MARKET UPDATE: WARNINGS ABOUND
by Anthony M. Cherniawski
The Practical Investor, LLC
April 22, 2007

Another China warning!

Yesterday the Shanghai Composite Index fell 4.5% on the news that that Chinese central bank would continue to raise interest rates to stop the excess liquidity that is flooding the markets.

Folks, what you see is called a weekly reversal. Whenever a decline day erases the gains for the past week or more, it needs to be taken seriously. Here is the “spin” put on the sell-off by the US media.

The recent rate of inflation is shocking!

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The March level of 205.352 (1982-84=100) was 2.8 percent higher than in March 2006.

“The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.0 percent in March, prior to seasonal adjustment. The March level of 200.612 (1982-84=100) was 2.7 percent higher than in March 2006.” Folks, this excludes food and energy, which rose 7.3% and 22.9% respectively last quarter. Here’s an admission, “For the first three months of 2007, consumer prices increased at a seasonally adjusted annual rate (SAAR) of 4.7 percent. This compares with an increase of 2.5 percent for all of 2006.”

Another warning on Japan!

Despite the rallies to new highs in virtually all other major markets, the Japanese stock markets have stagnated since the decline in February. Traders in Japan are taking some small consolation in the fact that the US markets are rallying today after the Nikkei index posted a loss yesterday.  But a lot of things can happen over this weekend that could pull the plug on the Nikkei index after its already weakened state.

The Dow is testing a trendline.

The concerns that the economy would soften in the second half of this year didn’t seem to faze investors. The rally just kept on marching. However, the realization of what an economic slowdown would do to profits (and stock prices), is slowly percolating into the market. This rally today may be called an exhaustion rally because fewer and fewer companies are participating in it. Last Friday’s net new highs over new lows on the New York Stock Exchange were 418. Yesterday’s net new highs were only 119, a 71% drop in participation. The drop in new highs over new lows comes right at trendline resistance, implying that selling is picking up, even as the market rallies

Bonds rallied this week.

Just when things are on a roll in one direction, they change. But that seems to be the nature of the market. The causes for the rise and fall of the market are many. In the case of bonds, they rallied earlier this week on the recognition that the stock rally was aging and investors began looking for alternative investments. Today bonds are declining slightly while the stocks look strong. This is called “rotation.”

Supply is overhanging the housing market.

The supply of homes on the resale market rose in February, the most recent month for which information has been compiled, to 6.7 months worth of sales from 6.6 in January, according to the National Association of Realtors.

Until we see the inventory of unsold homes decrease considerably, don’t consider the housing slump over. Remember in ’05 when you listed your home and within days, you’d get a bidders offering more than you thought you’d get? Those days are over.

The dollar is at trendline support.

Can it rally from here? Two weeks ago I commented that I would have to re-analyze my position on the dollar due to the continued decline shown in the chart. Not a lot, but pretty relentless since January. A look at the longer-term picture gave me an insight that wasn’t evident earlier…a declining wedge. This could be very bullish once the dollar bounces from the lower trendline. That may have actually happened today (not shown).

Gold is looking good, but can it sustain its rally?

A five-wave rally appears complete just as the dollar (which has inverse correlations with gold) has reached its lower support. It has now been nearly a year since gold has reached its highest point since the 1980’s. One issue that I have with those calling for a bull run in gold is that in a bull market you usually see a new high made within a year of the previous high. Time seems to be running out for our precious metal to convince me of that aspiration.

Relief in sight for commuters.

“Fuel retailers, coming off an abysmal first quarter of shrinking profit margins due to skyrocketing wholesale gasoline prices, have tough decisions to make. After weeks of every shipment of gasoline costing more than the last, the next 10,000 gallons retailers buy may fall in price. But will prices in wholesale and futures markets keep moving down? If they do and retailers begin to cut prices, do they keep pace with the competition across the street or do they keep prices steady to try to recapture something close to a normal margin?”  Good questions. What do you think?

Abundant Natural Gas inventories still rising despite colder weather.

“The natural gas market may have finally settled into a shoulder season trading pattern characterized by soft demand from the lack of weather extremes. A cold weather front in the Northeast sustained winter-like conditions for several days further into the spring, but this Nor’easter storm only temporarily boosted space-heating demand.”  Can you say, “The handwriting is on the wall?” 

“In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market… The big money in booms is always made first by the public-on paper. And it remains on paper. ” – Edwin Lef èvre, Reminiscences of a Stock Operator . 1923.

© 2007 Anthony Cherniawski
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The Practical Investor, LLC,
State Registered Investment Advisor
East Lansing, MI USA
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