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From the Trading Turret

May 1, 2005

04/01/2008 08:09 AM

Current Field Position

1. Offense or Defense?

NYSE Bullish Percent is in Bear Alert - Os @ 54%

Optionable Stocks Bullish Percent is in Bear Alert Status – Os @ 44%

OTC Bullish Percent is in a Bear Confirmed Status – Os @38%

2. Sector Bell Curve. Average Sector Bullish Percent is 44.64%

3. Favored Sectors: Transports, Telephone, Oil, Restaurant and Builders

4. Strategy: DEFENSE. We are currently in the Capital Preservation Mode.

This week’s comment

            Please Note: Due to my current workload, I have decided to make a change to the publishing schedule of this newsletter. Instead of publishing it every week, I will be publishing it every other week. If market situations warrant, I will write more frequently.  

            Also, do not forget to visit my blog at http://tradingadvisor.blogspot.com on a regular basis. There you will find day to day commentary as well as opinion pieces on just about whatever stirs my soul.

The stock markets have been exceptionally weak since peaking almost two months ago (March 7^).  In recent Turrets, I have stated repeatedly that the decline from the March highs did significant technical damage to the market and that it would take time to repair the damage before any successful rally is attempted. The market has its work cut for it because the investment environment has been worsening with each passing week. The same factors continue to pressure the market: continued economic weakening, mixed signals concerning future earnings growth, a cyclical bull market that is a tad long in the tooth, interest rates inching higher and liquidity draining from the system. Over the past two weeks, the market has stabilized with the Dow Jones Industrial Average holding above the 10,000 level, an area critical for the market in the intermediate-term. If the market were to close below 10,000, it might be the start of something ugly.  

We are now entering the weakest seasonal time period of the year, that which extends from May though September. This is where the slogan, "sell in May and go away", come from. Historically, the four weakest months of the year for the Dow are May, August, June, and September, with September being the worst.

It will be interesting to see how the market progresses during this time frame because the market really struggled earlier this year. It struggled during a time that many consider a seasonally strong time frame. Unlike commodities, stocks trading strategies are not usually based upon seasonal trends because many factors affect the market and investor psychology.  

Earnings

On the earnings front, we are now halfway through earnings season and by all accounts it looks stronger than expected. 417 of the S&P 500 companies have already reported with 67% beating estimates and 20% disappointing. Overall, earnings have risen by 17.5%, which is well ahead of current expectations. The stock market has not responded to this earnings strength, due to the fact that corporate guidance has painted a mixed bag with earnings and economic growth expected to slow for the remainder of the year.

Interest Rates

As expected, the Federal Reserve raised rates for the eighth time in as many meetings by 0.25% to 3.0%. While much of the Fed's statement was similar to the last time they raised rates in March, there seems to be more concern about inflation. The Fed repeated that "inflation pressures have picked up and pricing power is more evident" but they dropped the statements from the last meeting that said longer-term inflation expectations remain well contained and the rise in energy prices has not fed through to core consumer prices.

If you read between the lines, it seems as though the Fed is becoming more concerned about inflation. The Fed did acknowledge weakening trends by saying that "recent data suggest the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices." They also reiterated their plan to continue raising rates at a "measured" pace in an attempt to keep inflation contained. The statement said "The stance of monetary policy remains accommodative. With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured." The next FOMC meeting is scheduled for June 30th and the expectation is another 0.25% rate hike. In the futures market, the December contract is currently priced at around 4%, which suggests raised at the June, August and September Fed meetings.  

The Economy

Stagflation, a word we haven’t used lately, is now widely talked about with recent signs of the economy slowing and inflation remaining stubbornly high. While the concerns about stagflation are probably a bit premature, evidence of a soft spot in the economy is growing. The U.S. economy grew at a 3.1% annual rate during the first quarter, the slowest growth in two years. High fuel costs may finally be taking a toll on the economy as higher energy prices sap consumer and corporate spending. Consumer spending rose 3.5% after rising 4.2% the prior quarter. Business spending on equipment and software rose at the slowest pace in two years and inventory levels surged, suggesting consumer demand is slacking. In addition, inflation is creeping higher. The personal consumption price index, an inflation gauge watched closely by Federal Reserve policy makers, rose at a 2.2% annual rate during the first quarter, the fastest pace since the fourth quarter of 2001. Meanwhile, the ISM Manufacturing report showed that the manufacturing sector's rate of growth slowed for the 5th consecutive month.

That’s about it for now. Have a great week!

Bob

Robert Christy is a professional trader, author and money manager. Mr. Christy is also the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Plato Advisors LLC, or Christy Investment Group, Ltd.  has a position. In such cases, appropriate disclosure is made.  Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@christyinvestments.com.