 The ETF Authority for Monday, March 17th, 2003 Volume 2, Issue #11 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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MARKET SUMMARY Plummeting oil prices sent that sector sharply lower, as the Energy SPDR (XLE, $21.80) fell 3.5% and the Oil Sector HOLDR (OIH, $53.62) was eviscerated for a 6.3% loss. The only other non-international losers last week were the Financial SPDR (XLF, $20.58), which lost 0.6%, the iShares Russell 1000 Value Fund (IWD, $42.63), which gave back 0.6%, and the Pharmaceutical HOLDRs (PPH, $69.45), which sank 2.7%. On the international front, both the Canada WEBS (EWC, $9.66) and the Japan WEBS (EWJ, $6.52) lost ground as the U.S. rallied sharply. Though the sickly economy remains a problem, the bottom line is that the markets are getting whipsawed day in and day out by the shenanigans at the United Nations. This has left the market's short-term patterns sloppy at best, and has made swing trading a difficult task. It is increasingly difficult to separate the wheat from the chaff, although I did manage to close our recent QQQ covered put trade near its best levels. On the other side of the coin, however, the wild trading took its toll on our recommended iShares Russell Value Fund (IWD) trade. ECONOMIC ANALYSIS We saw a host of dismal economic news last week, but economists are finally starting to get on top of the data in many cases. This means that if there is a temporary lift in the economy, we will see a huge surge in bond market yields, as well as in the stock market. There were three data items worth reviewing last week. Retail sales slumped 1.6% -- falling 1.0% even with autos excluded from the picture. As I noted in my report last week, I felt the data would be somewhat worse than consensus forecasts, but that the release would have little impact on the markets. The retail results were difficult to interpret since much of the east coast was snowed in over the important President's Day weekend. If the numbers remain atrocious next month, however, then we could be in big trouble. The depth of the recent retail weakness has even surprised me, as higher energy prices have done little to lessen the impact of the weakening sales trend. As I suggested last week, industrial production and capacity utilization came in just shy of forecasts. The miniscule production increase highlights the continued weakness in the manufacturing sector. Although the weather was bad in February, it was warmer than in January, which made the month-to-month data look a bit worse than it would have been otherwise. University of Michigan consumer sentiment came in well below already-depressed expectations. These figures can be volatile, and any resolution with the situation in Iraq should bring a substantial rebound in these data. Other data last week were less important. The trade gap improved, which is common when the economy weakens (the U.S. imports fewer goods). Though a better trade balance is supposedly good for the dollar, if the only reason for improvement is due to a weaker economy, then the buck is not likely to find much support. Producer prices jumped, but tumbled 0.5% when food and energy were excluded. As I warned last week, the data were helped by the return of auto incentives, and absent that, the core drop came in at -0.1%. The 1.0% increase in the total though acts as a tax on the economy. Since producers cannot pass these price increases along, earnings are pressured. This kind of weakness implies risk of a recession going forward. Next week's economic calendar is quite light. The highlight will be the Fed's March 18th meeting. I cannot predict what will happen if we see military action in the Middle East or a terrorist attack against the United States (March 17th was the date for an attack on America according to the Debka File). Absent that, the Fed funds futures, which are rarely wrong, are forecasting about a 25% probability of a rate cut. I would concur with that thinking. There are only a few additional data points due for release. Housing start come out on the morning of the 18th as well. Consensus expectations call a drop into the 1.7-1.8 million range from January's 1.85 million annualized rate. However, I suspect the actual figure could come in a bit lower, largely due to the weather. No market impact is likely. Leading indicators come out on Thursday, March 20th at 10:00 AM. They are forecast to slump by 0.4%. This number rarely ever moves the market, as it is essentially just a compilation of mostly available data. However, the number is picked up by the news media and you can be sure there is a feedback loop into consumer sentiment (the rotten payroll report a week ago probably hurt the sentiment survey released last Friday). Consumer prices come out on Friday. While energy prices should push the number substantially higher (consensus estimates are for a gain of about 0.6%), the core figure should be benign. Consensus expectations are for a 0.2% increase, and I suspect that number could even end up flat to +0.1%. WHERE DO WE GO FROM HERE? In the shorter term, I expect to see another minor leg higher this week. While a dip is possible early on Monday, as market participants wring their hands over the lack of follow-through from Thursday's rally, hope shall spring eternal for a Fed rate cut, and this could help the market ring up another 2-4% in gains. I continue to favor the S&P 500 reaching at least the 850 area, with a move into the mid-870s an outside possibility. I do not expect the Fed to cut rates. As I noted elsewhere, Fed fund futures show only about a 25% probability of a rate cut. Given that these futures have not been wrong in a long time, I would not fade them. True, recent economic data has been atrocious, but unless the Fed sees a geopolitical reason to cut or the stock market enters into a freefall by Tuesday at 2:15PM (when the Fed should announce its decision), I doubt that there will be an easing. However, the bias will remain to a weaker economy. Much was made of last Tuesday's 90% downside day. A 90% downside day occurs when 90% of the volume takes place in stocks whose prices fell. It also requires that 90% of the accumulated point changes be to the downside. However, if you expect a major reversal, history says that you need to see a series of these days, not just one. The 90% upside day on the NYSE on Thursday is a positive and does suggest (barring terror attacks) follow-through higher this week, but it does not in any way suggest that the bottom is in. Note that all of this analysis may be rendered unimportant depending on what happens in Iraq. I continue to expect war, and I fear it will be without the U.N.'s sanction. That will be a negative for U.S. and foreign equities. It also raises the risks of future terrorist attacks on American soil. Even if we succeed in stopping such an attempt, large losses would be likely if the news got out. Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
Please Note: The current geopolitical situation is very fluid. All trade recommendations that have not been executed should be cancelled if war starts or Hussein steps down. Therefore, do not put any orders in the market to avoid getting filled on a news report. TRADE #1: SELL SHORT S&P SPDRS (SPY, $84.13) ON A RALLY As I've been saying, I continue to expect further losses in the S&P 500 in the coming weeks, despite the apparent turn. But, after a brief dip to start the week, further gains are likely in the near term. As such, we will likely grab late and weak longs on a break above recent resistance near $85.74-$85.80. I recommend sales as those stops go off. As long as prices remain below the head and shoulders neckline (the thick blue line on the chart below, at $86.57 on Monday and falling about $0.01 per day), I would be willing to stick with the shorts. I expect a new low, but will place targets higher up first and will revise them as needed.
TARGET: $81.55 (this is our initial target, but I
may lower it as we move forward)
Oil prices got clobbered last week and took XLE with them. I expect small gains for both oil and for this ETF to start the week, followed by a decline to triangle support.
TARGET: $21.06 (this is our initial target, but I
may lower it all the way to triangle support as we move forward)
As noted in the "Market Summary" section above, I expect a dip to start the week and then a rally after that. The major indices will not give me enough leeway to put a trade on, but the volatile financial sector should. Although XLF finished lower last week, it did surge by about 7% from its lows. I see room for a further dip to start the week Monday, but then a run of another 5% or more higher. From there, it will probably become a sell, but we'll take one step at a time with this trade.
TARGET: $21.09
4. CONTINUED GUIDANCE ON PREVIOUS TRADES PLACE A COVERED PUT TRADE ON THE NASDAQ-100 TRUST (QQQ, $25.72) BY SHORTING QQQ AND SHORTING A MARCH 25 PUT (QAVOY, $0.25) We closed this trade on Wednesday, March 12th for a +3.1% profit when the sum of the value of the put and QQQ reached $25.27
RECOMMENDATION: We quickly entered and exited this trade on our stops on
Monday morning as the iShares gapped lower, but not low enough to prevent
our entry, and then continued to fall beyond that point. We were stopped out
of the trade for a small 1.1% loss.
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