Market Outlook Commencing 27 May 2008

Wow, whatever bulls have made eventually have to be returned to the market. The bears took complete control this week. INDU dropped by 3.9%. COMPQ was down by 3.3%. SPX dropped by 3.5% and RUT dropped by 2.3%. From a sector rotation perspective, something I like from Conrad last week in Wealth Academy, the drop this week was not surprising to me at all. RUT is still the strongest amongst the Big Four and thus was not the worst performer amongst them. Go figure.

The Big Fou remained below 200 SMA respectively. VIX found the support and rebound, sending the indices down in this manner. The volume this week was up on the extremely down day. NYSE registered two consecutive distribution days and NASQ had a distribution day too. The distribution day on Thurs for both NYSE and NASQ was quite ugly.

Of course the big news this week is again oil. Oil registered a record high of $135.09 and closed at $131.82 this week. When I was at WAT on Friday, Conrad and his students discussed where the oil could possibly go. The number looks big but it is no big deal to me. Why? Because I don't care. What you can do is to get this number by drawing some Fibo extension. If you don't know how to do it, then it is something you must learn. The number at XXOP level is an interesting number.

Now, the financial sector is back to limelight after FOMC minutes were released on Wed section. Stocks did not like the minutes because it signals the end of the rate cut.

"...risks to growth were now thought to be more closely balanced by the risks to inflation... [and that] several members noted it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook."

Inflation pressure has revived and the market obviously did not like the news. If the market is still expecting a rate cut but the Fed minutes was a disapointment, bad news in short-term right? This signals that the interest rate could have found a bottom and Fed won't be cutting interest rate at least for the time being because this will just mean pushing inflation rate up where Fed has been trying hard to control the inflation rate.

Rising oil prices hurt consumer? It depends on how you see it. AMR announced that it would be cutting 11 to 12% capacity and instituting a $15 fee for the first checked bad on its flights to combat rising oil prices. F announced a cut in production of full-size SUVs and trucks in the US because the customers demand would likely be shifted to more fuel efficient vehicles. So, corporations are changing their strategies as a result of rising oil prices. It does not mean consumers must suffer. Again, it depends on how you see it.

HD and LOW issued cautious outlook but to me, it is not new. Why? The market has already expected a not-so-good outlook. The reaction on these stocks is short-term in my opinion.

Existing home sales in April fell 1% from March to annualised rate of 4.89m units. In fact, it is better than expected, and is important. Why? the market can only recover by taking the first step of registering a slowing rate of decline. Yes, there is still a decline but at a reducing rate. Is the worst over?

Market Outlook Commencing 27 May 2008

Overall, the short-term speculators took opportunity to push the market down because the economic data were not disappointing. Remember the market in the short-term is irrational and if you use logic to read the market, it won't work at all.

From a sector perspective, the energy sector still outperformed the rest. The financial sector plummeted 6.1% this week. Is the worst over yet or not for financial sector. The technical outlook is at this point a mess. The transports sector was another suffering party, dragged down by AMR and surge in oil price. So, the Dow Jones Transportation Average declined 4.2% and from its Monday high, 7.1%.

So, from a sector rotation perspective, I will patiently wait for entry signal for housing market and financial market. I have no established position at this point. Wait for the technical outlook. I won't be chasing for oil stocks aggressively because it has gone up so much and so fast. Patience and trade defensively is something I learnt so much from Conrad. And yes, it is perfectly fine not to trade when there is simply just one reason to trade.

OASIS is less than 2 weeks to go. I am looking forward to it.