Market Update
An overall bullish market was good for that play—and will likely benefit our new Baxter International (BAX) calls as well–however this uptrend hurt the put side of our IWM strangle play. We made money on the call side but the put side expired worthless delivering an overall loss with both sides tallied.
The problem is we were stopped out of the call side on a one-day pullback before the really big profits could be made as the IWM continued higher—a rare example of how a trailing stop can sometimes work against you. Which brings up an important point—there is no set of trading rules on the planet that will make you money in EVERY instance—the best scenario is to embrace a set of rules that makes you money in MOST instances—and that is exactly what our automatic orders are designed to do.
The best traders in the world still take losses on many of their positions but manage to make money overall because they trade by a proven set of rules. And they’ll be the first to tell you trading without sticking to your own rules is the fastest way to the poor house. So even though our trailing stop didn’t work out on that play it does most of the time—and that assurance is what guarantees a winning record over the long run.
We’ve got a market with some fascinating influences—and the right sectors are still providing some great opportunities. To find out where let’s take a good look at…
WHICH WAY THIS MARKET IS HEADED
As you can see the markets have been marching relentlessly higher with the Nasdaq leading the charge. The word on The Street is “Sell commodities and buy technology” and that is exactly what we’ve been seeing.
The tech sector and the small caps continue to lead the markets higher. One of the reasons for the tech rally is the growing demand for chips. International Data Corp announced on Friday that worldwide chip shipments grew +3.1% in the second quarter from the first quarter and +16 increase from Q2-07. Analysts credited the strong demand for notebooks and a very aggressive push by Intel in PC chips. Analyst Shane Rau said Intel’s processor shipments drove the growth with a 4.3% growth in processors for the quarter and 20.8% year over year. That’s a pretty bullish story for an economy that’s supposed to be in a recession. They say there is always a bull market somewhere and the tech sector—and the small cap growth sector—seem to be it right now.
Meanwhile commodities and precious metals continue to get beaten to a pulp. Gold fell to around $776 Friday, a nine-month low. Silver fell over 19% in just the past seven trading sessions, near a one-year low of $12 an ounce. Just about every commodity got slammed last week–all due to a potent combination of remarkable dollar strength and a sudden shift in trader sentiment. The prevailing wisdom says the global economy is entering a slowdown and there’ll be less need for materials, especially precious metals.
However gold, silver and the rest of the commodity sector won’t likely stay down for too long. Thursday’s inflationary CPI number, which showed U.S. consumer prices accelerating at a 17-year high pace, convinced currency traders that the Fed would refrain from lowering rates again. That assumption boosted the dollar index to a 2008 high.
So the dollar index settled Friday at an eight month high of 77.12 while the euro sells for $1.47, a six-month low. The pound closed around $1.86–you’d have to go all the way back to December 2006 to find the British currency that “cheap.” Over the last two weeks the dollar got another boost from the Russian attack on Georgia. Every time a conflict erupts overseas investors flee those currencies to the safety of the dollar.
However don’t let small news eclipse the big picture. The bottom line is a massive sea of newly created dollars over the past several years is inflationary and the only cure is raising interest rates to lessen the money supply. And with a global and US slowdown being the major concern central banks—and particularly the Federal Reserve—won’t likely be raising rates anytime soon. Which means inflation will continue and the dollar’s recent rise will likely be turned south sometime over the next several weeks. A turndown in the dollar will likely reverse the two major trends we’ve seen recently—a rising stock market and falling commodity prices.
That said the current stock trend is up and if we’re going to play we need to play the actual trend. Nowhere is the current optimism more apparent than in the financial sector. In spite of continuing bearish news the sector refused to fall—a pretty bullish sign in itself.
The financial sector (XLF) traded sideways last week in spite of continuing headwinds. Wachovia Bank (WB) announced a settlement on the auction rate security issue this past week. They agreed to buy back $8.5 billion in ARS and pay $50 million in fines. Wachovia is the 5th bank to agree to settle. The others were Citi, UBS, MS and JPM. Merrill is under fire and NY Attorney General Andrew Cuomo said he sent a letter to Merrill notifying them he will sue next week if they don’t settle. In addition late Friday the AG’s office said they were broadening their probe to include Fidelity and Schwab as sellers of the debt and 25 other companies. The markets somehow overlooked this news pushing the XLF higher Thursday and Friday but you have to wonder where these financial institutions are going to find the billions of dollars necessary to buy back their poison debt and pay their multi-million dollar fines.
The most likely scenario is more bail-outs from Uncle Sam (your tax dollars at work). And the only way to do that is create more funny money out of thin air—and that is inflationary.
So gold, silver, oil and every other commodity are not going to stay down forever—but they are sure doing a great swan dive for right now. Meanwhile the techs and certain other sectors are pushing higher almost on a daily basis.
Trade well!
Andy Huang
