Sunday, March 9, 2008

The Psychology in the Upcoming Week's Data

Here we take a look at the Psychological aspects of the upcoming week's data. We're certain you'll not find this very useful perspective anywhere else, so please read carefully and digest. Your wallet and your investment account will thank you. Your broker, if you have one, may not.

We look for Monday's Wholesale Inventories (10.00 AM EST) to come and go without any market moving impact. Wall Street pays close attention to the spending habits of Americans, but the Wholesale Inventories don’t reflect those habits. You really shouldn’t care how much inventory there is built up or down on the wholesale level.

Don't expect any help from Tuesday's Trade Balance release either (8.30 AM EST). Americans usually import $57B-$60B more than they export and the estimate for Tuesday calls for a deficit or imbalance of $59B. We feel this data is more important to our trading partners: Canada, Mexico, Japan, England, and China. It should be understood that if the U.S. Dollar continues to slide the Balance of Trade could affect foreign exports negatively, specifically the countries mentioned above.

Wednesday's Crude Oil Inventory data (10.30 AM EST) will have a definite market moving impact. For investors The Psychology of this particular Call has more to do with a realization of the domino effect that energy/gas prices will have on consumers, rather than the actual number. Regardless of whether there's a build up or a draw down in inventories, the simple fact that Oil will be in the news is a negative in our opinion. We feel OPEC is a paradox as what they say and what they do is always contradictory. According to one Moody's economist, Mark Zandi: “Everything is going wrong for households. They are struggling with rising unemployment; high debt loads, heavier because of mortgage resets and plunging housing values; soaring gasoline prices; wobbly stock prices. The data suggest bankruptcies will rise measurably through the remainder of the decade.”
We don’t agree with Zandi's prediction that U.S. bankruptcies will rise for “the remainder of the decade", but we do feel Wednesday's Crude Oil Inventory data will not help support stock prices. The release will only remind investors of the current spot price of Crude, which is almost $109 a barrel.

Monday's and Tuesday's volatility may be dwarfed by the reaction to Wednesday's "bubblin' crude" release. Our readers should welcome volatility and to use it wisely. Take advantage of greater price swings/movements whether you’re long, short, or just sitting in the weeds like a large mouth bass, ready to pounce with pockets full of cash. Volatility offers better entry and exit points; enjoy it.

Thursday's Retail Sales data (8.30 AM EST) looks to set the fundamental tone for the remainder of the week.

Retail Sales carry tremendous weight. If you believe Zandi's analysis above, you'll understand the significance IF the numbers surprise on the upside. The market would breathe a huge sigh of relief and celebrate UP!!! Bullishness!!! Although we don’t suggest you gamble on that chance. Until we see that 1,270 test on the S&P, we recommend our readers hold a minimum of 50% cash/money market. There are always opportunities to go into the game, especially when your mind is clear, the blood of others is evident, and your portfolio is flooded with more cash than equity exposure. And we're getting closer to some type of climax. The S&P 500 is a broad based U.S. Equity Index that money managers are always trying to out perform, so we ask, why so many mutual funds?

Most of them now wish they practiced our Second Commandment "Cash is King" since January 1, 2008. Oh well.. they haven't called us lately.. and you?

Friday brings the February Consumer Price Index (CPI) release (8.30 AM EST). The CPI is a set/fixed basket of products and services Americans buy and use. There are many who are critical of this metric/number, and for good reason. The month to month (m/m) number varies greatly and most economists give special weight to the year over year (y/y) change. We’ll not even attempt to guess this release, but with current investor sentiment it would have to come laced with solid Platinum and Blood Rubies to have any kind of positive effect. The Core CPI will also be released. The Core subtracts food and energy prices, which to many is ludicrous, realizing that the two things people do the most is discounted in terms of their inflationary effects. We reiterate.. ludicrous.

Friday also sees the release of Michigan's Consumer Sentiment, an extremely important poll that our readers must follow (10.00AM EST). DePaul University's Finance Professor Charlie O'Connell, who managed nearly half a billion dollars of the University of Chicago Endowment, paid very close attention to this number. For that reason and others we hope our readers do too (it foretold the stock market crash of 1987 and 2000). The expectations for this number are reaching 15+ year lows, so if it comes in below the 70.5 consensus, say at 64 or lower, investors may sprint for the exits and sell, sell, sell. And then there’s the weekend’s analysis by talking heads that will lead to more selling on Monday.

On the flip side, if it scores 73 or higher the opposite reaction may occur, although we can’t envisage the consumer being anything other than pessimistic in light of rising food and gasoline prices, coupled with an eroding stock market.

Here's a chart that illustrates just how telling the Consumer Sentiment number was ahead of the 1,500 point drop in the market in 2000:

Although the Retail Sales release on Thursday is very important from a fundamental stand point, we see the price trend being set Tuesday. "Trend Setting Tuesday", as its referred to on Wall Street, often tips off data ahead, so pay close attention to Tuesday's numbers. “As go Tuesday's, so goes the rest of the week” is the saying. Barring any drastic Fed/Government Market intervention or Bank Bail Out package announcement, which is being tossed around over Manhattans in New York, we don't see the equity market recovering this week. Granted the S&P looks cheap, but Goldman's highly respected analyst Abby J. Cohen noted it was cheap in January, so maybe there was something she missed in her analysis? Maybe she blinked over the skeletons in the Investment Banking closets. Perhaps she was too strict in her adherence to historical metrics and numbers. As far as we can judge, the credit market has never had such a deep foundational crack, ever. And we believe most strongly that a blow out climactic day, or number of days, is approaching.

There's the week ahead as we see it. So trade accordingly and please tell your friends the Psychology of the Call team is always by your side.

No comments: