of our concerns that the market may be near a short-term bottom. Monitor your stop losses closely. Even if you do they can be little help in a "fast market". We are going to use an aggressive (a.k.a. wide) stop loss at $31.31 to give the stock room to maneuver. We're listing two targets. Our first target is the $25.25-25.00 zone. Our target is the $20.50-20.00 zone, which doesn't even come close to its trendline of lower lows. The Point & Figure chart is bearish with an $11 target. FYI: The most recent data lists short interest at 3.1% of the 347 million-share float or about 1.9 days worth of short interest.
Picked on March 09 at $28.46
Cintas Corp. - CTAS - close: 27.74 chg: -0.51 stop: 30.05 *new*
CTAS continues to slip. This is another new low. We are adjusting the stop loss to $30.05. We are not suggesting new shorts. Our short-term target is the $27.00-26.00 range. More aggressive traders may want to aim lower. The P&F chart is bearish with a $24 target. FYI: The most recent data puts short interest at 1.7% of the 131 million-share float. That is a short ratio of 1.5 (about 1.5 days worth of average volume to cover).
Picked on February 15 at $29.75 *triggered
Dish Network - DISH - close: 27.08 chg: -1.26 stop: 30.26
The sell-off in DISH is picking up speed. The stock lost 4.4% today and did so on strong volume. The stock is currently resting near the January lows around $27.00 so it could see a rebound from here but a failed rally near $29 would be a new entry point for shorts. Our target is the $26.00-25.00 zone. FYI: The latest data put short interest at 2.3% of the 202 million-share float.
Picked on March 07 at $28.75 *triggered
eBay Inc. - EBAY - cls: 25.72 chg: -0.06 stop: 28.15
There wasn't much action in EBAY today. You could almost argue that EBAY's performance was a show of relative strength. The lack of movement makes us more cautious but our bias remains bearish. We are suggesting shorts here at current levels. However, readers may want to strongly consider waiting for a new relative low under $25.25 or even $25.00 before initiating positions. There is potential support near $22.80 but we're aiming for the $21.00-20.00 zone. The P&F chart happens to point to a $21 target. We are suggesting an aggressive stop loss at $28.15. More conservative traders may want to try a stop closer to $27.15 instead. FYI: The most recent data lists short interest at 2.7% of the 1.04 billion share float, which is about 1.5 days of short interest.
Picked on March 09 at $25.78
Granite Const. - GVA - close: 28.10 change: +0.14 stop: 30.51
GVA bounced today thanks to an upgrade this morning. The early strength proved to be another entry point for shorts. The rally faded after testing resistance near $30.00 and its 10-dma. We would still consider new shorts here (but only after you have read our weekend's play editor's note). Our target is the $25.50-25.00 zone. FYI: Readers need to be aware that the most recent data puts short interest at 8.8% of the 38.9 million-share float. That is about five days worth of short interest and raises the risk of a short squeeze.
Picked on March 03 at $29.85 *triggered
Kilroy Realty - KRC - close: 44.81 chg: -0.87 stop: 46.76
KRC lost 1.9% today and closed under support near $45.00. This looks like a new entry point for shorts. However, the stock has not yet hit our suggested entry point for shorts at $44.75. That will probably occur tomorrow morning. Please make sure you have read my weekend play editor's note before opening any new bearish positions. The stock is already in a long-term down trend and the Point & Figure chart is suggesting a $38 target. If triggered at $44.75 our target is the $40.40-40.00 range. FYI: The latest data puts short interest at 6.9% of the 30.3 million-share float. That does elevate our risk of a short squeeze.
Picked on March xx at $xx.xx <-- see TRIGGER
Manitowoc - MTW - close: 38.03 chg: -0.97 stop: 41.27
We don't see any changes from our weekend comments on MTW. The trend continues to look bearish. We're suggesting shorts at current levels or a failed rally near $40.00. Our short-term target is the $35.35-35.00 zone. FYI: The most recent data puts short interest at 6.9% of the 126 million-share float. That is an above average amount of short interest and elevates our risk for a short squeeze.
Picked on March 09 at $39.00
Starbucks - SBUX - close: 16.80 chg: -0.30 stop: 18.55
SBUX continues to drip lower following last week's breakdown. The move lower has produced a triple-bottom breakdown sell signal on the P&F chart that now forecasts a $3.00 target. A failed rally in the $17.75-18.00 zone would be another great entry point to consider shorts. We are aiming for a short-term trip to the $15.05-15.00 zone. More aggressive traders could aim lower. FYI: The most recent data puts short interest at 3.4% of the 703 million-share float, which is about 2 days worth of short interest.
Picked on March 07 at $17.49 *triggered
Sepracor - SEPR - close: 18.30 change: -0.44 stop: 22.05
SEPR sank to another new multi-year low. We are not suggesting new shorts at this time. SEPR is fast approaching our primary target. Right now our target is the $18.00-17.50 zone. We strongly suggest that readers cover the majority of your position there, near $18.00. Or consider taking some profits now. Our aggressive, secondary target is the $15.50-15.00 zone. Traders should expect a bounce near $17.50, which was the late June low back in 2003. FYI: Readers need to know that the most recent data puts short interest at 7.2% of the 110.5 million-share float. That is more than 3.5 days of short interest.
Picked on February 29 at $21.47
SanDisk - SNDK - close: 21.14 change: -0.27 stop: 24.16
SNDK continues to sink. The stock looks very oversold and way overdue for a bounce. We are not suggesting new bearish positions at this time. You may want to start profit taking now. Our target is currently the $20.50-20.00 zone. FYI: The P&F chart produced a new triple-bottom breakdown sell signal this past week.
Picked on February 29 at $23.99 *triggered
Safeway Inc. - SWY - close: 28.78 change: -0.20 stop: 30.51
SWY didn't do much today. The trend remains bearish but if you haven't opened positions by now we'd probably wait (see tonight's editor's note). There appears to be some support near $26.00 so we are suggesting a target in the $26.50-26.00 zone. The P&F chart is bearish with a $22.00 target. FYI: The latest data puts short interest at 3.9% of the 437 million-share float, which is about 4 days worth of short interest.
Picked on February 29 at $28.74
United Parcel Ser. - UPS - cls: 71.19 chg: -0.77 stop: 73.11
A spike to $108 a barrel is pushing the Transports lower but UPS is still showing relative strength against its peers. At this time we're getting more turned off by UPS and would probably look to bearish plays in FDX or the IYT instead. We're not suggesting new positions in UPS. Our target is the $66.00-65.00 zone.
Picked on February 10 at $70.58
Closed Long Plays
Closed Short Plays
AXA - AXA - close: 30.81 change: -0.86 stop: 34.25
Target achieved. AXA slipped another 2.7% and is nearing the February lows. Our target was the $31.00-30.00 zone. Investors should probably expect a bounce near $30.00.
Picked on February 29 at $34.25 *gap down /exit target 31.00
Blue Coat Sys. - BCSI - close: 20.04 change: -1.41 stop: 25.01
Target achieved. Looks like we should have stuck to our guns. Yesterday we adjusted our target from $20.25-20.00 to $20.50-20.00. Our concern was the potential for short covering near support at $20.00. BCSI lost 6.5% today and closed right at its lows and looks poised to keep going. The stock is very oversold and way overdue for a bounce so we're not going to complain about a $20.50 exit.
Picked on February 29 at $23.75 *triggered /exit target 20.50
Dean Foods - DF - close: 20.30 chg: -0.44 stop: 24.05
Target achieved. DF is another play where we adjusted our target over the weekend and we didn't need to. Shares hit an intraday low of $20.25. Our adjusted target was $20.50. Shares look extremely oversold and way overdue for a bounce. The $20 level should be psychological support and a good place to expect a rebound.
Picked on February 20 at $23.95 *triggered /exit target 20.50
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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