by Sam Collins 09/03/08
Stocks started strong Tuesday as a result of lower crude oil prices, then became weak in the afternoon as a result of lower crude oil prices. That may seem incongruous but there is some logic to it.
In the morning, crude oil sold off because there was no significant damage to oil rigs and associated infrastructure in the Gulf of Mexico, and the perceived benefit to corporate America of lower energy prices drove Dow (DJI) stocks up more than 200 points.
But then in the afternoon, an OPEC representative said that, in light of the current weakness in the world economy and the possibility of a global recession, it is likely the cartel will cut oil production. The big energy stocks, which were down in the morning, headed even lower in the afternoon and the broader market took back all of its gains.
In economic news, the August Institute for Supply Management (ISM) Index fell to 49.9 in August from 50 in July -- a slight disappointment -- and July construction spending was lower with housing the weakest link there. Economists looked for a decline of 0.4% and instead the report showed that spending fell by 0.6%.
At the close, the Dow Jones Industrial Average (DJI) was off 27 points at 11,520. The S&P 500 (SPX) fell five points, closing at 1,278, and the Nasdaq (NASD) was off 18%.
Volume continued to be lower than normal. The New York Stock Exchange traded just 1.1 billion shares yesterday and the Nasdaq crossed 793 million shares. On the NYSE, advancers were ahead of decliners by 8-to-7 and the Nasdaq's breadth was exactly even.
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The October crude oil contract fell to a low of $105.46 a barrel Tuesday morning, and then the strong afternoon rally brought it back to $109.71 -- but it was still down by $5.75. The Amex Energy SPDR (XLE) closed at $70.55, down $4.10, which was the low of the day and just above major support at $68.
The December gold contract plunged $24.70, ending at $810.50 per troy ounce, the weakest closing since Aug. 18. The PHLX Gold/Silver Index (XAU) lost $9.91 and closed at $139.31.
What the Markets Are Saying
Tuesday's up in the morning/down in the afternoon movement resulted in a reversal (down) for many of the major indices and some of the most widely followed stocks.
The Dow (DJI) experienced a strong daily reversal and triggered our internal indicator, the Collins Bollinger Reversal (CBR), for the second time in as many days. Today should be interesting since the Dow also gave a stochastic sell signal.
Volume is still low, as many traders have taken the shortened week off. But the significance of yesterday's violent intraday reversal can't be ignored and neither should the stochastic sell signal and other negative signals given by the internal indicators.
Several of the sentiment indicators, like the CBOE Volatility Index (VIX), improved just a bit Tuesday, moving from 24 to 26. But it will take a lot more than that to confirm that a bottom is in place.
After Tuesday's action, the defense is again back on the field. This means that any rally should be used to raise cash. The adventuresome might go short or grab one or more of the contra-ETFs, but because of the very high volatility, it would be wiser to wait for a rally than chase stocks lower.
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Today's Trading Landscape
Earnings to be reported today include: Adept Technology (ADEP), Casella Waste Systems (CWST), Casey's General Stores (CASY), Collective Brands (PSS), Culp (CFI), Global Crossing (GLBC), H&R Block (HRB) and Hovnanian Enterprises (HOV).
Industrie Natuzzi (NTZ), Isle of Capri Casinos (ISLE), Joy Global (JOYG), Mediware Information Systems (MEDW), Mindray Medical Int'l (MR), NCI Building Systems (NCS), SAIC (SAI), Shanda Interactive Entertainment Ltd (SNDA), Signet Group (SIG), Unify Corp (UNFY) and United Natural Foods (UNFI).
The following economic reports are due: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Aug. 30, Redbook Retail Sales Index for Aug. 30, and July Factory Orders (consensus expects a 0.5% gain).
Staples (SPLS) reported that its Q2 net earnings fell 16% but still met analysts' forecast of 21 cents.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
