Shopping for Trouble: Is this the time to short retail stocks? - by Patricia L (Spiker)

When I saw this picture last week, my immediate response was that retailers are not going to have a good Christmas. This picture represents 12% of the world’s container ships that are sitting idle in the ocean off Singapore. The article said that the cost of transporting a 40 ft container of merchandise from China to the UK has fallen from £850 plus fuel charges last year to £180 this year.

This bearish scenario is confirmed by the decline of the Baltic dry index, described in several previous posts on this blog. The index peaked at 11,793 in May 2008, and bottomed at 663 in December 2008. The Baltic Dry Index is now at 2246. The green line represents the price movement of SPY.

Would now be a good time to start shorting retail stocks? I have gathered this list of retail related stocks that the Spikers and SpikeTrade Members selected in the last year.

Cheers!

Patricia L

FYI - DOW closes at 9605 on the Anniversary of 9/11 by: Kerry

Did anyone notice that the DOW closed at 9605 today? What is significant about this close?

It is not so significant other than on September 10, 2001 the day before the tragic 9/11 attacks occurred. The DOW closed at 9605.

Long-base opportunity in SYT by Grant C

Here's a potential trade that offers lots of promise, but is ST/OB so not suitable for next week's Spike pick. SYT is all about long bases and moves within the Bollinger Bands. After hitting a yearly high around 51 in January, SYT has been grinding sideways, oscillating back and forth between the bands. Note on the weekly chart that all this sideways stuff is along the 50% Fib retracement from the 2008 high to the 2008 low. Now on the daily, the squeeze is in play and SYT has touched the upper band signaling it is ready to move. I'm inclined to wait for some sort of retracement--maybe 1-3 days--to the rising EMA before buying. Eventually, we should get a nice rise out of this long base and lots of chances to trade it back and forth from the rising EMA to the upper bands.

Trucking - a window into real economy - by: Kerry

The markets have been on a killer run. The earnings are coming in better than expected for many companies. All earnings are not created equal, and we need to ask ourselves - Where are these earnings coming from?

The earnings are driven primarily by cost cuts and reductions in workforce. If I look at my own steel business, net earnings were phenomenal in the 1st and 2nd quarters. They were great because of a huge reduction in workforce and massive overhead cuts that we made in 4th quarter of 2008. This is why I can tell you that no way we will meet or beat the earnings we saw in 1st half of the year going forward.

Here is the chart I receive each month from our freight companies, reflecting what is called the Freight Indexes. They measure the demand for Truckload services compared to the number of trucks on the road. The index begins in April 1994. When a reading is above prior years’ level it means there is more freight demand relative to available capacity. When a reading is below prior years’ level, it means there is less freight demand relative to available capacity.
As you can see, 2009 (Red Line) is down by a huge margin. Although we saw an uptick in May and June it is nowhere close to average.

The private company I am involved in has only recently seen the slightest of upticks in business activity - while selling for minimal or no profit margins. The steel companies have recently worked off old inventory and now they will need to see demand in order to replace that inventory.

For now that demand is seen only in a few small areas - it is not broad based. This appears to be a rebound from cost cuts and not demand-driven. Cost cuts have a one-time impact on profits until demand reappears. It should be interesting to see how things will develop now that Q2 earnings come to pass and we must look forward to Q3.

The Crystal Ball...Monthly Chart Musings...by Eric F

I have a Crystal Ball and it works! Only in hindsight J… Here it is I pondered if BRCD would run to $8 on 4/15 before what I consider to be a bear market rally runs out of steam… http://spiketradeblog.blogspot.com/2009/04/brcd-bull-or-bear-y-eric-f.html Looks like the rally has got more room to run. But the BRCD daily chart is flashing some interesting signals…I digress, I don’t want to get caught up in semantics, I don’t really like to use the term bull market or bear market, it is sort of like a label because I can be both based on what time frame I am looking at. I think the market is either trending higher or lower or chopping about going sideways. All I can say about this week is WOW! What goes up fast tends to come down fast also! I would not be surprised to see all these gains wiped out to set up a “double bottom” for some… at this intermediate pull back point…”We shall see said the blind man” is my mantra. The monthly indexes are showing the uptrend to sideways chop is intact and I figure it will likely be several months before value is reached and another major direction may be set...

Now back to the BRCD chart at hand…Not sure when this thing will run out of gas but it is looking to me like a weak advance…The 52 week high lies at $8.42 all former gaps in the daily are now closed…Somebody once said- “sell new highs”…Looks like a short opportunity may be coming in this one…

Good Trading,

Eric F

Simple pullback trade by Grant C

Sometimes it doesn't have to be complicated. I take these types of short-term trades whenever they popped up. FXC. the Canadian dollar ETF isn't right for a Spike trade so I thought I post it. FXC had a strong bull run and now we've gone through a 17-day grind down, about a 50 % retracement. We're testing support for a couple of days and looking for FXC to  move up above 88. Buy would be above Friday's high and Stop below Friday's low. Not thrilling, or something to write home about, but this type of pullback trade happens over and over again and is usually low risk.

A question about possible inflation - Alex

A question on fundamental analysis. The latest issue of The Economist, one of my favorite magazines, has the cover story on Debt - The Biggest Bill in History.

It begins: "THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens."

The governments, says The Economist, will have three options - to manage, default, or inflate. Apparently there is a danger of a default in some smaller European economies, but in the US the danger is inflation.

My first thought - gold, anyone? My second thought - are these numbers really that bad? Comparing them to my personal situation, my first thought is that my own 'consumer debt' is zero, but on the second thought, my mortgage is more than a year's income - which does not bother me one bit. If I can manage it, why can't the country?..

If you have a fundamental view of the national debt situation, please share it and post your reply.

Alex Elder

Misery around the 200 - by Grant C (in Venice)

Hell for me would be forced to trade large when the SPX closes to the 200 SMA. I hate it! Now, there are many theories about why the market jerks and chops as it bounces around the 200 SMA--big institutions, hedge funds, etc. Doesn't really matter. I just know that chop and churn is what we're in for when the SPY comes within 5 % of the venerable 200 SMA, so I try my best to stay away, to "sit on my hands" as Alex says.

Here are two charts that show this behavior. The first is from May 2008 as the SPY closes on a flattening 200 SMA. Note the price candles with shadows and tails and nothing much happening--this is churning--up big in the morning, selling off in the afternoon, or the next day, down in the morning, up in the afternoon. Notice too, that momemtum is ebbing, and we have a triple bearish divergence on the MACD-H leading to evenutal price failure. This time around, we've spent a month churning in a consolidation, then popped through a declining 200 SMA. Things look a bit shaky now; we may have a false break out developing. Note again the triple divergence in the MACD-H.

I've noticed this chop and churn behavior around the 200 SMA over the years and always wondered what causes it--maybe some day, I'll find out, but I just know that I'm better off trading small or staying away until prices clear in one direction or another from the 200.

BTU's long lovely base by Grant C

One of the characteristics of market crashes are Alex's  "Fallen Angels". Those extraordinary stocks or companies that were high flyers, then collapsed in the mad rush to raise money for margin calls, then travel sideways for months redefining themselves. Instead of rising from the ashes, many just go out of business, which of course was true of numerous Internet companies long ago. Today, we have many commodity companies, like Peabody coal that are tracing out the "L" or long base. Some will start to emerge over the next few months. BTU is now OB on the weekly, but after it corrects to support, it will have a run up the right side.

Double Top Anyone? - by Stephen M

Double Top anyone?

Where is the market headed and what is the potential degree of the move? Here are the characteristics that need to further materialize to confirm a double top:

*The subsequent decline from the second peak should witness an expansion in volume with acceleration of the descent.
*Completion and confirmation occurs when prices break through support which is the lowest point between the peaks. This also shows an increase in volume.
*The potential price target is determined by the distance from the support break to the peak.
This would complete at approximately 402.

GM, a major speculative idea - by Eric F

This is a major speculative idea. I have been waiting for several weeks watching and waiting and today it began to form. Are we seeing what I think we are seeing? A major bullish divergence? Let’s watch and see. Price points of interest maybe cracking 1.27?

I hope it goes to a $1…Am I too early? It looks like it may have a little more room to run on the downside but I am not sure of how much it can run…Although one thing I know- It will either GO TO ZERO or snap back to life…

Thanks,
Eric F

Wrestling with BRCD - by Eric F

Just wanted to revisit the BRCD trade idea I suggested back on 4/15-16 here on this blog: http://spiketradeblog.blogspot.com/2009/04/brcd-bull-or-bear-y-eric-f.html

Now the exit is so much more difficult than the entry in my opinion! Today I was 30 cents from Target #2 and it was dark cloud cover on large volume. It looks like it is going sideways here at $6 and its stretched from the EMA’s.

I told myself yesterday to watch the open but intentionally slept in and sat on my hands again. I know the gains at some point will need to be consolidated…when is the question and at what price. The stretch goal is $8…but I don’t have a crystal ball that works!

As I have said before- I hate Targets! I just want to sell when the chart says “Sell” on a technical exit or when the moving stop loss is hit…

Any comments or analysis would be appreciated.

Good Trading,
Eric F

Such a long, lovely base by Grant C

Since we had so much fun discussing GLD, I thought I throw out another one--DBA. However, since the price movement is pretty straightforward I doubt if we arouse the same level of opinion. DBA is the agricultural ETF, mostly softs. As you can see on the weekly, it crashed with everything else and has been trading sideways since Oct. 08. The result has been this enormous base, which means that the upside potential is equally enormous. The trick of course is the entry, and for that we need to look at the daily. The daily has a declining 200 DSMA, and a squeeze breakout showing. From past experience, the first time price hits a declining 200 DSMA it sells off. So, I'm waiting for price to come back to the rising 20 EMA, before thinking about buying. The other way to do it, would be to wait until price trades through the 200, and buy on the first pullback, or retest. Still, you could wait until the stock market corrects and the weekly 5-week RSI drifts back. The idea is not to chase an OB ETF, just be patient and wait for a reasonable entry. In any case, we can probably assume that the price of food isn't going down much in the next few months.

Another Perspective on Gold - by Jock G

Jock G is a SpikeTrade guest. He is a Camp graduate and an extremely serious researcher and trader - Alex

Another perspective on gold: First, there’s no doubt that GLD and GDX are looking technically weak right now. Here’s a chart noting 4 false breakouts of GDX at resistance of 38:

Since start of ’08, GLD has 3 times failed to close and hold above 97:

Longer-term charts are open to opposing interpretations:

Grant looks at the monthly chart, sees a 1-2-3 top, and expects further weakness, Eric Fremd also looks at the monthly chart, but sees an inverted H&S, and potential for a long-term rally.

This is no contradiction really, since no one can know the direction of the future “squiggles” of a chart. We can only assess future probabilities based on how we interpret today’s chart. And, events could change the picture tomorrow: oil blockade, assassination in Pakistan, Chinese pullback from buying US treasuries, inability of C and BAC to raise capital.

Short-term, a continued pullback looks likely. There’d be no chance of a major “spike” till GLD broke out and held (on volume) over 100, and GDX did so over 38. Should that happen, however, it’s probably off to the races. I feel certain this global financial crisis is going to go on for some time yet. Plenty of time for GDX and GLD to touch the bottom of their trading ranges, and then “spike” way above the top of their channels.

A look at the much longer term suggests why this could be the case. To me it’s compelling that in the major financial crises of the 30’s and 70’s, “super-spikes” DID occur. Here’s a look at a longer-term (and quite cluttered) chart:

The headline is that in Cycle 1 (ending in 1938) and cycle 3 (ending in 1979) gold rose to levels of 4.5 and 6 times the S&P (respectively). The first “super-spike” of the 30’s was a response to deflation – the great depression. The second “super-spike” in the 70’s a response to major inflation (including the OPEC oil embargoes). The common theme was a massive loss of faith in the banks and their paper money.

I don’t need to remind anyone that today’s psychology is similar. Gold’s latest “mini-spike” to 1000 was at the collapse of Bear Stearns. In fact, the threat to the global financial system has NOT receded. Paper currency is being debauched as never before – globally. Even the Swiss franc (partially backed by gold in the 70s) is a purely “fiat” currency, with no backing by hard assets! There IS no strong currency for traders to flee to if the US dollar weakens.

This underlies recent statements by the Russians and Chinese calling for less reliance on US dollars as the global reserve currency. The Gulf oil states are planning to incorporate gold in their creation of a common currency. These cultures have revered gold for millennia – and the US dollar for just decades.

By the way, if gold were to reach 4.5 times the S&P, the price of gold would spike to $4000! – and then probably retreat as quickly as it had risen. Gold stocks would probably rise a further multiple on the 4.5 times that the metal itself would rise.

Unless you believe that Geithner’s TARF, TALF and “PeePIP” are going to work, AND that Congress will then approve a further $1 Trillion for bank re-capitalization, you might be wise to address the possibility of a “super-spike” in gold. The latest IMF report foresees a further $4 trillion in global financial losses before the carnage is over. Estimates are that US banks alone will require $1 trillion in new capital AFTER toxic assets are removed from their balance sheets! Only after such re-capitalization will bank balance sheets be strong enough to encourage bank managements to resume lending.

Unless you believe the world’s key governments (US, UK, Germany, Japan, China, Russia) will get it right in the short term, and will cooperate to avoid beggaring-their-neighbors, you might consider the possibility of a further collapse in confidence in the banks and their paper money at some point during this crisis.

Where does this leave us regarding how we think about gold, and how to trade it? Maybe the best stance is that technically gold and gold stocks are currently weakening on the weekly chart. How long this continues, how far it goes, who knows? Whether GLD and GDX stop their declines and reverse at the bottom of their trading channels, or break down further is unknowable. Perhaps Alex (concentrating on incremental changes) has it right.

But, I can’t avoid looking at the possibility of the trade of a generation, if in fact gold shows behaviour similar to the comparable financial crises of the 20th century.

Perhaps we need to identify what (technically) would be required to change the stance of gold bears (such as Grant) and or of gold bulls (such as Eric and myself). You may want to associate yourself with whichever position you favor, but we all need to maintain a trader’s mental flexibility and willingness to admit when the market shows him he’s wrong. Life will certainly be less stressful if I am proven wrong on the above notions!

Jock G

China - by Didier

“Is China a bellwether: How important are bearish signals of this country for the markets?

My trading system is telling me that the long term trend is bullish (weekly one) but we have some short term bearish signs (daily ones). The couple USD/CAD confirms that as well as the industrial metals trend. However, China is one of the few indices of my system which shows a long term bearish signal. FXP, the inverse ETF of FXI, draws a perfect bullish MACD divergence and the Shangaï index show bearish signs on the long term and the short term. Without these signals, I would have been pretty bullish on the markets. However, China weights more and more in the worldwide trend.

In addition to the charts, I found an interesting article which sums up the situation in the BRIC from William Gamble in Seeking Alpha:

http://seekingalpha.com/article/131901-emerging-market-s-recent-boom-should-invoke-caution?source=yahoo

BRCD - bull or bear? - y Eric F

I wanted to post the BRCD chart since I think something interesting is going on…We have enjoyed an incredible rally for the last 5 weeks- among a long list of others. The question is - is this going to continue or will we see a major pull-back…

Looking at the hard right edge it looks like another jumping on point, but I may be the greater fool…I post the weekly and daily chart below. Once it fills a gap at $5 it can go to $6.50 without much resistance…who knows before this bear market bounce is over it may just go to $8 where it either tests a gap in the daily chart or fills it…


WEEKLY CHART- pulling back this week- does the trend have further to go or is it topping out? Price targets at 5 to 6.5…

DAILY CHART… Sorry for the large and busy chart- but this is what I got used to looking at…Overbought and pulling back…Oscillators are resetting but the big question is the trend?

Disclaimer: I am long BRCD…

The Aftermath of Financial Crises - from Rodryk S

Rodryk writes: I highly recommend looking at an article titled "The Aftermath of Financial Crises".
http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf

On p.5 there is a graph showing peak-to-trough equity price declines and years duration of downturn.

Interestingly, the average peak-to-trough equity price decline in historic bear markets after severe financial crises was -55.9%, with the average downturn phase of the cycle lasting 3.4 years. Considering the S&P high of 1576.09 in Oct 2007 and the low of 666.79 in Mar 2009 we already have seen a -57.7% decline in just 17 months or 1.4 years, thus an duration significantly below average.

Regards,
Rodryk

Thoughts on China Economy - by Hsin Y

One of our SpikeTrade members has sent in his second letter about China. It is posted here without editing - Alex

Current Myth:
1. China has $1.1 trillion of foreign reserve, they are strong financial sound country.
Some advisors even suggest change the G20 into G2 – US and China summit.
2. China current $586B stimulus plan, primary on SOE (State Own Enterprise) and infrastructure will jump start China economy.
3. China still have untapped domestic market to grow
4. China is world manufacturing, when export come back, they will be strong again
5. Chinese have the highest saving rate to weather any kinds of economy problem

My observation are China has three major problems that will hinder China becomes a global power:
1. China have ‘low end’, ‘polluted’, export manufacturing, they don’t have ‘value-added’, ‘innovative’ global supply chain.
Result:
a. An US$10 items in Walmart, China only get $1, while labor cost $0.35, material cost $0.65.
b. China college graduate can’t find job --- because ‘low end labor’ don’t need college graduate.
c. The whole countries water, air, resource, environment get deplete by making less than 10% of the whole supply chain.

2. China don’t have proper medical plan, retirement plan, social security
Result:
a. That is the reason why people need to save money … because they are on their own.
b. It cost average US$50 to treat a simple cold in Shanghai for general public.
c. Recently, it cost US$15K to have a simple heart surgery for my friend mother, while they are making US$1K per month.
d. So Chinese saving is NOT for ‘future consumption’… it is for their future life!
e. That is the reason why Government want to pump so much money in SOE --- because SOE pay for retirement and medical Benefit to their current and retired workers … without that… Chinese will be in chaos
f. For the 0.8 billion farmer population, they don’t have any medical or retirement system at all.

3. Don’t have a modern IP-transfer, R&D, due-diligence process --- Resource control by very few people
Result:
a. Last week, China complete their annual People Representative meeting, very little disclosure about how they going to spend the stimulus plan. Most of them will spend on infrastructure, SOE, Medical, etc… Without a transparent auditing, most of the resource will be waste to few people pocket.
b. Unlike US innovation, IP, technology can pass to commercial from military, university to commercial, which create ‘value-add’,
Jobs, new economy … a whole process to protect people rights, funding, financial system, legal system, trust in business Transaction, etc. … China don’t have anything in place.
c. This time, China will support SOE instead of SME, will further hurt its entrepreneurship.

Comment:
1. A country can’t be strong without innovation and value-added service
2. A country can’t be strong without well define law, and process of country resource allocation and direction

Conclusion: (Unless Chinese Government can fundamental change)
1. In short term (2009), we can invest in commodity, infrastructure, energy area
2. In mid-term (2010 – 2020), citizen unrest will getting more frequent … aging people can’t afford for medical treatment, young college kids can’t get their tuition return back … entrepreneur don’t invest in business but speculate in stock and real easte
3. In long term (2020+), major problem in resource allocation result into local province conflict

Baltic Dry Index - a Leading Indicator? - by Didier

I didn’t know the BDI and added it immediately to my weekly check list. Thank you.

Rodryk’s last post on the BDI which was instructive for me. Now, we can see that it has been going down for 3 weeks while the markets have been going up for exactly the same period.


I wondered whether the shipping industry could be used as an indicator of a possible recovery of the markets. I compared both the MG776 (index of the US shipping companies) and the BDI as of 2009-03-26. Unfortunately, MG776 follows the main indexes and hit its lows at the same time although the weekly MACD remained very positive. It didn’t bring us any new information compared to the BDI which was up since the second week of December while the markets tumbled as Rodryk pointed it out.

Didier

Baltic Dry Index & DRYS

This index has been popping up in SpikeTrade discussions, and is a part of my daily homework. This is why I want to share with you this email from a friend, Yannis R, a trader in Paris:

"I have read a lot of things about the Baltic Freight Index and I would like to put things in their right perspective. There is a widespread need to identify leading signals for economic recovery. The paradox is that people involved with the shipping industry try to find signs on what their industry will do by analyzing the economy. The rest try to see what the BDI does as a signal for economic recovery!!! This is very dangerous for outsiders as the mechanics of shipping are complicated. I am in the industry 20 years and claim to know 30% of it. So for the latest developments let me lay out the following:

1. During the downturn a lot of ships and especially the big ones (Capesizes) were laid up. These were around 400 ships. That's a lot and not counting the ships slow steaming as to win time.
2. These ships now are reactivating and see what is happening to BDI..!
3. On top we have the huge order book of new buildings. Even with the reported cancellations their size is 46% of existing tonnage due for delivery this year and next.
4. When demand returns to normal levels in the economies, shipping will still have to fight its own demons that were created during the greed years.

***** after receiving this email, I sent Yannis the following message ***************

************************** he responded: *****************************

Regarding DRYS I have to say I am biased so I might not be able to guide you accordingly.

Firstly I do not trust the guy who runs it.
During the drop he sold 10 ships from his private company to Drys .
Drys paid top money for them even though the market had dropped 50%.
I think the deal never went through goes of public outcry.
During the 90’s and the junk bond craziness he got 150 million from investors and bought bonds back at 30 cents..!!!
As I said the fundamentals of shipping for the next couple of years are not looking good because of the new buildings coming in and the low expectations for economic growth.
DRYS has a huge orderbook but I know they have cancelled a lot. But still they are hugely leveraged and the market will hardly justify repaying those loans.
For sure technical action can give us rebounds and may double or triple in price but I will not be part of it…!!!
The stock has been really volatile and after what has happened I think investor’s are loosing their faith.