Saturday, May 17, 2008

Psychology in the Upcoming Economic & Earnings Data

Good Day and Good Evening to All ! Last week's stock market rally caught many market participants off guard. The fact that crude oil continued its relentless climb, breaking through $127/barrel, and then only pulled back slightly will be a study in market mechanics for Finance students for many decades. The Psychology of the Call team (POTC) did predict one month ago, when crude was at $108/barrel that it would make sense to short it in the $120-$130 range, and we stand by that. Remember the disastrous hurricane Katrina disruption in 2005, when pipelines and refineries were shut down for weeks? The spike in oil then was $76/barrel and many felt that was over done. Now, less than three years later, with no such freak event upon us, oil is 66% higher! POTC regards this a classic market bubble and our readers would be wise to short crude here, with a stop loss at $131. We don't see that upper limit being triggered, barring any cataclysmic event, like a war with Iran or another category 4 or 5 Gulf hurricane. POTC actually believes the Beijing summer Olympic build out has caused tremendous strain on prices, and that build out is now completely behind us. A speculative component is definitely in the price of oil and as the hurricane season comes and goes with no major Gulf hits, we see at least 15% of that speculative premium being taken out. $107 would be the initial swing cover target for you short players out there. Wednesday's Crude Oil Inventory report will be something to pay close attention to, as a build up or draw down in inventories should see a fall in price per barrel in our opinion, strengthening our bubble thesis, but especially if oil falls in the face of a draw down.

Also, we would be more bearish on crude if the Dow Jones Transport Index broke through its 1 year high; that would confirm "smart money" sees more pricing power ahead, and that could only happen with a crude oil pull back to the $100/barrel. That pull back on a percentage basis would be small, compared to what has transpired post Katrina; 26% compared to 66%, yes? ($76 to $126, and $126 to $100).

Our conviction of oil pulling back grew stronger on Tuesday when Goldman Sachs (GS) economists predicted $200/barrel within 24 months.

Institutions like GS have vested interests in their commentary and often times their trading desk profits reflect the opposite of their public press releases, so exhibit caution. The markets are very humbling and they fool the average market participant at every turn. PLEASE keep this in mind. As oil pulls back, MASSIVE liquidity will be released in to other asset classes, but especially stocks. The question now is whether oil will begin its pull back this week. Bubble tops are very difficult to call, but when GS comes out and predicts $200/barrel, we feel more assured that a top is in. Please vote in our poll whether you feel crude oil will close above $130/barrel this week.
POTC will monitor a couple of important factors this week. First, the Dow Jones Transport Index (DJT) has formed a double top, just 89 points away from a one year high. Will it close above the last high of 5514, or back off in the face of high food and energy prices? A very interesting element of market mechanics is unfolding in front of our eyes. Evolutionary scientists need not apply here, as we will have our answers within days. The week ahead is perhaps the most important week of 2008, and will dictate whether POTC becomes short term (3-6 months) bullish or bearish. As it stands now, we are optimistic as we see the unwinding of crude oil money acting as a fire starter, in a similar fashion to the weak dollar and strong foreign currency argument that we have been espousing for the last several weeks. The U.S. markets have a lot to be thankful for and ironically the rise in energy prices is one of those elements. Again, our bullish thesis will be greatly confirmed when the transports close above 5514 and settle there for at least one month.We think the transports will rally this week and close above that elusive 5514 mark, but perhaps back off on profit taking Friday. Here's the double top formation we pointed to last week and we urge caution from jumping in to stocks until this 5514 target is taken out:

Investors and traders would be wise to miss a few percent on the upside than jump in to a May bull trap; caution. The saying "sell in May and go away" still has two weeks to play out.

Monday, May 19th brings Leading Economic Indicators at 10:00 ET.

This report only garners a C- in terms of market moving significance by the economists at, but IF we DO in fact see a positive 0.1% Monday morning, as forecast, the bulls will run wild. The market has NOT seen two consecutive month to month positive readings in over a year. After market earnings come from DryShips, Inc. (DRYS). The estimate is for $4.06/share Q1 2008. DRYS is a dry bulk shipping carrier out of Athens, Greece. It's a highly regarded stock in Institutional circles, as CNBC had several guests mention it as their favorite stock going forward. Remember though, what looks expensive usually gets more expensive, and that which looks cheap usually gets cheaper. Good luck to all DRYS shareholders.

Trend Setting Tuesday, May 20th brings the Producer Price Index (PPI) at 8:30 ET.

The data measures prices paid for goods, not services, at their wholesale level. The PPI measures a wide range of goods at their unfinished stage and with energy prices only rising recently, can anyone be optimistic about this report? The core PPI subtracts food and energy prices, which to many is an outrageous gauge, as food and energy have definitely NOT lived up to their historical cyclicality. Food and energy prices are in nose bleed territory in POTC's opinion and discounting that is foolish. The year over year (y/y) PPI stands at 6.9%, and the 25 year high mark came last January at 7.4%. POTC feels the current administration must force the hands of Congress and the House to open up drilling in more U.S. territories. With the advancement of science in the past decade, horizontal drilling techniques are highly effective and environmentally friendly measures have come a far way from the early 1950s. After market earnings come from Analog Devices (ADI) Q2 2008 estimate for $.41/share, and Intuit Inc (INTU) Q3 2008 estimate for $1.29/share.

Wednesday, May 21st brings Crude Oil Inventories at 10:30 ET.

We reiterate our feeling about crude oil being both good and bad for the market. As the crude oil trade unwinds, massive amounts of capital will be released to the stock market, acting as a fire starter, just like the weak U.S. currency for S&P 500 exporters. And just as the weak U.S. dollar is a double edged sword, so to is the explosion of energy prices; it all depends on which side of the trade you're on. Some economists feel the U.S. stock market would be in great trouble if it weren't for the weak U.S. dollar and high energy prices. POTC agrees, but crude above $130/barrel would have devastating consequences on the consumer and retailers nationwide. We continue to favor stocks like Genentech (DNA), ahead of Chicago's ASCO conference on May 30th:, and First Solar (FSLR), the 'Best in Show' solar/alternative energy transition play. These two stocks are well positioned whether crude oil rises, falls, or stabilizes. Although we do see a pull back in crude oil short term (3-6 months), we do not see it coming down too much below $90/barrel by year end.

Federal Open Market Committee's minutes from the April 30th meeting are released at 2:00 PM ET.

This release is VERY market moving, as it offers more psychology into their decision. There were two dissenters in the last 0.25% interest rate cut and that will dominate the headlines. One dissenter is not uncommon, but two is a rare event. Trading volume usually slows down during the summer months. IF there is talk of higher rates on the horizon to strengthen the U.S. dollar, as POTC feels there will be, the stock market will favor high P/E stocks like FSLR and DNA. Please remember to practice the 11 Commandments everyday, but especially ahead of such market moving releases as the FOMC minutes. Volatility, as measured by the VIX Index will be in order for the last 2 hours of trading come Wednesday, so set your trades up accordingly, and learn to profit from such market jarring releases.

After market earnings come from Network Appliance Inc. (NTAP) Q4 2008 estimate for $.27/share, and Inc (CRM) Q1 2009 estimate for $.07/share. CRM's software platform continues to gain market share, and although $.07/share seems piddly, the psychology surrounding this stock has to do with their management, momentum, and future ability to monetize their volume.

Thursday, May 22nd brings Initial Claims for Unemployment at 8:30 ET.

Weekly claims are usually not market moving events. Many economists who called for a recession are looking more foolish as weeks pass. Most agree that a month over month (m/m) rise in unemployment has to be in the 150K range and that has not happened. The seasonal aspect of school ending usually carries cyclical and positive ramifications on employment data, and we are at such a period, so be cautious. POTC only sees the 371K estimate coming in better due to the Alice Cooper "schools out for summer" effect; meaning less than $370K. The market will breathe an expected sigh of relief and we predict a rally come Thursday. Before market earnings come from GameStop Inc (GME) Q1 2009 estimate for .$34/share, and after market Aeropostale Inc (ARO) reports Q1 2009 and estimate is for .$25/share. POTC would avoid GME in light of high nose bleed gas prices, and summer break, with its weather prohibitive to game playing hours. ARO is also in a difficult operating environment and we do not recommend any retailers at this time.

Friday, May 23rd brings Existing Home Sales for month of April at 10:00 ET.

Quick psychology: with the Fed having eased rates aggressively, POTC does believe existing home sales will improve before new home sales do. The last report was 4.93M units sold and this estimate is for 4.85M units sold. Strangely, economists feel existing home sales will not improve. IF the number of home sales can beat the previous 4.93M and trump the 4.85M estimate, the clamour about a recession will be muted.

A boring Friday trading session will result due to the three day weekend ahead; Monday, May 26th is Memorial Day. POTC reminds our readers about Shanda Interactive (SNDA) Q1 2009 reports Monday night, SO if anyone does want to roll the dice, Tuesday's SNDA open will not be for the faint of heart, as you will be tied to any earnings fall out. POTC sees SNDA finally breaking out to the higher valuation it deserves; the Chinese Dragon's tide is raising all ships of late: SOHU, BIDU, SINA, and even JRJC, which we recommended shorting, oops... The Chinese economy is not showing any signs of slowing and unless talk of the Yuan devaluation gets louder, it would be wise to stay long China. We recommend buying SNDA $45 June calls with a chance the stock FINALLY takes out the mid $40 range like a fire breathing dragon. We're expecting a climactic move come Tuesday morning.

The Psychology of the Call team wishes everyone a healthy and happy Memorial Day weekend to all our U.S. readers.

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