Sam Collins

Prepare to Take Profits

by Sam Collins   08/15/08

Even though the economic reports weren't favorable yesterday, the market again focused on lower prices in crude oil and other commodities, and this brought buyers into stocks.

But before the buyers emerged, the stock market opened lower following the release of the latest inflation numbers in the form of the July Consumer Price Index (CPI), which was up 5.6% year-over-year -- the impact of food and energy prices that were higher than forecast.

After Thursday's opening weakness, stocks rallied as buyers went after the financial and technology stocks. Fannie Mae (FNM), up 7.7%, and Freddie Mac (FRE), up 7%, led the financials, while Research In Motion (RIMM), up 3.02%, helped the tech sector.

And there were better earnings from the retail sector, as well. Wal-Mart (WMT), Urban Outfitters (URBN) and Estee Lauder (EL) all reported earnings gains that exceeded forecasts.

The Dow Jones Industrial Average (DJI) rose 83 points to 11,616, the S&P 500 (SPX) gained 7 to 1,293 and the Nasdaq (NASD) rose 25 to close at 2,454. Only 1 billion shares traded on the NYSE, and 742 million crossed on the Nasdaq. On both exchanges, advancers were ahead of decliners by about 2-to-1.

September crude oil fell 99 cents to $115.01 a barrel, and the Amex Energy SPDR (XLE) was off $1.12 to $72.38. The December gold contract fell $17 to $814.50 per troy ounce. The PHLX Gold/Silver Index (XAU) lost $5.86 and closed at $143.22.

What the Markets Are Saying

Our regular readers know that I place importance upon four general categories of indicators, plus our own internal Collins Bollinger Reversal (CBR) indicator, when evaluating market trends. These include:

• Internal Indicators (Moving Average Convergence/Divergence, stochastics, momentum, etc.)
• Sentiment Indicators (American Association of Individual Investors, CBOE Volatility Index (VIX)/Nasdaq Volatility Index (VXN), put/call ratio, insider transactions, market letter-writers, etc.)
• Volume
• Charting Techniques (trendlines, moving averages, zones of support/resistance, etc.)

In the absence of some unusual technical occurrence, I try to cover each indicator at least once a week and, on Thursday, discuss the sentiment indicators with emphasis upon what the public and non-public members of the investment community are doing.

Despite the high daily volatility, the market is in a tight trading range with each of the major indices trading with short-term upward channels (defined in yesterday's issue) within intermediate- and long-term downtrends.

Above these short-term channels is a huge overhead of potential sellers accumulated most recently from January 2008 to June 2008. And before that there was another, higher level from September 2006 to December 2007.

With such an enormous accumulation of potential sellers just above current prices, sentiment indicators are of little long-term use but can help with short-term trading. And so, my comments on them will be confined to the very short term.

The American Institute of Individual Investors (AAII) publishes its Sentiment Survey every Wednesday evening. It is a contra-indicator of great worth and if you have an interest in technical analysis you should go to their Web site at AAII.com and check it out.

On June 12, the index switched from bullish to bearish (that's positive for the market) and stayed bearish for six weeks. Then it went neutral on July 31, and has remained that way.

But the small investors have been heading in the direction of bullishness (which is negative for the market) just as the indices approached the massive overhead referred to above. For this reason, I'm relatively confident that the short-term bullish channel is close to rolling over for a test of the July 15 low.

But this doesn't mean that the rally will end today, and anticipating changes in the trend with actual purchases can be dangerous. Nevertheless, prepare to take profits in financials and other sectors in which you have gains, and plan to either house your cash in high-yielding money market equivalents or go short again.

In other words, know what signals to look for, prices to pay, and stocks to short or contra-funds to buy when the opportunity arises.

Today's Trading Landscape

Earnings to be reported include: Abercrombie & Fitch (ANF), Delta Apparel (DLA), Gushan Environmental Energy (GU), J.C. Penney (JCP), Limco Piedmont (LIMC), LiveDeal (LIVE), New York & Co. (NWY), OSI Restaurant Partners (OSI), Pinnacle Gas Resources (PINN), Ram Holdings (RAMR), TRX (TRXI) and WSP Holdings (WH).

Economic reports due: August N.Y. Fed Manufacturing Index (consensus expects -5.5), June Treasury International Capital Flows, July Industrial Production (consensus expects 0.0%), July Capacity Utilization (consensus expects 79.8%), and the Mid-August Reuters/University of Michigan Sentiment Index.

The lead story in today's Wall Street Journal suggests the "Global Economic Picture Darkens" and says that four of the world's five largest economies are now "flirting with recession." Firms agreed to buy back more than $7 billion in auction-rate securities. Additionally, the dollar is trading higher and gold and crude oil lower again this morning.

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Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.