Robots by Toyota

This news story grabbed my attention today:

TOKYO (Reuters) -
Toyota Motor Corp. aims to start selling robots that can help look after elderly people or serve tea to guests by 2010, the Asahi daily reported on Tuesday.

Japan's top automaker sees a declining birthrate and aging population leading to growing demand for robots that can help in tasks such as child care and nursing care, the report said.

I have heard a lot about the Japanese initiatives with robots. Did you ever see that Sony robot dog? It wags it's tail, sits up, barks, and never needs to be taken for a walk. But if they could invent a robot that could change my baby's diapers-- I'm in!!!!!!

Quote of the Day

"Increased borrowing must be matched by increased ability to repay. Otherwise we aren't expanding the economy, we're merely puffing it up." -- Henry C. Alexander


Morning News of Note:

• EU Economy: French referendum on EU constitution defeated; 55% of voters were against referendum (Sunday) // EU12 May consumer confidence (15) vs (13) in Apr, industry confidence (11) vs (9) in Apr, services confidence 10 vs 9 in Apr, retial confidence unch at (8) // UK May Gfk consumer confidence (1) vs 0 in Apr // Ifo economist Gernot Nerb said ECB should consider cutting interest rates to help rekindle EU economic growth -- Handelsblatt (Saturday)
• BBBY: Bed Bath & Beyond Builds Up A Following Among Hedge Funds Some star hedge-fund managers have been snapping up shares of Bed Bath & Beyond Inc. like desperate housewives at a white sale. Once a highflier, Bed Bath shares have come down to earth, trading around $40 for much of the past three years. Some investors have questioned whether the company is taking too long to open new stores, while others have focused on turnarounds in the retail sector, even as Bed Bath churns out dependable profits. But a number of major hedge funds with stellar track records have been buying up Bed Bath shares, sensing that the stock has fallen into the bargain bin. (Full Story) WSJ
• AMD INTC: AMD to Unveil New Line of Chips To Boost PC Speed Advanced Micro Devices Inc. is introducing its first dual-processor chips for personal computers, a move highlighting differences with Intel Corp. in marketing the highly touted technology. Such "dual-core" chips, as they are called, combine two electronic brains on a single piece of silicon to boost computing performance. Only a small number of programs have been rewritten to apply both brains to a single task. But dual-core products can improve the way computers do multiple chores at once, such as downloading music while creating a document. (Full Story) WSJ
• GRMN: Tracking Garmin's Rival GARMIN HAS PROVEN ITSELF AN INNOVATOR and a nimble competitor in the market for navigation devices that use the satellite-based Global Positioning System. In cars, boats and planes, Garmin's dashboard-mounted displays show you where you are and tell you where to go. Rivals come and go, but they haven't slowed Garmin's progress. Sales rose 33% last year to $763 million, while earnings climbed 26%, in constant dollars, to $1.89 a share. But investors keep changing direction on Garmin shares (ticker: GRMN). Over the course of 2004, the Nasdaq-listed stock swerved from 58 to 30 and then back above 62. This year, it has skidded back to about 44, giving the Olathe, Kan.-based firm an enterprise value of better than $4 billion, after backing out the company's $600 million in cash. (Full Story) BARRONS
• NFLX WMT: A Force Too Strong, Even for Wal-Mart WHEN Wal-Mart announced recently that it was giving up on the mail-order movie rental business and directing its subscribers to Netflix, the implication seemed clear: Wal-Mart had stumbled. But the company's apparent capitulation came at roughly the same time as another interesting piece of movie-related news: a copy of the new "Star Wars" movie surfaced on the Internet more or less simultaneously with its theatrical release. Dan Glickman, president of the Motion Picture Association of America, put that development in this perspective: "The unfortunate fact is this type of theft happens on a regular basis on peer-to-peer networks all over the world." (Full Story) NY Times
• RIMM: RIM rival Good wins improved Cingular sales deal Cingular Wireless, the No. 1 U.S. mobile phone service provider, will begin directly selling Good Technology's wireless e-mail service for the first time, the companies said on Tuesday. Closely held Good said it believes the agreement will help it win more wireless e-mail users, a sector currently dominated by BlackBerry maker Research In Motion Ltd. (Full Story) Washington Post

Market comments: Stocks are set to open lower, likely due to profit taking. Consumer confidence numbers came in better-than-expected (102.2 vs 96.0 consensus), while the Chicago PMI was weaker (54.1 vs 62.0 consensus).

Weekly Sentiment Review

The market was able to tack on another 0.80% last week, and has now moved firmly into overbought territory. That doesn't mean that it can't go up from here, but just that the gains will be harder to come by until we have worked off this overbought condition. This could come in the form of a correction (read: decline) or just some sideways consolidation.

As far as the sentiment indicators, some have moved off of their extreme bearish readings while others haven't moved much. I would say, at this point the sentiment picture is moving toward neutral, but still has a ways to go before it moves overwhelmingly into the bullish camp. Here is how some of the indicators look:

• The bull/bear spread in the Investor's Intelligence survey widened to +21 (47% bulls, 26% bears)
• The bull/bear spread in the AAII survey widened to +21 (44% bulls, 23% bears)
• The Rydex Ursa/Nova ratio is still low at 0.23
• The Specialist Short Ratio is still near record low levels at 0.16

I still expect additional short covering on future rallies to bolster gains in the market, as investors/traders continue to try to fade (short) further strength. Short-sellers are having a banner year so far, and I doubt they will stand for watching those gains evaporate. Lots of good stocks are breaking out, so get your buy list ready and use upcoming pullbacks to increase your long exposure.

Quote of the Day

"Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it. The man who knows how will always have a job." -- Ralph Waldo Emerson


Morning news of note:

FRE FNM: Fannie, Freddie: Give and Take Bill Would Strengthen Oversight But Expand Firms' Prospects For nearly two years, the White House has been pushing for tighter constraints on Fannie Mae and Freddie Mac, the giant government-sponsored providers of funds for home mortgage loans. Yet legislation approved Wednesday by the House Financial Services Committee wouldn't shackle them as the White House wants. The bill would create a new, stronger regulator to supervise the companies, both of which are recovering from accounting scandals (Full Story) WSJ

ATK: Alliant = Defense + Technology + Growth AS INVESTORS INCREASINGLY TURN to growth stocks to fire up their portfolios, they're buying technology again, while also looking more kindly on the stability that comes from groups like defense. "What has done well for the last couple of years is value [investing], and now it is certainly looking like growth is starting to pick up," says Thomas Moore, head of investment management at HSBC Private Bank. "At some point, we would like to think technology gets some traction." One stock that combines both technology and defense and also looks reasonably priced is Alliant Techsystems. (Full Story) BARRONS

Consumer Spending: U.S. Consumer Spending Probably Rose 0.8% in April, Survey Says U.S. consumer spending probably rose in April at the fastest pace of the year, boosted by job growth, economists said before a government report today. The Commerce Department is expected to report a 0.8 percent increase in spending, according to the median of 66 estimates in a survey by Bloomberg News. Spending rose 0.6 percent in March. Incomes probably increased 0.7 percent after a 0.5 percent gain. (Full Story) Bloomberg

Hedge Funds: Hedge Funds Are Stumbling but Manager Salaries Aren't At hedge funds, the rich just keep getting richer. Across Wall Street, fees for businesses from trading stocks to investing in mutual funds have been falling. But at hedge funds, those exclusive investment partnerships for the wealthy and institutions like pension funds, fees have stayed dizzyingly high, even as billions of dollars have poured into the industry and performance, on average, has faltered. Last year, the top-paid hedge fund manager, Edward S. Lampert of ESL Investments, earned $1 billion, according to a survey to be released today by Alpha, a magazine published by Institutional Investor that follows hedge funds. (Full Story) NY Times

The market powered higher yesterday, on the heels of the upwardly revised GDP report (+3.5%). The SPX came thisclose to the 1200 level. This market looks like it has an agenda - to get back to this year's highs. I still expect some modest backing and filling, but would still focus on being long this market.

Quote of the Day

"Make you plans as fantastic as you like, because 25 years from now, they will seem mediocre." --Henry Curtis

• HPQ: Photo Price War Heats Up Online: 10 Cents a Print Hewlett-Packard Co.'s online-photo site Snapfish said it is lowering the price for printing a digital photo to 10 cents and 12 cents. The aggressive move would make H-P, which acquired Snapfish for an undisclosed sum in late March, among the least expensive places to print digital photos. Other online photos sites such as Shutterfly Inc. charge 19 cents to 29 cents to print a 4-by-6-inch digital image, and retailers such as Costco charge around 17 cents a photo. Snapfish had been charging 19 cents a print, or 15 cents on a prepaid plan. (Full Story) WSJ
• NOK: Nokia Unveils First Wi-Fi Device Nokia Corp., the world's largest cellphone maker, unveiled its first gizmo that relies on the short-range wireless technology Wi-Fi, rather than mobile-phone networks, to connect to the Web and send email. Designed for Internet access in the home, the Nokia 770 Internet Tablet highlights how Nokia is trying to expand beyond the cellphone market to compete with laptop and personal-organizer makers, such as Dell Inc. of Round Rock, Texas, and Hewlett-Packard Co. of Palo Alto, Calif. (Full Story) WSJ
• Economic Growth: U.S. Economy Probably Grew 3.6% in First Quarter, Survey Says The U.S. economy probably grew at a 3.6 percent annual rate from January to March, faster than the government previously estimated, economists surveyed by Bloomberg News said before a report today. The estimate for gross domestic product, the sum of all goods and services produced in the U.S., compares with a 3.1 percent rate reported April 28 and 3.8 percent in the fourth quarter. The prediction is the median estimate of 73 economists in a Bloomberg News survey. (Full Story) Bloomberg
• YHOO: Yahoo says rolling out new PhotoMail service Yahoo Inc. is introducing a test version of a new service called PhotoMail that lets users insert up to 300 digital photographs into the body of an e-mail and store an unlimited numbers of photos on the Web and media company's computers. The Sunnyvale, California-based company said late on Wednesday that users can also add borders and captions to photos embedded in the body of e-mails and can perform limited editing on them, such as rotating them or adjusting the size and quality of the image. (Full Story) Washington Post

The market is set for a strong open, on the heels of a solid GDP report. I still think the market is overbought, and its better not to chase stocks here. There are always pullbacks you can use to build positions.

Quote of the Day

"Without rest, a man cannot work; without work, the rest does not give you any benefit." --Abkhasian proverb

Morning news of note:

• GM: Should GMAC Go on the Block? Wall Street is betting that General Motors Corp. - facing the twin issues of having its bonds rated "junk" and Las Vegas billionaire Kirk Kerkorian's tender offer under way - soon will undertake a more ambitious restructuring than Chairman and Chief Executive Rick Wagoner has signaled to date. Attention is focused on GM's highly profitable finance arm, General Motors Acceptance Corp., which last year earned $2.9 billion, or about 80% of GM's total net income. (Full Story) WSJ
• FNM FRE: Fannie, Freddie House-Panel Bill Falls Short of White House Hopes New legislation designed to tighten regulation of Fannie Mae and Freddie Mac, expected to be debated today in the House Financial Services Committee, falls far short of the Bush administration's demands for reining in the two providers of funds for home-mortgage lending. The legislation, drafted by Michael Oxley, the Ohio Republican who is chairman of the committee, would create a regulatory agency to replace the Office of Federal Housing Enterprise Oversight in supervising Fannie, Freddie and the 12 regional Federal Home Loan Banks. The new agency would have power to raise the companies' minimum capital levels and could put them into receivership in a crisis. (Full Story) WSJ
• INTC: Intel to Launch Platform Early Next Year Intel Corp.'s chief executive officer said the company expects its next major technology platform for consumers, aimed at the "digital home," will probably be ready early next year. Paul Otellini, speaking at a Wall Street Journal conference here, said the company has been working on sets of chips, software and other technology building blocks to help hardware partners develop new computers and other products that will let consumers control digital entertainment in the home. (Full Story) WSJ
• AAPL: Scotland Adds iPods to Menu I don't care what Bill Gates says. We're nothing more than little peas in Apple's pod. The Cupertino, Calif.-based computer maker has created a market so eager to buy its digital music player that everyone from public health do-gooders to nefarious online marketers is capitalizing on the knowledge that people will do just about anything to get their hands on one (Full Story) Washington Post
• Energy: Iranian OPEC Minister Bijan Zangeneh said OPEC should discuss the possibilty of cutting output at June meeting // Saudi Arabia and Kuwait anncd each country added 200k bbl/day of addtl production this month -- Reuters // Indonesian OPEC Minister Purnomo Yusgiantoro said there is no need to cut ouput; wants crude $35-$40/bbl // rising oil prices cutting into margins for gas retailers; Lundberg Survey 1Q avg self service margins 7.7c vs 9.1c in 2004; CVX, COP and XOM all sold stations in past yr; WMT and COST are increasing sales -- WSJ

Futures are pointing to a down open in the market. I won't comment on the overdue pause, since I am beginning to sound like a broken record.

Quote of the Day

"The happiest time in a man's life is when he is in hot pursuit of a dollar, with a reasonable prospect of overtaking it." - Josh Billings


Morning news of note:

MGM HET WYNN LVS CZR: Casino Investors Pondering Whether To Hold or to Fold Casino companies are winning big these days. So why aren't their stocks paying off? The Nevada Gaming Control Board says casinos in the state won more than $1 billion from gamblers in March alone. Big casino operators like MGM Mirage and Harrah's Entertainment Inc. have posted strong profits, and Wynn Resorts Ltd. opened a glistening Vegas resort with publicity that helped the whole Strip. And there are new opportunities in Asia. (Full Story) WSJ

BKRA SPI: Berkshire Unit to Acquire PacifiCorp for $5.1 Billion Buffett's MidAmerican Energy Is Buying The Utility From Britain's Scottish Power Berkshire Hathaway Inc.'s MidAmerican Energy Holdings Co. agreed to buy electric utility PacifiCorp from Britain's Scottish Power PLC for $5.1 billion in cash, plus debt assumption of $4.3 billion. MidAmerican said the purchase of PacifiCorp - the leading electricity provider in the U.S. Northwest - will create an energy holding company serving three million electric and natural-gas customers in 10 contiguous states and 6.6 million customers world-wide. (Full Story) WSJ

Gambling: Nevada May Allow Hand-Held Gaming Devices After a push by a large financial-services company, Nevada lawmakers are poised to allow gamblers to play video poker, blackjack and other games on hand-held devices while at a resort. The measure, which could be approved as soon as Wednesday, would make Nevada the first state to allow betting on casino games using personal digital assistants and other proprietary gadgets. Customers would be able to open accounts with casinos and rent the devices. To help ensure that only guests of legal gambling age make bets, the machines would be limited to public spaces such as pool lounges and restaurants (Full Story) WSJ

MSFT GOOG: Sky-High Search Wars Microsoft, Google Vie to Offer Best Aerial Views of Earth; Pinpointing a City's Pizzerias The battle over Internet search is moving to the skies. Microsoft Corp. Chairman Bill Gates yesterday showed off his company's latest bid to better compete with Google Inc. -- a Web service starting later this year that uses aerial photography and satellite images to pinpoint places on the earth. The project, dubbed Virtual Earth, will combine search results of a local area with mapping software and detailed aerial images that could allow Internet users to zoom into pictures of city streets and see shops, restaurants and other locations. (Full Story) WSJ

Inflation Threat: Fed Minutes May Not Show Big Split on Inflation The Federal Reserve's Open Market Committee probably wasn't as split on the threat of inflation at its May 3 meeting as bond traders may think, economists said. Minutes of the meeting, to be released today in Washington, may show that data signaling weakness in the economy had some members fretting about the impact of further interest-rate increases. The dominant view probably reflected that of Fed Governor Donald Kohn, who in an April 22 speech said rates remained below a level that would keep inflation in check. At the meeting, central bankers agreed to raise the benchmark rate a quarter point to 3 percent. (Full Story) Bloomberg


The futures are pointing to a down open in the market. Maybe today will be the elusive day that the market finally pauses to catch its breath. Remember, the market rarely moves (up or down) in a straight line.

Quote of the Day

"It is not doing what you like, but liking what you do that is the secret of happiness." --James Barrie

Morning news of note:

• AAPL INTC: Apple explores use of Intel chips -report Apple Computer Inc. has been in talks that could lead to a decision soon to use Intel Corp. chips in its Macintosh computer line, the Wall Street Journal reported on Monday. The report, citing two industry executives with knowledge of recent discussions between the companies, said Apple will agree to use Intel chips. Neither company would confirm the report and an Apple spokeswoman told the Journal she would characterize it as "rumor and speculation." (Full Story) Washington Post
• Wireless Growth: Slower Growth Hits Cellphone Services Overseas In EU, Japan, Saturation Leads to Some Contraction; Looking Beyond Voice, Text Markets for cellphone services in Europe and Japan, where explosive growth spearheaded the wireless revolution in the 1990s, are slowing substantially and in some places contracting -- signaling big challenges for large providers and a shake-up for the entire industry. While handset sales are booming thanks to the addition of cameras, music players and fancy software, cellphone voice services are fast becoming a basic commodity distinguished primarily by price. (Full Story) WSJ
• TWX: Time Warner May Sell AOL Shares IPO, if Done, Could Provide Capital for Acquisitions; Quarterly Dividend Is Set Time Warner Inc. Chairman and Chief Executive Richard Parsons signaled that he might consider selling a stake in America Online to the public in the future. The New York media giant also said Friday, as shareholders gathered for its annual meeting, that it will begin paying a quarterly dividend of five cents a share. The dividend, costing the company about $940 million a year, is the first to be paid by Time Warner since December 2000. (Full Story) WSJ
• HD Television: HDTV: Who Wins, Who Loses Over the next two years, HDTV will brighten the lives of couch potatoes and send a jolt through a range of industries. AFTER MORE FITS THAN STARTS, high-definition television is finally showing up...just about everywhere. When a few over-the-air stations started sending HDTV signals in 1998, there were hardly any shows -- or TV sets -- available in the wide-screen, high-resolution format. Today, the transition to HDTV is in full swing. You can watch most prime-time shows in this crystal-clear format, you can get a set for under $1,000 and you can't find a sports bar without one. (Full Story) BARRONS

The futures are pointing to an up open in the market. Let's see if stocks can build on their gains, or need to take a bit of a breather.

iPod Nation

So I am finally a member of the iPod Nation. Well, kind of. I got my wife an iPod Shuffle for Mother's Day and had to help her get started setting it up and downloading songs. The thing is really cool, and I will of course be borrowing it for workouts, etc.

It wasn't the easiest thing in the world to get up and running (otherwise my wife would have done it herself), but it wasn't too difficult. The software and interface are pretty user friendly, and the catalog of music is fairly vast.

I don't think I would have paid the $300+ for the big iPod. It just seemed like overkill for our needs. But at $99, the iPod Shuffle was perfect. I am not usually one of the first consumers to rush out and buy a new product. I generally like to wait to see if the company will tweak the first iterations, or if they will come out with cool, follow-on models like Apple did. I also don't like when there is a technology standards war among competitors. But I don't think iPods will be like Betamax!

Weekly Sentiment Review

The market had a strong showing last week. The S&P 500 rose 3.1%, its biggest weekly gain since November 2004. The Nazz rose 3.5%, the biggest gain since August 2004. These are often the type of snapback rallies you get when there has been a buildup of negative sentiment in the market. That is the reason I have been highlighting the degree of pessimism I was seeing in the indicators. Here is where they stand currently:

• The bull/bear spread in the Investor's Intelligence survey is +18 (46% bulls, 29% bears)
• The bull/bear spread in the AAII survey bounced back to +10 (39% bulls, 29% bears)
• The Rydex Ursa/Nova ratio is still low at 0.21
• The NYSE reported this week that short interest reached record levels in May, supporting the low Specialist Short Ratios we have seen recently

These sentiment levels are still far from bullish. That means I expect continued gains in the market as the buildup of bearish bets continues to get unwound. When the sentiment indicators move all the way back to optimistic levels, then it will be time to move to the sidelines again. But don't chase stocks here. The market is short-term overbought right now, so I would expect some consolidating of the recent gains.

"Sell in May and go away?" Not this year. I think this month will be better characterized as "buy in May, and plan to stay."

Quote of the Day

"This is no time for ease and comfort. It is the time to dare and endure." - Winston Churchill


Morning news of note:

• NYSE short interest rises to record levels in May, for the third month in a row
• French economic growth slowed to +0.2% in Q4, near recessions levels
• Time Warner initiated its first dividend - $0.20, or 1.1% yield
• The FDA requested additional technical information from Syneron Medical on its VelaSmooth approval
• Apple recalls 128,000 iBook, Powerbook batteries

The market is opening a little weak this morning. I would not be surprised to see the market take a breather today. It would actually be healthy.

Market Wrap

Well, the indexes closed higher on the day. The SPX has been up 4 straight sessions, while the Nazz has been up for 5 straight. Impressive. Volume levels ran slightly lower than the previous day, so buyers showed a bit less enthusiasm, but still a nice day.

The SPX is thisclose to taking out its April highs - a bullish sign. So while I think the short-term trend has changed, I don't expect it to come in a straight line. That means I would not chase stocks here. Better to be patient, wait for some weakness, and buy your favorite stocks on pullbacks. If you need to generate some ideas, try the links off to the right.

Tough Break for the Tribe

Did you catch the Indians vs. Angels game last night? What a bummer. I happened to catch the tail end of it, which was all you needed to see. When I turned on the game, the Tribe was heading into the 9th inning with a 1-0 lead.

Jake Westbrook had a 2-hitter going and was 3 outs away from a complete game shutout. Doh! Westbrook got into trouble and allowed the tying run to score. He was then relieved by
Arthur Rhodes who gave up another run. Tribe loses 2-1. The reason: NO RUN SUPPORT!

That's what makes it tough to be a Tribe fan these days. They used to have incredible hitters. No longer. At least...that's how I see it.

Quote of the Day

"Don't gamble! Take all of your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." -- Will Rogers


Morning news of note:

• GE plans to exit most insurance businesses, focus on faster growth segments
• New PalmOne device to rival iPods
• Wal-mart plans to exit DVD-rental business, points customers to Netflix (stock up 15%)
• Greenspand says Fannie Mae and Freddie Mac portfolios cannot be justified
• U.S. Index of Leading Economic Indicators fell -0.2% (in-line with consensus)

Market is up at the open. Let's see if it can make it 4 days of gains in a row--

Mid-day Market Check

The market is soaring for the third consecutive day. In recent posts, I commented about the build-up of bearish sentiment and how I though those bearish bets would likely get unwound as the market moved higher.

This is likely what we are witnessing today, and is exacerbated by options expiration this week, as traders rush to sell puts that are going to expire.

Technically speaking, the SPX closed above its 50-day average yesterday for the first time since March. It is building on those gains today, and has taken out the highs from 5/9 at 1178. Near-term resistance now comes into play around the April highs near 1191. A series of higher highs is very bullish, and would confirm that the trend has changed from down to up.

Weekly Sentiment Review

The market remained choppy last week, and sentiment remained quite bearish. The indicators point to a market characterized by a high degree of pessimism among investors. Some recent examples include:

• The Specialist Short Ratio remains at 40-year lows (0.15)
• Bears on the AAII survey have matched or exceeded bulls for 8 of the last 9 weeks
• The 10-day ISE Sentiment index hit 135, the lowest level since September 2004
• The 21-day CBOE equity put/call ratio moved above 0.70, an elevated level

I think that the longer this bearish sentiment builds, the higher the market will eventually have to climb before all of these bearish bets get unwound. This is an important point, and one that I debated recently with my colleague (Doug Kass) on Street Insight.

Doug argued that the "sentiment trade" was too easy, because everyone could see it, and thus it would not help buoy the market. I don't believe that to be the case. While you might be able to make this argument for the investment advisory surveys, the indicators involving things like put/call ratios and short interest represent real bets made in the market, with real money on the line - not just opinions.

Only time will tell which way things will play out. But I have seen this movie before, and history tells us that the odds favor my thinking. The market loves to climb a "wall of worry", and I think a substantial one is presently being built. At least...that's how I see it.

Margin Selling

The steep, waterfall selloffs that hit the market late Thursday and Friday afternoons had the markings of forced margin selling. I checked around, and couldn't get any real confirmation of it, but that doesn't mean it wasn't happening.

If some large funds (hedge funds or mutual funds) were getting some combination of margin calls or investor redemptions, they would be forced to engage in this kind of reckless selling that can drive a market lower in a heartbeat.

Since this selling is artificial by nature, these are the kind of declines that are often short-lived, and thus more profitable to fade. Moreover, they are coming after the market has already experienced a lengthy decline, rather than at the beginning of a new one. So if we get more of them next week, I want to use the temporary weakness to build positions in my favorite stocks.

Nasty Day in the Oil Patch

Crude oil started to rollover today, after breaking below the psychological $50 level. That led to a mass exodus out of the oil stocks, causing the oil service index (OSX) to decline -4.5%. Nasty.

I am hearing people making predictions that oil will fall back below $40, and that will hurt the projected earnings power of most of the oil-related stocks. I think those predictions will be false. I think the price of crude has good support in the mid-$40s, first of all, and stronger support near $40. If oil continues to trade in the range of low 40s to the low 50s, then the earnings estimates for most oil stocks will continue to be revised higher, and the stocks will follow suit.

I still like the energy sector, and would use any continued weakness in the stocks to start to build positions. This is likely just the first real correction in a bull market for energy that could last for years.

A New Era for Energy?

I read an interesting interview recently with the CEO of Valero Energy (VLO), the largest independent U.S. refiner. CEO Bill Greehey said their stock continues to be undervalued by the market. He said internally they are forecasting earnings of $12.27, while Wall St. analysts are forecasting just $6.95. Huh? That's a pretty huge discrepancy. Could the analysts (who Greehey calls "rabbits") be off by that much? Anything is possible. If he is right, that stock has a lot higher to go. I have traded it several times, but it is very volatile, so be careful there.

Greehey said the analyts are afraid prices will go down as fast as they went up. But "this is a new era", he exclaims. Those are usually dangerous words. Remember the Internet bubble? That was surely different at the time. But Greehey says everybody needs to get used to high prices, and that oil isn't going back below $30.

I tend to agree with him. I think oil is in short supply globally. The only thing I see taking oil back down below $30 would be a synchronized global recession. Otherwise, the incremental demand from countries like China and India will likely keep a floor under oil prices.

A new era? Nah, I wouldn't go that far. But the current up-cycle in energy is likely to last longer than most current forecasts. At least...that's how I see it.

Weekly Sentiment Review

The sentiment indicators I follow ended the week still deep in bearish territory. That means, despite the bounce we have seen in the markets, many investors are still non-believers and expect further declines soon. This is the kind of set-up that often makes for a good contrarian trade.

• The bull/bear spread on the Investor's Intelligence survey narrowed further (44% bulls, 30% bears)
• The bears on the AAII survey exceed bulls (45% vs. 29%) for 7 of last 8 weeks
• The put/call ratio last week averaged 1.0
• And, the Specialist short ratio remains near 40-year lows!

I would expect further short-covering to kick in if the SPX breaks above its overhead 50-day moving average (around 1180). But even if we get further consolidation in the markets, I still expect to see the market move higher as the buildup of bearish sentiment begins to unwind.

Follow-thru Day Arrives

Nice action in the market today. If you review my last few posts, you'll see that two important things I was looking for both happened today. First, the SPX broke convincingly above resistance at 1165 (the high from 4/26). That likely sparked additional short-covering and helped propel the market.

Second, today was the 4th day from the initial rally day I highlighted last Friday, the first day to look for a follow-thru day. We got that today, as the SPX gained +1.25% on accelerating volume. Confirmation that the recent downtrend has been reversed.

Now I don't know how high the market will climb on this rally, we'll just have to monitor the price/volume action. But I know I want to favor long positions here, as opposed to shorting stocks. I would look for SPEC 1165 (former resistance) to act as initial support, and SPEC 1190 to offer resistance. Hope you have your buy list ready...

The Fed Rides Again

So the Fed met today and raised interest rates again for the 8th time in a year, to 3.0%. (Remember, the Fed can only raise short-term rates. Long-term rates, or bond yields, are set by the market.) While this may seem like a lot of rate hikes, the language used by the Fed in their statement indicated that they would likely continue to raise rates at a "measured" pace.

Most investors hoped that the Fed would drop the use of this language, and signal that maybe they were close to the end of this rate hiking campaign. But it looks like they aren't done yet. I am still in the camp that believes that they only have one or two more hikes to go, and then they will take a pause and assess the damage. Not really, but some industries will likely be affected more than others.

That's one of the hazards of this whole shooting match. The Fed hoped to cool off an overheated housing market by tightening monetary policy. But at last check, the housing market was still humming along just fine. But that's a debate for another post...

Market Rap

The action in the stock market today was very constructive. For starters, the pattern of one up-day, followed by one down-day was broken after a string of nine consecutive flip-flops. I know it's only 2 days, but it's a start.

Last Friday the stock market put in what's called a large-range outside day (LROD) to the upside. That could be a signal that a new uptrend is at hand. But first, we need to see some follow-thru. Investors Business Daily (IBD) describes these follow-thru days as an increase of roughly 1% or more on one of the major indexes, accompanied by an increase in volume, and occurring on the 4th-7th day after the initial start. So that means we need to be on the lookout for a follow-thru day somewhere from this Wednesday to next Monday. That would be an additional signal that the bulls are in charge.

Of course, tomorrow (5/3) is the FOMC meeting, where the Fed will almost assuredly raise interest rates again. Depending on the language they use regarding future rate hikes, the market could react in either direction. So I don't want to place too much emphasis on the next day or so, but rather if stocks can rally again later in the week.

Weekly Sentiment Review

The market ended the week with sentiment still firmly in bearish territory. Among the indicators I follow, put/call ratios remain elevated, bullishness among investment advisors is low, and selling/short selling activity is hitting extreme levels. But it is this last indicator on which I'd like to expound.

One of the indicators I follow is the Specialist Short Ratio. This is the ratio of short selling on the part of NYSE specialists as a percent of overall short sales. One of the roles of the NYSE specialist is to make an orderly, two-way market in stocks. So when a flurry of sellers comes in, the specialist has to be the buyer of last resort, so to speak. As such, during periods of extreme selling this ratio drops to low levels. Alternatively, when a buying panic ensues, the specialist assumes the role of short-seller and this ratio rises.

Right now the specialist short ratio is at levels as low (0.15) as I can remember. That means that there is a dearth of buyers out there, and the specialist is having to step up and fill this role. With the market down 3 of the last 4 months, it's likely that short sellers are sitting on nice profits for the year. I doubt they want to risk seeing those profits evaporate on a turnaround in the market. As such, I would expect short covering to add additional fuel to the fire on any subsequent rallies.

I am watching the 1165 level on the S&P 500 (SPX), which is the high from last week (4/26), to spark the first round of short covering. Conversely, if the recent low at SPX 1137 is taken out, it could further embolden the bears. But let's hope the market likes what the Fed has to say next week and the bulls can gain some momentum.