NOTE: We are experiencing spreadsheet problems this morning; hence our Chart Comment price updates and related information will be impacted this morning. This should be cleared up by tomorrow; our apologies.
STOCK GAINS ARE HARD TO COME BY AROUND THE WORLD THIS MORNING: Asian bourses closed modestly higher, with Hong Kong leading the charge…closing higher by +0.3%. European shares opened a bit higher, but have since traded sharply lower…with losses ranging from Germany’s -1.2% decline to the UK’s -0.7% decline. Hence, US stock futures are on the defensive. We would expect today’s trade to be dominated by the small caps, and the reason we say this is that the Russell 2000 comes into this morning’s trade at 677.49, which is just about 1% above last week’s low. The small caps have been under enormous pressure, and a breakdown below this low would drag all the indices lower…perhaps sharply so.
Turning to the commodity markets for just a moment – a sense of calm is rather pervasive; copper is less than a cent lower, but cannot seem to hold in the “plus column” for any time at all before sellers return to the market; gold too is lower, but by a very modest amount. Crude oil too is lower…but by pennies. We welcome this “calm” to a degree, but suspect it is more the “calm before the storm” in which many commodities embark upon another leg lower.
We are short copper-miner Phelps Dodge (PD) and steelproducer Nucor Steel (NUE) – each of which has downside room to trade into major moving average support.
OUR TRADING STRATEGY: We have written at length recently that we believe a bear market has begun, with the strategy of using rallies to put on short positions. Generally in the newsletter, we want to be fully exposed at all times in order to generate ideas; however, we are making an exception at this point in time as our gains are rather good this year, and to be quite honest – we are in a trading quandary. It isn’t that clear to us that a rally to 1280 will materialize; nor are we confident that new reactionary lows will obtain across the board. Perhaps the small caps form a sharply lower new reactionary low, but perhaps the S&P 500 forms a very modest one, while the NASDAQ’s do not. The purpose of this exercise is that when we don’t believe we have an edge – we tend to stand the sidelines, keep our powder dry, which allows us to search for optimal risk/reward setups to which we can build on our gains.
As noted above, from a technical perspective – we can make the case for a countertrend rally higher via the S&P 500 towards 1260-1280 without tampering with the overall newly established downtrend; certainly
watching the intraday tape would indicate just how prevalent selling pressure really is in the stock market.
The small caps in particular are showing a great deal of pressure as intraday rallies are sold rather aggressively. Therefore, with the S&P is trading right about 1240 (a bit above the mid-point of the potential 1180-1260 trading range we may be developing)…we have no real compunction to trade aggressively from the long perspective unless it is in the defensive sectors such as Healthcare and Consumer Staples; but we find ourselves more and more than willing to take on risk in high-beta short positions in the commodity and semiconductor stocks.
THERE IS VERY LITTLE IN THE WAY OF ECONOMIC DATA TODAY: There are only two reports to comment upon: the weekly MBA Mortgage Applications Survey for the week ending June 16th; and the Dept. of Energy’s weekly inventory report. Last week’s MBA purchase index reading was 401, which was -5% below the 1Q’s average; this shows the deceleration is still ongoing in the housing market, with refinancing activity slowing as well. No one should be surprised by the mortgage market’s continuation of the trend established during the Summer of lat year; and don’t be surprised to see even more weakness given mortgage rates for a 30- year fixed-term are now at 6.61%.
As for the inventory data; the consensus believes crude supplies declining by -500 thousand barrels; gasoline supplies rising by +1.5 million barrels; with distillate supplies rising by +1.5 million barrels as well. The real focus of traders will not be upon the gasoline supplies; crude oil supplies are quite some distance above their 5-year average and we would expect to see quite a bit of gasoline flow into storage given
hurricane season is now underway. Remember, this is a Congressional election year, and if the Gulf Coast is hit by a hurricane and affects refining operations – gasoline prices would go well north of $4.00/gallon in most parts of the country…and above $5.00/gallon in California. Expect supplies to build.
Turning to yesterday’s building permits data; we found it rather interesting to see May housing starts rise a rather material +5.0% to a 1.957 million annualized rate…far, far above the consensus of 1.860 million; however, building permits declined by -2.1% to 1.932 million. The driver of the starts gains were the multi-unit segment which grew +19.7% month-over-month. Ostensibly, this is due to the fact that many potential home buyers are being shut out of the housing market due to rising interest rates; they must now pay rent, and developers are certainly moving to satiate this need via rental housing. Also, we would note that if we average the April and May total starts figures – this average is -10% below 1Q’s average, and -7% below the year ago average; therefore, the contribution to economic growth going forward will be negative.
About Richard Rhodes and The Rhodes Report
