MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

We listened.  We heard nothing.

They listened.  They heard obscenity.

The New Paradigmers recoiled as the foul language emanating from their Real Audio players sliced at their beliefs like a knife. The possibility had been raised that maybe DeBeers is right and it really is true that only Diamonds are Forever.  The Great Orator spoke of concepts long forgotten, of enemies long vanquished, of unknown danger lurking in the shadows, of a setting of the sun on the days of wine and roses.

We listened.  We heard nothing new because we already knew.

They listened.  They heard a wakeup call.

The question remains now the degree to which the wakeup call will be heeded, and the degree to which sentiment will be pulled in the opposite direction by the message.  Yesterday's speech did not increase by even an iota the odds of an imminent Fed tightening, but as we said on Monday, "While we do not see any risk of Greenspan & Co. raising rates ...., we do see a very real risk of the market succumbing to a fear of a rate rise and doing the Fed's work for it, thereby pushing rates up through resistance at 5.97% and the S&P 500 down through support at 1318."

Greenspan's comments, and the economic reports which preceded them this week, have increased the fear factor, but the much noted proverbial wall of worry is a wall that thus far  exists primarily in the bond market.  An awareness of the possibility of danger has been awakened in the minds of stock market investors, but an actual fear of the danger has yet to set in.  We have seen slight lip service paid to the danger of inflation in the form of an obligatory selloff of high multiple stocks, but we have also seen investors still willing to step into these very same stocks at the blink of an eye (or economic report, as the case may be).  The late afternoon rallies in the Dow the past two days underscore the still rampantly bullish sentiment that still exists just below the market's surface.

The stock market heard Greenspan's warning yesterday, but the magnetic pull of the New Era's promise of unending prosperity prevents the warning from being heeded. If today's employment report comes in weaker than expected it will not decrease the odds that the so called New Paradigm is of a finite nature, but the market will ignore this fact and instead take it as a reaffirmation of their belief in the Eternal Goldilockian Era.

Tech stocks staged a powerful last hour rally, led by the Internet stocks and NASDAQ blue chips.  Chip stocks rallied and are likely to see further gains today on the backs of a report from the Semiconductor Industry Association which showed a 6.7% gain in March sales.  Gold stocks continued their rally, with the XAU surging 4.88 points.

The oil stocks took a breather, with the XOI falling 5.53 after the release of a report showing higher than expected gasoline stockpiles.   Despite yesterday's fall, the sharp rise in the price of oil continues to be a potential inflation inducing thorn in the market's side.  The Oil Juggernaut is beginning to take its toll: the profits of pricing power poor Asian airlines are already being hit (look for some knock on effects from this to hit aircraft manufacturers).   Import prices in Germany surged 0.8% last month, with the increase mainly due to a jump in oil prices.  The increase in prices is likely to prevent the ECB from making badly need interest rate cuts.

The rise in the price of oil and other commodities is likely to keep the market's focus on the inflation front in the coming weeks, with each economic report causing a seismic shift in market sentiment.  We have seen inflationary fears rise and fall following the release of economic data during each of the past 5 trading sessions, and the next two days will see a continuation of this pattern.   The market's course over the next few days will be determined by Greenspan's speech this morning, and by the release of tomorrow's employment data--keep an eye on both reports for signs of inflationary pressure.

With the U.S. market balancing on a thread while it awaits guidance, we will briefly turn our attention to Asia.  The Nikkei, fueled by exporters jumped 599 points overnight and surged over resistance. While the breaking of technical resistance presents a short term trading opportunity, we remain negative on the prospects for economic recovery in Japan and would avoid placing long term bets in the market.  Short term, we would be cautious when investing in either South Korea or Indonesia.  While we have long been bullish on these two markets and remain positive on their long term prospects, their recent sharp runups leaves them vulnerable to a severe correction.

Now, while rising interest rates will get all of the credit for yesterday's market haircut, which saw the Dow lose 1.2% and the beleaguered tech laced NASDAQ deflate 2%, we have a sneaking suspicion that the real culprit was the debut of Goldman Sachs and the attendant realization by many traders that the firm has a pretty good track record of calling market tops.

Goldman jumped 32% in its first day of trading as investors eagerly snapped up the issue.  Investors know quality when they cross paths with it, and Goldman Sachs undeniably is a company that radiates quality.  At a (very) different stage of the market's cycle, even cynics like ourselves might consider buying it.  Unfortunately the terms high quality company and good investment are not always eternally synonymous.  To repeat Monday's Buffett quote, "An IPO is sold when the seller wants to sell it."

In our view, with the Dow trading at 27 times earnings and being held aloft by a group of cyclicals that are pricing in peak cycle earnings which are anything but a given at this point, the Goldman partners picked their spots just right to achieve maximum value for their holdings, and not a moment too soon at that.

Contrary to the opinion that seems to be held by many of the digital eyed speculators who have piled into the likes of Ameritrade and E*Trade in recent weeks,  brokerage stock earnings do not exhibit the same steady monotonously reliable growth patterns that the earnings of a Cisco or Microsoft do.  Rather, they are subject to sharp cyclical swings which ebb and flow with the prevailing trend of the market.  Even Goldilocks, as witnessed by last year's fourth quarter plunge in brokerage house earnings, is unable to repeal the immutable law of the cyclicality of the wire house.

Perhaps even more unalterable than the law of the cyclicality of the wire house is the age tested simple maxim, 'when the brokerage stocks begin to weaken after a long run while the averages doth push higher, the first notes of the rally's swan song are being played.'  Last month we said to keep an eye on the divergence that was developing between the price action of the brokerage stocks (specifically Merrill Lynch) and the price action of the major averages.  On April 19th we issued a warning to the itinerant chart gazers that frequent these parts that "MER tends to be a good leading indicator for the market and usually changes trend before the major averages...A break below the support band from 82.56-86 would be a good leading signal to lighten long positions in the overall market."

Traders, with their emotions caught between the bearish implications of a plunging long bond and the bullish implications of strong (consumer-fueled) domestic economic growth, had a decision to make.   They chose to buy the bullish scenario. 

The strategy worked...until shortly after Noon when a report surfaced that the underwriting fiefdom was at risk and Goldman and other underwriters were under attack from the Justice Department.  In a blink of an eye, jubilation turned to panic, the morning sun scurried behind afternoon storm clouds, and...the stock market sold off.

This week will see a continuation of the flip flop sentiment factor as traders grapple with rally-stopping apprehension on the one hand (ahead of the release of the NAPM today and the Employment Report on Friday), and rally-inducing elation on the other hand (a full slate of Internet IPOs and the debut of   leading underwriter Goldman Sachs).

Circumstances favor the pins and needles apprehensive lot gaining the upper hand by the end of the week.  Last Friday's stronger than expected GDP report, and the 2 year high recorded by the price deflator, increased the pressure on the Fed to remain vigilant in its battle against the long banished inflationary nemesis.   We expect today's NAPM report and Friday's Employment report to come in above expectations.  While we do not see any risk of Greenspan & Co. raising rates as a result of the reports, we do see a very real risk of the market succumbing to a fear of a rate rise and doing the Fed's work for it, thereby pushing rates up through resistance at 5.97% and the S&P 500 down through support at 1318.