Summer is almost over

First, we apologize for our long "vacation" from the commentary. Considering the volume shrinkage since the last Fed meeting on 8/8, we are waiting for the big players to be back in business after Labor Day Weekend. But we did see a few key economic data reports this week, such as new home sales, existing home sales, and personal consumption. The bearish mood seems to have picked up in the housing sector, helping out the puts on NEW.

Weekly wrap-up 7-28-06

My sincerest apologies for the tardiness of this missive. Last week saw surprising life in equity markets, and a renewed spark in commodity buying. The Nasdaq and stocks in general closed the week strongly (with 2%+ gains on Friday), laughing in the face of our anticipation of a precipitous decline in the near future. We would like to note the seasonal strength at the turn of the month, to which July proved to be no exception. It may be wise to hedge/cover shorts as the end of the month approaches in the future – we were not aware of this historically persistent phenomenon previously. A valuable lesson learned! We are not concerned that our prediction of the bear market commencing is false. Leadership in July’s rally was concentrated in defensive sectors – healthcare, pharma, oil, etc. These sectors do not lead broad sustainable rallies, they signal a transition to a bear environment.


Moving on to every commentator’s favorite catalyst of the oh-so-hoped-for equity romp: the Fed rate hike pause (and subsequent rate cuts, we presume). How short our fellow market participants’ memories prove to be! A look back to only five years ago shows that the last time the Fed paused after an extended period of rate hikes basically marked the top for the soaring Nasdaq 100 index. The Fed pause, whenever it comes, will probably be the “sell the news” event of the year.


As to whether the Fed pauses or hikes on the 8th, we do not have a strong view. We know that we do not envy Bernanke & Co., who must realize that the US economy is rapidly rolling off a cliff, with housing in the driver’s seat. The sell-off in the dollar will be vicious when it is ultimately sacrificed in an attempt to resuscitate the limp, cold, stick-a-fork-in-it-cuz-it’s-dead US economy. We will carefully observe the various markets’ reactions to gauge prevailing sentiment, which we expect to be quite sour, regardless of the Fed’s actual move.

We took profit on our long in an energy stock index, and have resisted the temptation to pile back in as the leader of the pack, Exxon Mobil, soars to new highs. We don’t trust this rally, especially given the weakness in volume. Nor do we view this as an attractive low-risk entry point, as we note the overbought levels. We are actually tentatively bearish on energy, medium-term. We expect slowing demand from the ailing US consumer to alleviate pressure on supply as spare capacity rebuilds. We note that in the first quarter of 2006 world oil demand shrunk while supply rose relative to the fourth quarter of 2005. This sector is not to be shorted, however, in light of the non-negligible probability of a totally unpredictable geopolitical/supply shock, which would send oil prices rocketing upwards.

Drink a lot of water

It was so hot today that I had to turn back while en route to the driving range. This heat wave has driven up the price of natrual gas during the past week, and our long natty position has benefited greatly. We took profit today, however, and plan on buying into the next sell off. Stocks opened in the red this morning and remained down flat throughout the day. Then during the last half hour of trading, we saw the bulls rush in to close the market with stocks tailing up. With respect to NDX, not only is today's close disconcerting, but I also noticed that the recent parallel downtrend has not been confirmed (at least to our satisfaction) by the RSI or MACD indicators. These factors concern our short NDX position, but we will wait to see further confirmation. We maintain our stop at 1525 and our target at 1400.


Silver had a big rally today, showing what could be a breakout to the upside from its triangle formation. Silver also has a very important resistance level at 11.8, and a break above this level should be a strong buy signal.


Tomorrow Aqua America (WTR) wil be reporting its earnings, and we will be keeping an eye on whether the potential head and shoulders formation will come into play. Looking at various techincals, we hope to see a break above 23. It's really hot out there, so drink a lot of WTR.


The caveat to our forecasts is, of course, the uncertainty of next week's FOMC meeting. Jim will talk more about the Fed in his belated weekly wrap-up.

Disclosure: Long Gold Futures; Short NDX