MONDAY RECAP - Jeanette Young
SELL IN MAY AND GO AWAY?...NOT... He just couldn't leave well enough alone; there was the Dow Jones, enjoying a rally in today's session and then, Chairman Bernanke's comments were aired, minimizing the rally in gold, crude oil and a rise in interest rates. Chairman Bernanke indicated that the market didn't understand his comments in last week's congressional testimony. Didn't understand the pause part, the data part, what? He described himself as an inflation fighter; not a dove. Commodities seem the recipient of the inflows of cash, enjoying a robust rally. Today, as is common on the first day of a new month, cash inflows seem to be finding their way to the commodities markets.
Chart 1
DOW JONES INDUSTRIALS... In Chart 1, we have the Dow Jones, clinging to the upper edge of the Bollinger Band without so much as a retreat to its moving average. The study on the bottom is one which I use, the Commodity Channel Index with a 5- period exponential moving average on top. The reason that this 5- period exponential moving average is placed on the CCI is to obtain better triggers than would be offered by the CCI alone. Were I to use the CCI alone, I would miss about 75% of the trade. By using the 5- period Exponential Moving average, I have created a trigger for both a buy and a sell. As you can see, this market is at the overbought edge of the range, and today has issued a sell-signal.
MAYDAY... Markets in Europe are closed for the May Day Holiday and most foreign currency desks are lightly populated. Tomorrow will be a telling day with regard to the US Dollar index. Today we saw the US Dollar index fall to a new 2006 low. The US Dollar has been in trouble for some time. When I looked at the weekly chart, I was astonished to see a head and shoulders top pattern. While the shoulder B is higher than shoulder A, which it should not be, I believe that this formation is projecting a further retreat in the US Dollar index, certainly to the 84 level as a minimum.
Chart 2
US DOLLAR... Notice that the daily chart of the US Dollar index is extremely oversold, but although the CCI seems to be curling to the upside, the trigger has not been elected. The chart looks awful and because the decline has been very steep, we would expect to see a bounce within a day or so, but I suggest that it only be used to exit any long positions. I would not recommend a purchase of the US Dollar index at this time.
Chart 3
OVERSEAS... This week we will have the interest rate decision from both the Bank of England and the European Central Bank. The Japanese yen is matching the previous highs seen in January of 2006 and seems poised to make a new high.
HURRICANE SEASON IS UPON US... Just when we thought it couldn't get worse, we are faced with the onset of hurricane season again, starting next month. For those who have forgotten about Katrina and Wilma, they were beauties, knocking our off-shore oil platforms off line and destroying some of the refineries in Louisiana, causing a sales spike in the products. Today, we have the added influence of Iran, adding to the price hikes in the products. Fortunately, natural gas has been on the decline; well, at least one energy product is lower. Natural Gas has the dubious distinction of garnering the title of worst-performing energy commodity for this past month. We are faced with the possible fury of Mother Nature and the fear of unstable oil-supplier governments. Based on Supply and Demand, we are approaching the peak automobile driving season with more demand than supply. It seems that we have enough oil, but are unable to refine the product fast enough to keep up with the demand. Just as a foot-note, Iran is the 4th largest oil producer; so, if they remove their oil from the market, we will surely feel the effect. Remember when crude oil was $58/ barrel? Today, crude is comfortably trading at above the $70/ barrel price. June crude oil is up 2% today, alone; true this is fear, but at these levels, it is certain to be a significant ultimate drag on the Economy. Is Iran causing the price of crude to rise, or is it just adding fuel to the fire of an already firm market?
CONSUMER ALIVE AND WELL... The American consumer stepped up their appetite with a 6 tenths of a percent (0.6%) increase in consumption, as reported in today's ISM Report. Wages grew at 0.8 % but inflation managed to grow near the top of the range of 0.3% excluding food and energy. This rally in inflation might be troubling for some Fed officials. We are seeing is a strong economy with little slow-down even after 15 rate hikes by the Fed. The ISM report shows that the manufacturing end of the economy expanded in April to 57.3 up from the March level of 48.7 even with higher interest rates. Spending rose to 6.7% while incomes rose 1.7%. The 10 year bond is trading at 5.12% a new high for the 10 year. So, when do the increased costs of raw materials and higher costs of money slow the economy? I don't know, but will counsel caution, keeping investments in companies that pay dividends, have decent growth and low Price/Earning ratios. The large capitalization stocks should weather any storm clouds in our future, better than their small and medium cap companions. Companies which earn money off shore should do better with a declining dollar.
GOLD AND SILVER... Gold and silver continue the rally as the US Dollar falls. Not only are the metals a safe-heaven for unstable currency, but the metal is a proxy for inflation and world insecurity. Therefore, the metals are in rally mode with so many props to hold the metal up; we see no reason to believe that a huge correction will be seen anytime soon. Gold and even more so Silver, have rallied, perhaps spurred on by the formation of the ETF's which give the investor a direct investment in the metal, we now have a gold ETF and as of Friday, a silver ETF. The precious metals have rallied about 3% today. I do not believe that this was the cause of the rally in the silver market, although, I have heard from traders that they fear the supply of the metal but, I feel that it added fuel to the fire of inflation in this metal. Copper has been in rally mode, not because it is an inflation play but, rather because there seem to be some supply disruptions and the demand is outpacing the supply. Today, copper is attempting to rally to the high seen on Thursday of 3.3850 in June Copper. This is the way commodity markets behave, after you remove the hysteria from the equation, they rally when a real or perceived shortage is seen in the market. Gold has made a new high for the year today in the session at the COMEX, but retreated slightly into the close. Silver is underperforming gold in today's session but, it has been the better percentage gainer in the recent rally.
Chart 4
Chart 5
CONTINUOUS COMMODITY INDEX... The continuous commodity index made a new fresh high in today's trading session. Just as a reminder, this index has only 14.5% or so energy in it and is an equally weighted index of 17 commodities reflecting agricultural and softs as well as some metals. The Reuters Jefferies CRB which reflects more industrial components is enjoying a rally in today's market but, is not making a new high.
Chart 6
CONUNDRUM CONTINUES... Apparently, interest rates increases are not enough to steal the investment dollars from the stock market. Growth is perceived to outpace safety and thus, the dollars flow into the markets. The over-enthusiastic buyers can continue for some time, although I feel that a market such as this, which has rallied without so much as a 10% correction since 2003, will eventually succumb to the pressure of higher interest rates and inflation. As a result of this belief, I counsel that you enjoy the rally, but keep your portfolio balanced with companies with international exposure, earnings and growth. Further, I recommend that you employ the use of stops. These are orders that would become elected, as a sale, should the value of the security retreat. I further recommend that you use these good times to sell call options on your securities, as in covered calls. When you do this, you are pre-selling your securities. True, you cap further gains, but you also pocket some winning trades. Just remember, today if your money sits in the money market, you are probably earning more than the dividend you will receive from your stock; not a bad option for some freed up money. - Jeanette Young
