Natural Gas Explosion

Stocks opened lower this morning, following a 2 day rally, but were lifted temporarily after today's Fed Beige Book report of regional economic conditions. The report showed slowing growth in the economy, and the market interpreted this as another indication that the Fed will pause or even cut in August. However, I keep stressing that the bottom line of that report, including Bernanke's comments last week, is the fact that the economy is slowing. A slowing economy is not good for stocks. I wonder when this Fed rate bias will end and bad economic data will start sending stocks lower, instead of higher. With respect to yesterday's new short position on BIDU, the stock opened in the red, but rallied hard to close at a gain of 2.5%. Similar to PHM, I took this opportunity to build more shorts on BIDU. Tomorrow we will see earnings from both BIDU and PHM (also new home sales figures).

We expect this week's 3 day rally to have come to end, as evidenced by a very weak closing today accompanied by light volume. This is supported by the doji that formed today in the S&P and Dow.


We are re-entering our short in the Nasdaq 100 (NDX). Although there is a possibility that there may be a follow through rally until the end of the week, the technicals for NDX do not agree. Today's internal technicals showed just 65 new highs compared to 125 new lows in the Nasdaq. One factor that concerns us is the NDX making a new low on 7/23, while the RSI failed to follow suit, indicating divergence. Our stop for NDX is at 1525, and our target is at 1400.


Today's most exciting activity came from natrual gas, which rallied very hard to close with a gain of nearly 9%! We feel very fortunate to have went long natrual gas futures yesterday as part of our relative value trade against crude oil. Frank Barbera's chart from Financialsense provides a great depiction of the historical relationship between natural gas and crude oil. As Barbera's indicator shows on the chart, a peak in the crude:natural gas ratio has coincided with important bottoms in natural gas. Indeed, today we saw natural gas break out of its downtrend, indicating that a bottom may have been forming.


Disclosure: Long BIDU, PHM Puts; Long NatGas/Short Crude; Short NDX Futures