June 2008

We haven't wavered in asserting that the markets had it all wrong about an impending Fed rate hike. We said it simply wasn't in the cards, despite the fact that bond traders were recently pricing in a 75 percent chance of tightening by November. Our reasoning was that the U.S. economy is much too frail right now to saddle with higher interest rates, and that any move toward tightening could turn an already staggering housing bust into a full-blown disaster. Deflation is still developing at this point, its effects limited mainly to an imploding real estate market and a dramatic downturn in financial speculation. But just one turn of the screw by the central bank would affect a much broader swath of the economy, possibly triggering a collapse that would be unstoppable. That point of view is still well outside the mainstream, since it is rampant commodity inflation that has been troubling consumers and economists. But does the Fed chairman secretly shares our fear of deflation? Quite possibly, according to a recent report by Washington Post political columnist Robert Novak. 'Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong,' writes Novak. 'Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it with a wage-cost spiral. According to sources close to him, America's leading central bank has no plans for a raise.' If Novak's sources are correct, it would increase our respect for Bernanke. Not that one has to be a genius to see that the commodity inflation now ravaging consumers around the world cannot go much farther without killing the demand for the commodities themselves. Take oil. Some are predicting that the price could continue to rise, reaching $200 a barrel before

We have our doubts that the pennant formation show in the chart below is going to produce lower oil prices over the near term. More likely is that the cost of a barrel of crude will get to at least $147-$148 before peaking. To be more precise, we have been looking for a potential top in the July futures contract at exactly 148.31, a Hidden Pivot resistance with the potential to reverse the bullish tide. If the price of oil were to achieve that level soon ' say, within the next two to three weeks -- we'd have to rate it as bullish for stocks in general. That's because share prices lately have shown greater elasticity when energy prices were falling than when they were rising. One could infer from this that even though investors get spooked whenever energy quotes are surging higher, their fears are outweighed by a sense of relief when oil prices are falling. To the extent this is so, Wall Street bulls appear to have discounted significantly higher oil prices and are gearing to buy stocks no matter what. [Insert chart here] Make no mistake, the broad averages are all but certain to fall in the weeks ahead if the price of a barrel of crude is indeed about to tack on another $13-$14. But if the price of oil were to fall sharply thereafter, making investors more confident that a top was in, it would probably propel shares into a summer rally lasting well into August. Any such rally would be turbo-charged by short-covering. As much was evident last week, when bears got stampeded on Thursday and Friday, ostensibly because of what was happening in the oil pits. The rally faded on the first day, but on Friday it got second wind in the final

Yesterday's rally on Wall Street faded coming down the stretch, supposedly because oil prices jumped on concerns over Nigerian supply. We saw the news as nearly irrelevant, however. It looked like a purely technical day, with DaBoyz testing the mettle of bears by manipulating a fairly powerful short-squeeze on the opening. With no negative news of significance on the tape, the specialists simply stepped aside and let shorts work their magic. And so they did, buying with the kind of urgency that bulls very seldom can muster. An hour into the session, the Dow Industrials were up about 185 points. But the short-covering ran out of steam after another hour, perhaps because there was not enough news of any kind for the spinmeisters to spin. Retail sales were up a little bit for a change, and although the news was a day old, it could not have hurt. But because the tax-rebate effect is presumably close to exhaustion, we doubt it will have much of an impact on sales, let alone on stocks, in the weeks and months ahead. (For our part, we're not sure whether we already spent the rebate or not, since there were some extraordinary household expenses to deal with before the check even arrived.) Even though there was not much news to power stocks, there was certainly enough of it to entertain. The item of the day concerned Yahoo!, which appears to have escaped the greedy clutches of Carl Icahn. While Icahn would have us believe that his corporate-raider shtick is rooted in his deep concern for the welfare of shareholders, we know an unregenerate mercenary when we see one. Icahn has been trying to force Yahoo! to sell itself to Microsoft for upwards of $34 a share, but his plan went down in flames yesterday (see

We held bullish positions yesterday morning in Citigroup and the E-mini S&Ps but side-stepped trouble by paying heed to the following Citi Tout sent out the night before: 'Thrilled though we are about having caught a contrarian breeze via our purchase of July 17.50 calls, we should have no illusions that a bunch of shaky financial stocks are going to hold this market up for much longer. The broad averages are acting like they want to go down, and they are about to pull down the bank stocks, fleetingly in the grip of delusion, with them. Let's try to hedge our bet by offering two July 20 calls short for 1.65 against the calls we already hold for 2.65. Keep your bulletin launcher on, though, since conditions after the opening may warrant a change in our strategy.' Although we missed shorting the July 20 calls against our long position, we still managed to book a profit by exiting the position entirely before the fleeting, good times in Citi came to an end. Similarly, we dodged the bullet in the E-Mini S&P after getting long early in the session via the following advice: 'We're using a Hidden Pivot support at 1340.50 as our minimum downside objective, and you can bottom-fish there with an initial stop-loss at 1338.75. If the order fills and goes profitable I'll post further guidance in the chat room and under Intraday Notes.' (Click on chart to enlarge) As you can see in the chart above, a 1340.50 bid would have done very nicely yesterday, since it came within two ticks of nailing the opening low and held for more than two hours as the futures bounced eight points. In retrospect, initial risk (theoretical) of $87 could have returned a profit of as much as $400. Fortunately, we

With the dollar up a relatively fragile 1.8% in the last two days, hope grows that the economy can finally get back on track. At least, that's the story America's mainstream news outlets seem to be selling at the moment. Just look at what the greenback's gravity-defying skew has allowed Helicopter Ben to say without having a rotten tomato tossed at his face. Here he is Monday night, addressing a Fed-sponsored conference in Boston: "Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly." Is this guy cool, or what? A week ago he couldn't have gotten a CETA job forecasting the weather in Igloo, South Dakota. Now, with the dollar ever-so-timidly on the rise, Helicopter Ben seems to have regained credibility in the newsrooms, and reporters appear to be taking seriously any hints that the Fed's next move will be to tighten. Yeah, sure. And here's the deed to a bridge that you can give Dad for Father's Day. With the U.S. economy weakened almost to the point of coma, pushing rates higher would be like tossing an anvil to someone who is drowning. But that hasn't stopped the punditry from speculating about an imminent reversal of monetary policy, or exchange traders from laying odds that the Fed will tighten by October. We're not buying it, though, since we remain convinced that all of the commodity inflation we've seen so far, even $139-a-barrel oil, is insignificant compared to the deflationary juggernaut that has yet to unwind. You think the housing bust has been nasty so far? Wait till you see how it unfolds with the banking system under siege. Splat! Those who believe that tightening lies ahead

Ever eager to see the sunny side of the 'subprime mess,' we bought July 17.50 calls in Citigroup yesterday at what turned out to be their lows. This wasn't a bargain play, mind you, nor do we even remotely believe the bank is about to turn things around. Rather, we went bottom-fishing simply because we doubt Citi shares are ready to plunge to their next milestone on the road to perdition, $15 a share. The stock closed under $20 yesterday for the first time in a decade, and even though it traded as low as 19.40 intraday -- exactly 16 cents beneath a Hidden Pivot support we'd identified earlier -- we expect the stock to hang out near $20 for a long while before it does its inevitable swan dive to yet another dubious divisible-by-$5 milestone. Our recommendation to buy Citi calls was a Pick of the Day selection at the web site. These trades are geared toward helping subscribers recoup the $350 annual tab for Rick's Picks and chat room, and they usually involve simple orders that can be parked in advance with one's stockbroker. We've had a pretty decent run with them lately, although we're obliged to tell you that it could've been just blind luck. Most of them entail breaking the retail customer's cardinal rule of trading, which is to avoid puts and calls altogether. But what fun would that be? We look for an edge, such as it is, by initiating positions at Hidden Pivot Swing points ' a tactic that, if executed perfectly, leaves us with perhaps somewhat better odds than we'd face spinning a Big Six Wheel at a casino. One thing we almost never do is buy options priced above $3 that have a few months left on them. If any retail customer

Clues abound that Friday's selloff is unlikely to turn into an avalanche next week. In the first place, if investors had reacted rationally to the day's horrific unemployment news and soaring oil quotes, the Dow might have fallen 800 points rather than a mere 400. The fact that bulls even attempted to rally stocks about two-thirds into the session attests that they still don't get it. More than a few of them evidently believe the U.S. economy will experience either a shallow recession or none at all, and we should therefore look for them to turn up bargain hunting next week, preventing the rout that most bears are probably expecting. We wouldn't be surprised if by week's end the Dow Industrials had traded no lower than 12032, a Hidden Pivot support that lies just 160 points beneath Friday's bottom. We plan on bidding cautiously there ourselves, using a tight stop-loss. We are no bulls, to put it mildly, and we'd be dumbfounded if the Dow has not shed a third or more of its value by year's end. Panic selling will help get it there, and quickly once it begins, but investors do not yet appear to have reached that point. Nor does one of the stocks we love to hate, Citigroup, seem quite ready to initiate its death dive. Citi settled on Friday at 20.05, down nearly 5% along with quite a few other financial-sector biggies. Just a week ago, we e-mailed to those who requested them a series of bank-stock charts that showed why we think Citi is bound for at least $10.05. But for now, we're advising subscribers to bid cautiously at a Hidden Pivot support that lies less than $1 beneath Friday's low. Apple Foie Gras And then there's Apple, which seems like it is being groomed by

A few more days like yesterday and you can look for me in my hula skirt in Times Square next winter. I'd promised to dance the hula if the Dow failed to plummet exactly 360 points to a Hidden Pivot target, and soon. My bearishness was based on the fact that stocks did not seem to be getting much lift from falling oil prices. However, what happened next stood this logic on its ear. With crude quotes surging to one of their biggest one-day gains in history, stocks rose sharply as well, led by a 214-point gain in the Dow Industrials. At least I had one thing right in yesterday's commentary when I wrote that 'no manifestation of rational human behavior could be farther from observable reality than the stock market.' How else to explain such exuberant behavior when soaring energy quotes were once again threatening to squash the U.S. economy, bankrupt the airlines and auto manufacturers, and push up the price of nearly everything we consume? For the stock market to seemingly celebrate the increasing likelihood of this was more than merely absurd, it was obscene. As always, whenever I am mystified by investor behavior, I browse The Wall Street Journal's end-of-day wrap-up to see what my poor, underappreciated colleague, Peter McKay, had to say. He explained it as follows: 'Stocks recouped most of their recent losses Thursday amid a welcome round of corporate deal making and strong reports on retail sales, which outweighed an eye-popping surge in crude prices.' So that's it! I was beginning to think I'd missed news of a cure for cancer, or a breakthrough in cold fusion technology, or even a conciliatory statement from bin Laden to the effect that Islamists have decided to work with the West to help bring greater harmony and

The 12032 target shown in the Dow chart below is what Rick's Picks calls a 'hula number.' So confident are we that this Hidden Pivot support will be reached, and soon, that if it is not, we'll don a grass skirt and dance the hula in Times Square in the middle of February. The target implies a 360-point drop from current levels, and although that might not sound like anything to cheer about, it could prove to be just a small downpayment on what comes next. For beneath it is only one further support we consider worth noting, a Hidden Pivot at 11208 that lies a whopping 824 points lower. Optimists that we are, we'll probably try bottom-fishing if and when the blue chip average gets there, since we expect a tradable bounce. However, if the Dow should settle below 12032, or trade more than 15 points beneath it intraday, we'd likely exit the position and saunter toward the fire escape. In our daily forecasts we try to keep technical analysis separate from real-world concerns, since no manifestation of rational human behavior could be farther from observable reality than the stock market. But if we were looking for evidence to support a bearish outlook, we would cite the recent disjunction between the price of oil and the performance of the broad averages. Stocks obviously came under pressure as crude quotes made their way toward recent, record highs near $135. But now that oil's world-impaling spike has begun to recede, touching a low yesterday of 121.84, the stock market has yet to breathe the ostentatious sigh of relief we might have expected. Where, we might ask, is the celebratory short-squeeze rally? Could something else be troubling Wall Street? Glue-Horses A possible answer to that question surfaced yesterday in the form of