CAPITAL MARKET COMMENTARY
WORLD STOCK MARKETS ARE “MIXED” THIS MORNING:
And once again we find they are “mixed” based on regions; Asian shares closed lower overnight – led by Japan’s Nikkei -224 point decline or -1.45%. The South Korean KOSPI and Hong Kong’s Hang Seng were basically unchanged; all Asian markets opened “flat” and then traded lower. We would have thought given yesterday’s US reversal higher would have pushed Asian prices higher; they did not, and this should be duly noted. However, European shares opened “flat” as well, and did indeed move higher throughout the morning – with the continent shares trading higher on average by +1.21%
Turning to the commodity markets for just a moment; we find the base metals of zinc, nickel, aluminum, lead and copper rising rather sharply. Copper, our long-held poster child for speculation, has risen back towards $3.73/lb from just under $3.0/lb several weeks ago. Precious metals too are higher; gold is once again beating on the $650/oz. door, and sliver is trading $11.66/oz. Bond yields however, are trading higher across the terms structure of the yield curve. Hence, the speculative realm of the capital markets is “alive and well”, and it does so with the US dollar trading sharply higher against all the major currencies save for the Australian dollar.
What then are we to make of this morning’s movements; we don’t quite know to be perfectly honest, and we find them curious at best. We do know that if by today’s end that Iran hasn’t decided to go down the “negotiation track”, then the US and her allies will assume that Iran isn’t going to negotiate in good faith and will take the “UN Security Council track”. The Iranian response will be important, and given her insistence of “playing her way”, then we have no doubt that last night’s Sec’y of State Rice’s ultimatum to negotiate or else will be meet with disdain, which increases the risk for nearterm volatility for all assets. Or perhaps, this is in response to yesterday Mumbai bombings, which will increase India’s propensity to “beef up their war on terror”, and generally this means more spending on nearly everything military related.
This is certainly reasonable; the world is a risky place. However, we would postulate that a more prosaic reason might be that prices remain in an uptrend, and many traders view the May/June swoon as the necessary precursor to higher prices. This we can agree upon, but whether new highs are forthcoming on this rally is open to debate.
KLA-TENCOR (KLAC) “BULLISH COMMENTS” MARKS THE BOTTOM: Yesterday, at the annual Semicon West trade show in San Francisco, KLAC’s CEO Rick Wallace today analysts that the company’s order book for the quarter ended in June topped its internal target, fueled by demand for machines that make memory chips used in consumer electronics. KLAC is under SEC investigation due to options backdating, and we think given the stock slide…they were hard pressed to bring out some positive information by shareholders. They exceeded “internal targets”, which may or may not be the same as explicitly stated targets for the market. We won’t know until earnings are released However, this was sufficient to send stocks higher via shortcovering, and by gosh…that short covering was the strongest we had seen in quite sometime. This was sufficient to “shake off” earnings disappointments and send stocks higher on the day; the advance/decline too rallied sharply. And perhaps one of the more important points not seen by many – was the enormous +1100 tick readings seen on the NYSE during the last hour. We were passed a note yesterday by someone who watches these things, for we tend not to get too far involved in such minutia – that the sheer number of +1100 tick readings has happened 3 times this year; the first two were after a decline, of which prices then rallied to higher highs. The 3rd, was after a sharp rally, and did in fact “mark the high” for the move.
So…what now do we make of this: we have been, and continue to be intermediate-term bears; however, yesterday’s rally in the S&P 500 did manage to hold the 200-day moving average, with the two week price consolidation consistent with prices wanting to work higher in the days and perhaps even weeks ahead. We thought a test of the lows was warranted; however, we are questioning that premise at this time.
Our focus from a technical perspective in light of the above is upon the S&P 1278-to-1280 zone; a breakout above this zone would suggest an increased probability of a move to new highs in the S&P is forthcoming. First, a break of 1278 would confirm a bullish reverse “head & shoulders” bottom pattern on the hourly chart, which targets S&P 1325-to-1350. Secondly, a break above the previous high at 1280 is just simply bullish – higher lows and higher highs are the hallmark of an uptrend.
We don’t make these comments lightly; we fear for our short positions, and will cover one-half of our short positions in the Global ETF Portfolio on the open to reduce our risk; if we break above 1280…we will cover the rest. If we are wrong, and prices don’t breakout to the upside, then we will have plenty of time to build a short position. However, risk management comes first and foremost.
In terms of the PTP Portfolio, we are relatively hedged; hence we aren’t as predisposed to make major changes. But if we breakout above 1280, then we will take the portfolio from its current 44% long/56% short makeup, to something more along the lines of 60% long/40% short. Be prepared to act. We can accomplish this by simply pulling off short positions, and if we do…it will be the technology names first.
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