by Sam Collins 08/22/08
Another low-volume, high-volatility day ended on a mixed note Thursday after higher oil prices and a cross-current of stories about the future of Fannie Mae (FNM) and Freddie Mac (FRE) buffeted stocks in the first minutes of trading.
The Dow (DJI) opened slightly lower but five minutes after the opening bell, it was down more than 100 points. It took an entire session of trading to move prices back to a point where the Dow was up 50 points. But a late round of profit-taking erased the gains and most of the indices closed pretty much where they ended the day before.
The Wall Street Journal reported that Freddie Mac (FRE) executives would be meeting with Treasury officials, and rumors spread that the government would soon be taking over both Freddie and Fannie Mae (FNM). Despite no comment from either of the two mortgage giants or the Treasury Department, financial stocks made up most of their early losses but still closed lower.
American Express (AXP) was off 1.1%, and American International Group (AIG) fell 4.9% on a rollback of earnings estimates by analysts who are looking for Q3 to come in around 75 cents a share. That would be a drop of 45% from the same quarter last year. JPMorgan (JPM) fell 2% and Merrill Lynch (MER) was off slightly.
Merrill Lynch (MER), Deutsche Bank AG (DB) and Goldman Sachs (GS) agreed late yesterday to buy back more than $12 billion in auction rate securities as part of a deal with state regulators.
At the close, the Dow Industrials (DJI) were up 13 points at 11,430. The S&P 500 (SPX) gained three points, closing at 1,278 and the Nasdaq (NASD) fell nine points to 2,380.
Volume was again light, with just one billion shares trading on the NYSE and 710 million were exchanged on the Nasdaq. Breadth was slightly positive on both exchanges.
Crude oil (September contract) gained 45 cents to $114.98 a barrel, and the Amex Energy SPDR (XLE) gained $1.61, closing at $76.11.
The December gold contract closed at its highest price in two weeks at $839 an ounce, up $22.70, propelled by a dollar sell-off and renewed strength in oil. The PHLX Gold/Silver Index (XAU) gained $8.53 to close at $153.88.
What the Markets Are Saying
The pattern of 'oil up, gold up and a weak dollar' is a familiar one and its resurgence does not bode well for the markets.
The market's rise began on Aug. 5 and accelerated this week. But the prior fall in oil that began early in July emboldened the bulls and now the percent of bullish investment letter writers, as reported by Investors Intelligence, have "surged to 40.7% from 31.8% a week ago."
The publication points out that the bulls have increased for five of the last six weeks starting from a low of 27.4% in early July. During the same time frame, the bears have declined to 38.4% from 50%.
Last week, I pointed out that the American Association of Individual Investors (AAII) Sentiment Survey showed that the bulls went to a neutral stance on July 31 -- they are still neutral with a reading this week of 38.10% bullish and 37.30% bearish.
In this study it is not quite so important how strong the individual number is but the direction of the change. In this time frame, the move has been from very bearish to neutral and that is not good news for the market.
And finally the CBOE Volatility Index (VIX) yesterday posted the lowest number (19.49) since the beginning of May when the Dow Industrials were north of 13,000.
Hold onto your shorts, folks, because the bulls are about to lose their shirts.
Today's Trading Landscape
Earnings to be reported today include: Ann Taylor Stores Corp (ANN), Perry Ellis Int'l (PERY), Harris Interactive (HPOL) and Skillsoft Plc (SKIL).
No economic reports are due today.
The Fed's annual "retreat" is being held and, according to the Wall Street Journal, "The highlight for Friday's session comes at 10 a.m. EDT, when Mr. Bernanke delivers a speech on financial stability at a time when government-sponsored mortgage buyers Fannie Mae and Freddie Mac are anything but stable."
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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.
