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June 13, 2008 Options Success Market Commentary
Market Commentary is provided by Cashflowheaven.com's Options Success Newsletter.
Over the last few weeks, we have seen a number of big down days and once the momentum is established, the selling has continued right into the bell. And that's exactly what's happened---right up until today. The question now is whether we're in for a nice rebound or whether this is just the latest tick higher in an ongoing parade of lower highs and lower lows.
Worries of a global hike in interest rates, higher oil prices and concerns in the financial sector are all weighing on the market and in spite of today's brief reprieve the market is fighting some pretty tough headwinds.
For example on Thursday India raised its interest rates by a quarter of a point which now stands at 8%--a step that further strengthens their currency against the dollar. On Wednesday China raised its reserve requirements and it has continued to tighten monetary policy over the last year. Emerging markets are also hurt by inflation with Vietnam for example spiraling out of control at 25%. The ECB is ready to raise rates and banking officials around the world are taking action. Thursday, the Philly Fed President said that interest rates will need to move higher to combat inflation while Ben Bernanke stated that the Fed's focus had shifted from the economy to inflation.
Meanwhile devastating floods in Iowa and torrential rain in other Midwestern states have taken a heavy toll on crops, throwing the door wide open to higher costs on the farm and the nation's food shelves. Underscoring the point, the Labor Dept reported today that U.S. consumer prices rose 0.6% in May at the fastest pace in six months, bolstered by surging energy prices. The prospect of rising interest rates driven by spiraling inflation will keep a lid on this market.
Wednesday's oil inventory numbers showed a much bigger than expected draw and energy prices moved higher. Even though oil dropped slightly today the likelihood of a major pullback in the next two weeks has diminished. Traders that were long the front month futures contract that expires next week have rolled out their positions. As they did so, that could have created a short-term decline in oil prices and it could have flushed out some speculators. The oil inventories have drawn-down much more than expected for three straight weeks. Discussions on how to deal with Iran's nuclear facilities are elevating the risk premium in oil with Israel has threatening an air strike. The La Niņa weather pattern traditionally brings hurricanes to the Gulf of Mexico and the potential for supply disruptions is high--when you add it all up, high oil is here to stay for at least the summer. It will be interesting to see how many airlines are left flying by this time next year and if you've flown lately you have already been shocked by having to pay for checked baggage. Fasten your seatbelt because by the looks of things this ride is just beginning.
A management shakeup at Lehman has the stock trading higher and the entire sector bounced today but there are still serious issues to resolve before the industry can lead the markets higher.
Retail sales posted a bigger than expected gain of 1% in May. While that number beat expectations, the increase is attributed to the rebate checks. Once that stimulus flows through, this sector will be in trouble. If you strip out gasoline sales, the retail figure would only be up by .8%.
Jobless claims rose more than expected increasing to 384,000. The four-week average has been 369,000. The biggest threat to the economy at this stage is a loss of jobs--if people can't finance their high debt levels, this credit crisis will spread like wildfire.
The market is bouncing from an oversold condition--however, the headwinds are blowing strong and I believe this rally will be short lived. This morning's CPI number came in at 0.6% in May, worse than the 0.5% expected by economists. The core CPI, which excludes food and energy prices rose 0.2% as expected. As one market pundit cracked, "It's not a bad report as long as you don't eat or drive."
The best strategy right now is to let the markets rally to resistance and then short the relatively weak for more fat downside gains. We're seeing many great trades hitting the searches everyday--especially the ones going in the direction of the overall trend. But as you can see from our last two weekly reports the scans are even finding great upside plays in a down market. This market is rich with opportunities and you don't want to miss a single big trade.
Market Commentary is provided by Cashflowheaven.com.