Friday, February 5, 2010

February Update

Ok, here's a quick update for February.

RAILS - (from Railfax) -
The next few weeks will reveal how much of the recovery is real. As you can see, rail traffic is now on the verge of a breakout over last year's levels. To this point, all of the talk about recovery has been forward looking and full of "Hope". We will see the truth in the next two to three weeks.

Commercial and residential building is not showing up here in the shipping of lumber and crushed stone. It is very interesting to note though that home builders did not break through their lows in the correction over the last two weeks, and we are seeing lumber prices really catch a bid.

See futures trading - You'll see lumber prices have moved much higher and there is quite a bullish trend underway. They do not give permission to copy their charts so I have included a link here.

The question I am asking here is simply this - Does this move in lumber prices indicate some type of increase in demand that will translate into greater production for homebuilders and commercial development? Someone is buying so we should be looking at these types of investments. It is interesting to note the the XHB (homebuilder's etf - I'll add a chart later)
has not really broken down terribly over the correction of the last couple of weeks. This should be on our radar as a potential bullish breakout if the overall market gains traction.

Once again, KSU is back over last year's trendline in shipping. We might review how the stock is trading and attempt to go back to the well one more time.

Click on the chart for KSU - I see $29.00 as pretty strong support here. I might look to purchase the stock in the low $30.00 level with a target for exit at $33.50. Fundamentals coupled with the channel that remains intact will produce a good opportunity for a 8% to 10% move higher. As I mentioned, set stops at $29.00

The Baltic Dry Goods Index is continuing to make higher highs and higher lows. We'll continue to monitor this trend which indicates that a recovery in commodities and shipment pricing power is underway. It is important to note that a decline here below the $2200 level would indicate that commodity demand is drying up.


The Financial Conditions Index dropped back below zero (0) last week with the market correction. The message here is that we are not out of the woods yet and the recession is not completely over. A strong move over zero would allow us to declare everything is better. As you know, I question the FCI simply because more than 1/2 of its components are Fed liquidity driven, meaning that the slosh of funds provided by our generous Federal Reserve are being captured in many of the inputs here.

The dollar has been the beneficiary of strength due to the concerns with the debt of several European countries - namely Portugal, Greece, & Spain. Recall we had similar issues with the debt of Dubai just a month or so ago. As investors fear uncertainty they flood back to the good old greenback and typically buy US treasuries. They aren't buying treasuries because they yield a bunch or as we've discussed, compensate them for the actual risk they are taking, they are merely buying the dollar because it is the best of the bunch.
What has been the result of this 2 weeks of dollar buying? The obvious answer is just what we noted would happen. When the dollar gets stronger, EVERYTHING else gets beat up. That has included the overall equity market, the corporate bond market, gold, silver, and any other commodity.
Well, what is the strategy for this month? I think the best approach for this month is to recall the ranges we've previously discussed. Remember we've highlighted the upper boundary for the range at 1150, well we punched through the 1110 area on the S&P and now have a lower area of 1060 as a lower boundary.
As traders become more concerned about risks, they put more bearish bets on and that is bullish and portends a rebound in the market.
Greece is the near term catalyst for a bounce. If an announcement is made that protects or guarantees their debt we may see a jump. The EU needs to be concerned though because this will set in motion a precedent for further actions for Spain and Portugal which both are very sick.
If you have dry power left you might consider putting to work some of it here and looking at the same old items we've mentioned before (commodities and emerging markets). Don't forget that KSU trade either because it seems like a good set up. Finally, if you bought the VXX (fear index) I mentioned you made great money, you need to get rid of that because if the market bounces you'll start losing.

View of S&P 500 - look for support at 1018