Sam Collins

Tip of the Capitulation

by Sam Collins   07/16/08

Fear that the Federal Reserve is unable to stop inflation and promote economic growth led to another hectic day of responding to the latest newscast -- and there were plenty of those.

At the beginning of Fed Chairman Ben Bernanke's testimony to the Senate Banking Committee Tuesday, he outlined a long list of downside economic risks, including "ongoing" financial stress, falling home prices, a weaker jobs market and rising food prices. He said, "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

As the Fed chief, the treasury secretary, and the president were addressing TV audiences yesterday, oil prices were plunging and gold was hitting new highs. And both Freddie Mac (FRE) and Fannie Mae (FNM) sold off again, as investors questioned the government's ability to save the two most important U.S. mortgage holders.

Investors even focused on bank deposits for the first time in the Street's collective memory following the failure of IndyMac (IMB), as bank depositors wondered which bank will be next. On that score, the focus turned to Wachovia Corp. (WB) when Oppenheimer (OPY) downgraded it to "underperform" and the stock closed down 7.7% to $9.08.

But all of the news was not gloomy: Johnson & Johnson (JNJ) reported higher-than-expected earnings and the stock rose $1.26, and First Horizon National (FHN) led a rally in banking stocks after reporting strong earnings and the stock gained 16.9%.

The June Producer-Price Index (PPI) reported mixed results. The Total June PPI was high because of bloated energy prices and higher food prices while Core PPI, which excludes food and energy prices, increased by a lower-than-expected number. June retail sales were less than expected.

At the close, the Dow Jones Industrial Average (DJI) was off 93 points at 10,963. The S&P 500 (SPX) fell 13 points to 1,215 and the Nasdaq (NASD) was up three points, closing at 2,216.

The New York Stock Exchange traded 1.8 billion shares, with decliners ahead by 3-to-1. On the Nasdaq (NASD), more than 1.2 billion shares crossed with decliners ahead by 3-to-2.

The August crude oil contract fell $6.44 to $138.74 a barrel -- the biggest one-day drop in more than 17 years as concerns over a slowing economy created fear of a drop in demand. The Amex Energy SPDR (XLE) fell $3.47 to close at $78.87, confirming a strong sell signal from our internal indicator, the Collins Bollinger Reversal (CBR), as it broke through the 100-day moving average and closed just above the 200-day moving average.

The August gold contract gained $5 at $978.70 per try ounce and the PHLX Gold/Silver Index (XAU) fell $5.27, closing at $195.86.

What the Markets Are Saying

It took the fear of bank failures to finally trigger the level of sentiment numbers normally associated with a bottom.

Yesterday the CBOE Volatility Index (VIX) hit a high of 30.81 and the Nasdaq 100 Volatility Index (VXN) hit 35.28, both the highest readings since March when stocks then hit their lowest prices.

But despite yesterday's close by the VXN of 33.01, which even exceeds the March closing high by a full point, the VIX has still not quite attained capitulation levels. In March, the VIX had an intraday high of 35.60 and a closing high of 32.24 and closed yesterday at 28.54.

But we are close to a capitulation and even one more day like yesterday could provide the levels normally associated with a bottom. However, even with the sentiment numbers showing high levels of fear, the other sentiment numbers highly bearish, and with the internal indicators grossly oversold, it will take more than just a normal oversold bounce to reverse the downward spiral of stock prices.

The minimum downside targets of the major indices are Dow 10,750, S&P 500 1,220 and Nasdaq 2,155 (with the possibility of even deeper thrusts), which should keep the bears in charge for at least several months.

But fear is now high and with it comes the hope of a final capitulation.

Today's Trading Landscape

Earnings to be reported include: Abbott Laboratories (ABT), Alliance Data (ADS), AMB Property Corp. (AMB), AMR Corp. (AMR), ASML Holdings NV (ASML), Astoria Financial Corp. (AF), Colonial Bank (COBK), Crown Holdings (CCK), Datalink Corp. (STLK), Delta Air Lines (DAL), eBay (EBAY), First Midwest Bancorp (FMBI), Gannett (GCI), Hoku Scientific (HOKU), Host Hotels & Resorts (HST), Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management (KMR), Knight Capital Group (NITE) and Lufkin Industries (LUFK)/

The following companies are also reporting earnings today: Marshall & Ilsley (MI), Medtox Scientific (MTOX), Mercantile Bank Corp. (MBWM), National Penn Bancshares (NPBC), New Oriental Education & Technology Group (EDU), Northern Trust (NTRS), Piper Jaffray (PJC), Polycom (PLCM), Rurban Financial Corp. (RBNF), Saba Software (SABA), St. Jude Medical (STJ), Texas Capital Bancshares (TCBI), TrueBlue (TBI), United Community Financial Corp. (UCFC), United Security Bancshares (USBI), Universal Forest Products (UFPI), Valley National Bancorp (VLY), Wells Fargo & Co. (WFC), Xilinx (XLNX) and Yum! Brands (YUM).

Several key economic reports are due: June Consumer Price Index (the consensus expects 0.7%), the June CPI excluding food and energy (the consensus expects 0.2%), May Treasury International Capital Flows, June Industrial Production (the consensus expects 0.1%), June Capacity Utilization (the consensus expects 79.4%) and the July NAHB Housing Market Index.

Intel (INTC) reports that Q2 net was up 25% to 28 cents versus estimates of 25 cents per share. Goldman Sachs (GS) is being scrutinized: The Wall Street Journal reports, "Now, the big securities firm has come under suspicion, at least from the chiefs of two rivals who have questioned in recent months whether Goldman, even indirectly, might have put pressure on their firms' stocks."

The SEC moved to curb short selling in the stocks of Fannie Mae (FNM) and Freddie Mac (FRE) and 17 other financial firms. After a big drop yesterday crude oil is lower again.

---

Get Sam Collins' Daily Trader's Alert e-mailed straight to your inbox each morning before the opening bell absolutely FREE!

In addition to getting instant access to his Daily Market Outlook, you'll also receive, in the same e-mail, his Trade of the Day so you can start your day off right by positioning yourself for profits!

Click here today to sign up today for Sam's FREE Daily Trader's Alert!

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.