Market Wrap Up April 28/05

by Martin Goldberg

If you own stocks or mutual funds today make no mistake, you aren’t investing, you are speculating. That goes for ALL stocks from Tootsie Roll to Krispy Kreme, from Vioxx to Viagra, from high flyers to dividend paying stalwarts. In today’s market at these valuations, you are speculating and subject to significant risks. Time won’t help you either, that is, unless you have 50 years to break even. Now is not the time to wax poetic about how wonderful your company’s management teams are. By and large at these prices and valuations no managements can be trusted. They put on their pants one leg at a time (sometimes in a rush). I don’t care how long they paid dividends – In 2001, Enron had paid dividends for 65 straight years. The S&P 500 pays a measly 1.9% – not a good investment in my book. If you own stocks today, make no mistake, you aren’t investing; you are depending on the greater fool behind you. From Jeff Skilling to Immelt, sell ‘em all.

Another quarter passes and with it still the preponderance of one time and special events and things that didn’t go just right. They all shove these aside while the ex-item numbers are reported with a CNBC smile eaten up by your fellow speculators. Whisper numbers are back along with untimely and baseless analyst upgrades. Today, Jim Cramer is a folk hero. His studio should be redder with fire and smoke. Today’s stock market in whatever form is not investing, it is speculating. Sell ‘em all.

You can’t trust the best companies. AAA bond ratings are dropping like flies while attracting them at the same time. The remaining AAA Companies are practically all financials. Financial companies amount to roughly 40% of all S&P profits – an inharmonious picture of a sick and debt-based distorted economy. Sell ‘em all.

There are over 8,000 hedge funds in our fed-induced bubble economy, all looking to squeeze a buck from a weak and uneducated public (and of course, each other) while not producing anything. These folks had a great time profiting from the pre-election bid-up. It was based entirely on herd mentality coupled with a misguided rumor that Bush is good for stocks. Yet so far, practically all the stock market has to show for the election is bullish charts for certain defense companies benefiting from the war in Iraq. Whether this is a righteous war or not is not the point. But as an investor, you might want to ask yourself if you want a piece of that action. I don’t. Sell ‘em all.

Without a good excuse to bid stocks up there are over 8,000 hedge funds managers waiting for movement to take money from John Q. Public. It doesn’t matter – up or down makes no difference to them. Down will do just as well as movement is what these guys want and need and there has been precious little of it for several months. When they discover that “down” is where the movement is, it won’t matter whether your stock’s management team is the best around. Your “investment” will get creamed, back to its intrinsic value and then some. Now is not the time for a Coca-Cola. Now is the time to sell ‘em all.

There’s hero status for Greenspan and Trump. Sell ‘em all. Stocks down, bonds up, commodities down (oil down), Japan down. The picture over about the last month is one of a deflationary spiral, seemingly only solvable with “helicopter money.” Yet, this is no solution; it’s a cure that is worse than the illness... a conundrum, if you will. If you are in the stock market in any way shape or form, you are not investing, you are speculating. Sell ‘em all.

The indices are weak having traced a head and shoulders reversal pattern. Shorts are working. Longs are failing. Sell ‘em all. Sell ‘em all. Sell ‘em all!!

They were a leader of the bull market, yet recently the transportation stocks have been notably lagging. Tonight, I will present a cross sectional look at the Dow Transports (ex. Airlines). These companies are among the most understandable companies anywhere. So when they began to trade like internet stocks in 2004, it seemed conspicuous. While at historically high valuations, many of these stocks entered into an apparent climax run into New Year's of 2005. Immediately after New Year's the stock market dropped, and then rallied in late January to March. During this stretch the transportation index actually made a new high, and this served as a source of bullish optimism for some interpretations of the Dow Theory. Yet recently the transports dropped again to lows not seen in January. While from the March highs the Dow Transportation index looks cheap, a look at the 3-year weekly chart shows that the index is still about 27% above apparent support, which is at 2,750. An examination of this chart suggests 2 potential intermediate term fates for the Dow Transports, both bearish. The index may have already made a double top, and the intermediate term trend may now be down. Alternatively, the index may try for one more rally in order to complete a head and shoulders reversal. If this occurs, it would be a particularly weak pattern since the neckline would be downward sloping. The latest high was made on less volume than the previous high, while the latest downtrend was on higher volume than the New Year's sell off.

The table below summarizes the Dow Transports (ex. Airlines), in terms of whether each is above its respective 50- and 200- day moving average.

Company (Ticker)	Above 50-day Moving Average?	Above 200-day Moving Average
Alexander & Baldwin (ALEX)	NO	YES
CH Robinson Worldwide Inc. (CHRW)	NO	YES
CNF Transportation Inc. (CNF)	NO	NO
CSX Corp. (CSX)	NO	YES
Expeditors International of Washington (EXPD)	NO	NO
Fed Ex. Corp (FDX)	NO	NO
GATX Corp. (GATX)	YES	YES
JB Hunt (JBHT)	NO	YES
Norfolk Southern (NSC)	NO	NO
Ryder (R)	NO	NO
Union Pacific Corp. (UNP)	NO	YES
UPS (UPS)	NO	NO
USF Corp. (USFC)	NO	YES
Yellow Corp. (YELL)	NO	NO

The only Dow Transport (ex. airlines), which is currently above its 50-day moving average, is JB Hunt. Seven of 14 companies are above their respective 200-day moving average.

The following charts include the 3-year weeklies, which provide a long-term perspective on the transportation stocks.

Alexander & Baldwin

Alexander & Baldwin appears to be weak, having formed 2/3 of a head and shoulders reversal pattern. There is resistance at the former uptrend line and perhaps at the 50-day moving average. ALEX is showing good relative strength compared to the other Dow Transports over the last 3 weeks, and therefore may not be a good shorting candidate.

C.H. Robinson

CHRW is showing good relative strength compared to the other Dow Transports. It appears that the previous uptrend has turned into a trading range.

Following a good earnings report today, CHRW crashed previous resistance to the upside, at least for the moment. There seems to have been only minimal follow-through from other transportation stocks from C.H. Robinson’s good fortune.

CNF Transportation
CNF has broken its uptrend and its previous uptrend line is likely to become resistance. There is support at 40.

CSX Corp.

CSX traded in a range for several years and has only taken part in the climax run that began in the summer of 2004. It now sits about 2 points below resistance at 41. There’s minor support at 37.5.

Expeditors Intl of Washington (EXPD)

The uptrend that began in April of 2004 has been broken and FDX now sits below both its 50-day and 200-day, with support at about 45.

Fed Ex. Corp.

A long linear uptrend has been broken, and FDX now sits below both its 50- and 200-day moving average. Minor support at 90 appears to have been taken out decisively, and the 50-day moving average is about to cross the 200-day moving average to the downside. The technical picture is bearish for Fed Ex.

GATX Corp.

GATX is the strongest stock of the Dow Transports. Note the moving averages, relative strength and trendlines are all intact

JB Hunt

JH Hunt is battling with its 200-day moving average. Two years ago it was a $12 dollar stock and now it is over $40.

Ryder
Wall Street now despises the formerly loved Ryder. The trend is down, and the only thing in question for the bear is establishing the appropriate trading tactic and stop loss point. Recent resistance appears to be near the 50-day moving average. A low volume rally to near 40 would appear to be an ideal entry point. Ryder is presently oversold.

Norfolk Southern

Norfolk Southern, after crashing from almost 40 to 30, then retraced back to the 38.2% retracement point. It's at a good entry point to short with a stop out at a close above the 4-week moving average at about 33.5. The risk as of Wednesday night is about 1.5 points. The potential reward is 7 points down, if support at 30 is taken out.

An examination of the daily chart suggests a potential entry point to short at the gap fill, just below 33, and a cover point a close above 33.9, providing a risk of about 1 point and a potential reward of about 7 points (if weak support at 30 is taken out).

Union Pacific

UNP stock is on a wild ride, which is not the stuff of a major advance.

UPS

UPS has completed a head and shoulders reversal. By the measurement principle there is about 15 points of potential reward to the downside, and about 4 points of risk back to above the neckline (which would invalidate the pattern). A low volume rally to the neckline would be an excellent entry point to short UPS.

USF and Yellow

These 2 companies were involved in a recent merger deal. The stocks dropped precipitously following announcements that business wasn’t so good because of slowness in the auto industry. Similar to the auto industry, trucking is a cyclical business.

Yellow, which enjoyed the Transportation stock mania as much as any of the others, appears to be falling fast. It appears to have taken out support at 50, and the next support is at about 40. It sits at 48.59 (Wednesday), and relative strength in the Dow Transportation Index is falling. A short sale at 48.59 presents a potential reward of about 8.5 points of gain and a stop out of a close above 51, or a failure to “act right.” This appears to be a good risk to reward ratio.

Today’s Market

All of the major indices were down big today as the market experienced a high volume sell off that gained momentum toward the close. The Dow was down 1.3%, the S&P 500 down 1.14%, the Nasdaq down 1.36%, the S&P mid-caps down 1.51%, and the Russell 2000 small caps down 2.06% (!), and the Dow Transports down only 0.85%. Oil touched $49.80/barrel before recovering to finish at $51.77. Gold and silver were both down today, and in the short term gold looks undecided about what it wants to do. The XAU (-1.7%) and the HUI (-1.6%) sold off today along with oil stocks (Exxon Mobil - 4%). Over the short run, there is nowhere to hide except perhaps Google which was unchanged today. It is significant that in spite of a recent bond market rally, homebuilders went nowhere and sold heavy today with the Dow Jones US Homebuilders down 3.4%.

The chart of copper may be suggesting an economic slowdown, thereby confirming government statistics and confirming the downward trajectory in lumber. While the uptrend is still intact, the chart is looking sloppier as copper has decisively broken through the popular 50-day simple and 20-day exponential moving averages over the last week.

At critical times, the stock market makes fools of the masses and we may now be at such a critical time. In January, I attended a meeting of stock market technicians that included some famous gurus who gave their prognostications for the year to come. It seemed that the prevailing attitude among the experts was that money could be made in the stock market, if only you could establish where the bull market was. There was significant bullish sentiment regarding oil and commodities as well as US equities, and although some of the experts expressed caution with regard to the US markets and valuations, there was practically no discussion of shorting or buying puts as a means of profiting in the stock market 2005. Yet except for those trading short term fluctuations, thus far this year only the bears are doing well. Of late it seems that there is literally nowhere to hide in this market. I suspect, as bearish positions become more “fashionable,” that side of the trade may become crowded from time to time, and this could precipitate sharp and tradable short covering rallies. This scenario will produce a bull market in volatility.

Those from the Graham Dodd and Buffett School of value can take heart that the righteous side of the value trade in today’s stock market is the short side. Of course, traditional value investors would likely object to that side of the trade as “speculating.” But let’s face it – if you are in today’s market in any way shape or form, from stocks to mutual funds, from Krispy Kreme to Tootsie Roll, from Vioxx to Viagra, you are speculating.

The intermediate trend appears to be a downward one. There are likely to be rallies, but as a fundamental investor it would be wise not to kid yourself about the greatness of management teams or consistency of company dividends. Value is value. As an investor, Sell ‘em all!

The President speaks tonight about social security, and you can bet that he will consider his words carefully with a stock market that is on shaky ground. I’m expecting a short term rally, and that would make for an excellent exiting point for many stocks including transports.

Have a great evening.

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net