Stocks at Important Levels

Sentiment is such a misunderstood factor in markets, but it is now a very large part of the psychology and direction of stocks. On Monday, the Dow quickly dropped below the 13,000 level and stayed there, after an early rise and subsequent fall on Friday.

This, with the other indices moving in in unison is a dead give-away for a significant shift in sentiment from bullish to bearish. It's not difficult to comprehend, as stocks have been on an upswing since March 10, and with earnings reports all but complete for the quarter, there's little on which to hang a resumption of the rally.

The levels important to investors over the near term are: Dow 13,000 (already breached to the downside); S&P 1400 (holding just single digits above); NASDAQ 2500 (failed at 2499 on May 2) and potentially the most overlooked, NYSE Composite 9500 (failed at 9496 on May 2).

Dow 12,969.54 -88.66; NASDAQ 2,464.12 -12.87; S&P 500 1,407.49 -6.41; NYSE Composite 9,438.10 -13.07

Once the S&P drops another 7-12 points, the index superfecta will be complete and investors will begin taking profits in larger quantities. With summer coming, the dominant sentiment will return to negative for four reasons: 1) the market is essentially overbought; 2) high gas and food prices are crimping spending and that is becoming a worldwide phenomenon; 3) the employment situation is, by any standard, deteriorated and possibly worsening; and, 4) housing and credit markets are still in crisis.

The balance of this week will likely determine market direction for the rest of May, June and probably well into July.

As noted, stocks were sent lower just about right out of the gate and stayed in negative territory all session long. Declining issues took command over gainers, 3512-2700. New lows outstripped new highs, 161-116, reversing Friday's decision, which was only the fifth time since October 31, 2007 that there were more new highs registered than new lows.

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After last week's respite, oil continued its relentless ascent, closing at another record, $119.97 per barrel, up $3.65 on the day. Gold caught onto the updraft, gaining $16.10 to $874.10, as did silver, up 37 cents to $16.83.

Tomorrow and Wednesday's should be critical. If the markets cannot move higher, the stage is set for a two-to-three-month low, testing the bottoms made in January and March. If the recession is really already here and the US economy is indeed in a trough, this could mark the bottom. However, there are still critical issues and hurdles to overcome - housing, interest rates, inflation, labor, gas, food, politics - which will all play a role in determining whether the economy can bounce back or continue slumping.

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Why the Markets Lost Friday's Gains

The Commerce Department treated Wall Street to a rare glimpse into the arcane workings of politics and statistics. The Bush administration is hell-bent on preventing a recession and keeping the economic outlook somewhat rosy until November. To that end, it's a near certainty that today's release of April Non-Farm Payroll figures was at worst, manipulated, and at best, simply wrong.

Somehow, US employment was actually shown to be relatively stronger in April than in the previous three months in which more than 240,000 net job losses appeared. The headline number was a loss of only 20,000 jobs in April, but a peek inside the release uncovers some very troubling and difficult-to-rectify numbers.

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First, the report shows that between March and April, the civilian labor force grew by 173,000 and that the number of employed people grew by 362,000. These figures actually produced a drop in unemployment of 0.2%, or 189,000 people.

The report broke out some key areas of gains and losses. There were losses of 61,000 construction jobs, 46,000 manufacturing jobs and 27,000 retail jobs. Gains in health care (37,000), professional and technical services (27,000), and food service (18,000). Taking the gains against the losses (+82,000, -128,000) still leaves us with a net loss of not 20,000 jobs but 46,000.

Noting that small discrepancy, the report delivers two highly dubious statements:

"In April, the number of persons working part time for economic reasons increased by 306,000 to 5.2 million. This level was 849,000 higher than in April 2007. These individuals indicated that they were working part time because their hours had been cut back or because they were unable to find a full-time job. (See table A-5.)

Persons Not in the Labor Force (Household Survey Data)

About 1.4 million persons (not seasonally adjusted) were marginally attached to the labor force in April. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 412,000 discouraged workers in April, about the same as a year earlier. Discouraged workers were not currently looking for work specifically because they believed no jobs were available for them. The other 1.0 million persons classified as marginally attached to the labor force in April cited reasons such as school attendance or family responsibilities."

Well, 306,000 new part-time workers begins to cloud the picture and is hardly believable. And of course, we won't count 1.4 million people "marginally attached" to the labor force in April.

Of these two statements, the addition of 306,000 part-time workers in one month is the most troubling and dubious. In a word, this report was a crock, and anyone who believes these numbers has lost his or her grip on reality.

And that's precisely what happened on Wall Street. The Dow shot up more than 120 points before the analysts began poring over the numbers and coming to their bosses shaking their heads. The numbers simply do not jibe and traders, once wind of the discrepancies hit the street, began unwinding positions, sending the markets back to unchanged and slightly into the negative by early afternoon. Only some spirited tape-painting prevented an all-out rout.

Dow 13,058.20 +48.20; NASDAQ 2,476.99 -3.72; S&P 500 1,413.90 +4.56; NYSE Composite 9,451.17 +56.13

Naturally, most of the civilized world will never take a second glance at the Non-Farms Employment data for April 2008 and simply take the government at its word. Some of us have to be doubters, however, and this writer has no doubt whatsoever that government figures are today more maligned, politicized and unreliable as to be nearly completely useless.

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What the loss of "only" 20,000 jobs in April does is set the stage for job gains in May, June and beyond and more bogus stories about the "recovering" economy. This, of course, will suit the current administration perfectly well, as they will be able to laud praise upon Fed Chairman Bernanke and Treasury Secretary Paulson for wise stewardship in averting recession.

The truth, on the street and in homes across America, will be in stark contrast to these lies, but the media will gobble up the phony story from the government like a pack of hungry guppies because they have just about the same capacity for critical analysis overall.

We're facing a serious dilemma in the country over the next six to eight months. We're not only going to have to elect a new president, but also return or replace hundreds of members of Congress, and do so armed with faulty data, concocted news and outright lies via the government and the media. It's time the American people take back their government or just quit the charade altogether and stop paying taxes, voting and participating in the demise of democracy.

That said, the market data on the day was as mixed as the indices. Advancing issues beat decliners, but it was nearly a deadlock, 3.143-3,035. New highs shot ahead - for only the fifth day in six months time - of new lows, 166-148.

Commodities didn't miss out on the opportunity to tack on gains. Oil rose $3.80, to $116.20. Gold was up $7.10, to $858.00 and silver added 26 cents to $16.47. The gains in basic materials and metals was largely technical, following days of steep declines, though one should assume that oil is poised to price quite a bit higher in coming days.

All told, the bogus labor figures, like the crooked GDP figures earlier in the week, allowed the rally in equities to continue uninterrupted. One might guess that a day of reckoning is coming for all the manipulations, malignancies and mistaken trust. That day may not come until some far off date, sometime in 2009 or beyond, but by then the damage done will have been so severe that fixing it will be neither painless nor quick.

Massive Gains on Turn-Around Day

After witnessing the huge post-Fed sell-off yesterday and laughing at fooled investors, I found myself on the other side of the aisle today as the indices took off running and hummed to big across-the-board gains on Thursday.

The thrust forward seemed intent on the Dow closing above 13,000, as if to confirm that the worst of the subprime/recession/credit squeeze/inflation debacle is solidly behind us. The Dow made its move, establishing either a double top or just the breakthrough above a significantly emotional trading level.

We'll not know which it is until next week at the earliest. This is either a top or the Dow will proceed to 13,500, which will then be the absolute top, followed by a wicked decline. I don't know which I'd like to see, though I'm about done with the gains of the past six weeks.

Should the Dow push towards 13,500, I will ride the roller-coaster up, and then all the way back down to 12,000 or lower. I'm still not convinced that January-March was the bottom. There are still enough unresolved issues in the economy for the markets to move significantly higher, politics or not.

Meanwhile, I've been putting the finishing touches on my Investment Advisory Newsletter and am splitting hairs between going long and short, though my gut continues to tell me this market is overbought. Earnings will remain the focus through most of next week before economic news and reports should begin to shape the trade.

Dow 13,010.00 +189.87; NASDAQ 2,480.71 +67.91; S&P 500 1,409.34 +23.75; NYSE Composite 9,395.04 +95.44

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Advancing issues whipped decliners, 4347-1925, but new lows retained their long-held advantage over new highs, 164-140. Friday and Monday's trading should determine direction according to the new highs-lows gauge.

With the markets and the dollar showing strength, commodities took it on the chin once again. Oil dipped another 94 cents, closing at $112.52. Gold slipped even further, to a 4-month low, dropping $14.50, to $850.90. Silver shed 39 cents to close at $16.21 per ounce, a 3-month low.

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The Joke's On US... and You

I am laughing so hard my sides are about to split after watching the market's silly Fed-watch ritual for the past two-and-a-half days only to see the bottom basically fall out as today's session drew to a close.

What the Fed did was lower the federal funds rate another 25 basis points - essentially a do-nothing gambit - but signal that the cuts were over. What smart investors did was cash in their chips right at the highs. A nice play, if you're big, rich and not stupid.

Anyone not cashing out as early as possible tomorrow is going to be stuck with declining issues. As noted yesterday, today's most important announcement came not from the Fed, but from Commerce, which told us today that we are unofficially in recession.

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The word from Commerce was that "real" GDP was measured at an annualized growth rate of 0.6% in the first quarter of 2008, matching that of the 4th quarter of 2007. Since the term "real" isn't as confident a measure as it used to be, one necessarily has to include some of the inflation over the last six months to offset the gains. Inflation ran at a 3.7% annually in the 4th quarter of last year and 3.5% in the first quarter.

Now, the government will tell you that inflation, or, "prices paid" as they put it, are factored into the GDP question. I'll tell you that inflation is largely: 1) understated, and 2) not factored in correctly.

Without doing all the math and using their "estimates", here's my conclusion. If we "grew" at 0.6% over the past six months, but inflation averaged 3.6%, we're down 3% in "real" terms. In other words, that 0.6% gain didn't even keep pace with inflation. I am assuming that there's very little "reality" in the government's numbers.

It's more smoke and mirrors than anyone can possibly see through without losing one's mind, so you can take my word on it or the government's. Since I'm the one not $9.6 trillion in debt, I'd wager that I'm closer than the truth than the bean counters in Washington.

Plus, if you don't like my analysis, just look around. The Dow dropped almost 200 points off its intraday high once the excitement of a 0.25% interest rate cut ended (insert one hand clapping here). Gas is $3.60 a gallon, bread, milk and most vegetable prices are up at least 20% from where they were a year ago, and your wages simply are not keeping pace.

If you measure a growth rate of 0.6% in terms of a 5-foot-tall 12-year-old, it would amount to .36 inches in a year. By the time the poor kid reaches 18, he or she would still only be a shade over 5' 2" and likely be accused of smoking or engaging in some other kind of growth-stunting activity.

In any case, 0.6% growth is laughably sad. It doesn't even register, so if we're not in a recession, we're at best going nowhere fast.

Dow 12,820.13 -11.81; NASDAQ 2,412.80 -13.30; S&P 500 1,385.59 -5.35; NYSE Composite 9,299.60 +13.69

One other point of emphasis. The Dow (at one time I nearly disregarded it as a solid measure of American industrial and financial strength; today, I believe it is one of the best overall gauges) had gained 1,260 points from the March 10 low to today's intraday high just over 13,000 and it immediately backed off. Technical matters aside, every trader worth his or her salt knew that level was simply unsustainable and the market was severely overbought. Profits were taken and more will come off the table in weeks ahead. There is no bottom in place and won't be for at least another 3-5 months.

Advancing issues actually did better than decliners, though not by much, 3198-3046. New lows superseded new highs, 178-114. This has been the norm for every session except four since October 31, 2007, a span of now six full months. If you don't have some real dogs in your portfolio, count yourself among the lucky few.

Oil traders were obviously paying attention to developments outside their particular realm, sending crude down another $2.17, to $114.69, as were metals bettors, with gold losing another $11.70, to $865.10 and silver down 5 cents to $16.59.

With the world fully focused on higher prices, it would pay to keep an eye on global demand for commodities, which has been under pressure of late, along with credit markets, at a standstill since August. Deflation, not inflation, may turn out to be the more dangerous of those evil siblings.

NYSE Volume 4,508,902,000
NASDAQ Volume 2,219,310,000

Plenty of Bad News Ahead of Fed

The markets spent another day running in place as traders await Wednesday afternoon's rate policy announcement. As the Fed is largely expected to cut the federal funds rate another 25 basis points, there doesn't seem to be much to get excited about even after the announcement.

Tuesday was a good day for hand-ringing, with economic news very much on the negative side.

The Conference Board reported their measure of Consumer Confidence hit a 5-year low, falling to 62.3 in April, down from the revised 65.9 in March.

The housing situation in the US continues to deteriorate. Median home prices fell by 12.7% in February, at the same time the number of homes heading towards foreclosure leapt 112% in the first quarter of '08 as compared to the same period in '07, and up 23 percent from the 4th quarter of '07.

Perhaps the only good news was in the price of oil, which fell sharply on - believe it or not - supply and demand concerns. It seems as though the high prices at the pump are finally coming home to roost. People are changing their driving and buying habits, albeit slowly, and word is spreading that there's actually an oversupply of oil available.

It's inevitable that such a hyperventilated market as is oil would have to bust sooner than later. Here's hoping the price of crude is under $75 this time next year.

All of this did little to buoy the fears of collected investors. Stocks were off, though marginally, and seem to have stalled at key resistance levels. With the earnings season winding down, it's back to the grind of daily economic reports detailing a widening, deepening recession, such as was suggested by Warren Buffett on Monday.

Dow 12,831.94 -39.81; NASDAQ 2,426.10 +1.70; S&P 500 1,390.94 -5.43; NYSE Composite 9,285.91 -63.70

Of companies reporting on Tuesday, Corning (GLW), Visa (V), Mastercard (MA) and British Petroleum (BP) all topped estimates handily, while Deutsche Bank (DB) and US Steel (X) slipped below expectations. Merck (MRK) fell sharply when the US Food and Drug Administration rejected Cordaptive, a cholesterol-lowering drug.

Amid thin trading, declining issues outperformed advancers by 3663-2539. Once more, there were more new lows (170) than new highs (82), an ongoing trend. In fact, the gap between the new highs and new lows continues to widen, indicating the possibility that the market is ready to do an about face after six weeks of gains regardless of what the Fed decides on Wednesday. When all is said and done, the market may just move on its own weight back into the mid-March levels.

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As mentioned above, oil fell markedly, off $3.12, to $115.63. The metals also felt some pain, as gold fell $18.70 to $876.80 and silver lost 48 cents to $16.64. More evidence of a widespread deflationary spiral developing if worldwide growth sputters.

Two of the three main events for the week begin tomorrow, with the Fed rate announcement tomorrow afternoon and conclude on Friday after the Labor Dept. releases Non-farm payroll data for March. Maybe most importantly, the Commerce Department issues a preliminary reading on GDP for the first quarter prior to the market's open tomorrow, a key reading at what may turn out to be a critical moment. Following the 4th quarter reading of 0.6% growth, expectations are for anywhere from 0.4-0.7% growth, though much of that may be attributed to higher food and energy prices. In real terms, a reading under 0.5% may indicate that real growth has stalled and recession has already arrived, as some economists are already saying.

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