Market Commentary from Investools.com

Jeff Kohler

The market finds itself off to a running start this week, thanks to a pull back in oil prices. This timely news gave investors a reason to buy back into stocks, consequently running the Dow up 130 points; closing at 12,876. The NASDAQ finished the session up 42 points, closing at 2488, and the S&P 500 nailed down a 15 point gain, closing at 1403. This rally was broad based, as 9 out of the 10 market sectors finished the session in positive territory today.

One of the most bullish advances in the broader market today came via a surge in Consumer Discretionaries. Retail companies, led by Wal-Mart (WMT), posted gains on the day based on positive retail sales rumors that surfaced this morning. This news gave the market some reassurance that the consumer is still spending money, despite inflation and credit woes.

Lately I have been keeping a very close eye on these consumer discretionary companies, and been following the price action in the XLY. If you find yourself scratching your head wondering “what consumer discretionaries are,” these are stocks that tend to be the most sensitive to economic cycles and are companies that deal products and services directly to the consumer. These companies focus on services that are “above and beyond” what the consumer absolutely needs. In short they are companies that deal with “wants” rather than “needs.” Some of the companies included in this fund are HD, DIS, CMCSA, NKE, etc.

If you do not have this stock on your radar, set your sights accordingly. The XLY has been a critical measurement in my market posture going back a few months. As prices move higher, this deflates worries about the consumer and their impact on the future of our economy. If we can see a continued trend in consumer spending, all other problems will seem relatively small in comparison.

Figure 1: XLY finding support off a bullish triangle pattern.

In global news, a devastating earthquake shook Sichuan China today. The quake that measured a 7.9 has already claimed the lives of nearly 9,000 people, and caused major damages in southwest China. This comes at a bad time for China as the 2008 summer Olympics are set to start in Beijing in August of this year. Recently I have spoken about the possibility of a “bottom” in China’s equity markets, but keep an eye on the FXI as this news develops.

Energy/Commodities

One of the most common questions I am getting asked recently is whether or not a top is being put in on the Oil Service Companies and Commodity Related Companies. To illustrate the potential “top” in question, take a look at the charts below.

Figure 2: The CRX has stalled at its prior high.

Figure 3: OIH showing the same price action.

Last week I mentioned the risk in trading these stocks as the majority of them were advancing with a significant contraction in volume. While this does not confirm a trend reversal, volume has been known to work as a leading indicator. For those of you that own stock or call options on stocks in these groups, you might consider reducing your exposure.

Refiners

If you are looking to diversify and can’t quite find a great place to get some bearish exposure, take a quick glance at the refiners. This group has been one of the worst performing industry groups over the last year, and at the moment offers some interesting technical signals. Keep an eye on TSO, HOC, WNR, and VLO to gauge the overall weakness in this space. Despite some big gains today within the group, these stocks are all reaching resistance levels in their downward trends.

Figure 4: VLO Holding on to Resistance.

One of the biggest risks in trading this group to the downside is that as prices decrease, chances of an acquisition taking place increase. Be careful.

Technology

Research in Motion (RIMM) unveiled its newest addition to the BlackBerry family, the “Bold.” The news took the stock into a new all time high as it traded up 4.8%, closing at $139.10 today. Conversely, RIMM has been a “Top Pick” over the last couple weeks, and if you have a position going, consider selling a small portion into this strength and tightening up your stop order.

In late day trading, shares of HPQ and EDS were halted as news of a possible acquisition surfaced towards the close of business. HPQ is in talks to buy EDS for a price estimated to be between $12-13 billion, which would allow them to compete with the industry front runner- IBM. Shares in HPQ and IBM sold off at the day’s end, while trading in EDS was halted after having posted a 28% gain, finishing the day at $24.13.

Outlook

My outlook on the market continues to be optimistic. In other words, I am still bullish.

Follow-Up

Last week I highlighted the Dry Bulk Shippers as a great place to trade over the weeks to come. Today, most of these stocks made the chart toppers list. Take a quick glance at GNK, a “Top Pick” from last week.

Figure 5: GNK posts an 8.2% gain on the day.

If you happened to position yourself in front of this move, congratulations. Make sure you are taking profits into this strength and tightening your stop orders to lock in profits.

Homework

In regards to the mention of a possible short term top in commodities and oil companies, I’d like those of you who are interested in learning more about price patterns to conduct a little research on the chart pattern “Double Top.” Find out how this pattern signals a reversal, and more importantly try to understand why it is premature to consider this price action a double top.

I’ll follow up with this assignment on Thursday.

Regards,

Jeff Kohler

Content Manager