by Sam Collins 07/03/08
Oil prices hit new highs again yesterday and stocks sold off in reaction. This time even the extended energy stocks succumbed to selling as the long holiday weekend ahead forced many traders to cover positions rather than risk unpredictable world developments.
Earnings forecasts of Merrill Lynch (MER) were cut again -- this time by Oppenheimer (OPY). In turn, Merrill Lynch downgraded General Motors (GM) and lowered its price target to $7, down from $28.
Before Wednesday's opening, the American Data Processing (ADP) employment index showed that the United States lost 79,000 jobs in June. It was the largest decline since November 2002 and worse than expected.
The report set the stage for the more significant jobs report today, and The Street is nervous in light of yesterday's ADP number. But factory orders for May climbed 0.6% and beat forecasts showing the economy is chugging along, albeit more slowly.
At the close, the Dow Jones Industrial Average (DJI) fell 167 points to 11,215, the S&P 500 (SPX) lost 23 points at 1,262 and the Nasdaq (NASD) lost 54 points and closed at 2,251.
On the New York Stock Exchange, 1.5 billion shares traded and the Nasdaq's (NASD) volume topped 1 billion shares. Decliners led advancers on both exchanges by about 3-to-1.
Crude oil (August contract) again traded at a record high, up $2.60 to $143.67 a barrel. The Amex Energy SPDR (XLE) fell $2.68 to $86.17 as another Collins Bollinger Reversal (CBR) hit the index -- the fourth in as many weeks.
The August gold contract closed at $946.50 per troy ounce, up $2, and the PHLX Gold/Silver Index (XAU) fell $7.19 to $190.35.
What the Markets Are Saying
Yesterday was a rough day for the bulls. Even energy stocks were hit despite a new high in crude oil. But the energy sector's stock prices are now so overblown that even the slightest disappointment could cause a major correction.
Yesterday, coal stocks were hit hard after a sharp drop in European coal prices. In turn, the S&P Metals and Mining Index (XME) fell 11% despite Morgan Stanley's (MS) analyst who said the firm's opinion would be unchanged and urged buying if prices fell more. Massey Energy (MEE) was down almost 19% and Fording Canadian (FDG) fell over 12%.
The Wall Street Journal also reported the following story: "Earlier this year, Abu Dhabi businessman Saeed Khouri made headlines and the Guinness Book of World Records when he paid $14 million for the tag simply sporting a '1.' His cousin, stockbroker Talal Khouri, paid $9 million for '5' -- the second-largest sum ever paid for a license plate."
It is this story and others -- like the heavy buying of calls on $300 January crude and sheiks sporting five diamond-studded Rolex watches stacked on their arms and new fleets of Rolls Royces -- that focus attention on the extended condition of the crude-oil markets.
All that we need is for a bull to emerge from an oil barrel romping across the pages of Time Magazine to confirm that an oil top is near.
"Irrational exuberance" has finally hit the energy markets so investors should be very cautious about new positions in the energy sector -- new investments in oil, and some energy sectors, have become a very dangerous game. Unless you think that war in the Middle East is imminent, then it's best to stay away.
Today's Trading Landscape
No earnings are scheduled to be reported today or tomorrow. But there are several economic reports due: initial jobless claims for the week of June 28 (the consensus expects growth of 1,000), June non-farm payrolls (the consensus expects a loss of 58,000), June unemployment rate (the consensus expects 5.4%), June Institute for Supply Management (ISM) Non-Manufacturing Composite Index (the consensus expects 51.5) and DJ-BTMU Business Barometer for June 14.
Today's focus will be on the jobs numbers, oil and the dollar.
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