Wednesday Nov 01, 2006

The white elephant

Taipan Group's Dynamic Market Alert

-- The white elephant
-- Running of the Sensex bulls…
-- A certain decline?

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The white elephant

by J. Christoph Amberger

Today started out so well. My oldest son was out the door in time to catch his school bus (which he had missed the preceding two days). My morning radio interview on the Brent Clanton show was done with. The younger kids were dressed and fed before 8:30 a.m. The dog was walked. And we arrived at school just as the doors swung open with the first bell.

Then, right on cue, the “Check Engine” light went off in my car. I checked for the usual culprits -- including a gas cap that might have been tightened with only two turns instead of three -- but the light was persistent. So I drove up to the dealership.

Of course, there was a line of vehicles waiting in the drop-off lot. It would be early afternoon at best until they had time to look at my problem. So I walked a block north to the next Enterprise car rental place. Here, they had good news and bad news waiting for me.

They indeed still had one single vehicle left that they could rent me. That was good.

It was a white cargo van.

That was bad.

But the arithmetic of transportation quickly tipped the scales. A taxi ride downtown would cost me around 40 bucks each way. The van is only $70 for the day.

“Here’s your babe magnet,” said the clerk when he handed me the keys. I smiled in a dyspeptic kind of way.

As I rode south, directing the rolling steel box much like a mahout goads a white elephant, I called my wife from my cell phone to inform her about my new status symbol and sex appeal.

“Good,” she said. “You can stop by at home, pick up the old Ping-Pong table and take it to the dump.”

Running of the Sensex bulls…

by Ian L. Cooper

Months after a May-June 2006 market meltdown to 9,000, Bombay’s Sensex index nailed a new lifetime high above 13,000 on Monday, surging past the 12,671.11 high of May 11, 2006. Domestic and overseas bulls continue to be impressed by corporate earnings and the underlying strength of the India economy.  It doesn’t hurt that global investors have invested more than $1.2 billion in Indian stocks in October 2006 alone, according to IndiaExpress.com.

There’s little doubt that the India, whose Sensex cleared several psychological barriers -- including 10K, 11K and 12K barriers -- has become an attractive investment for worldwide investors.  And there’s little doubt that once the latest sustains itself, we’re likely to see heavy buy interest in small- and mid-cap names (especially those associated with e-commerce), namely Rediff (REDF) and Sify (SIFY), in our opinion.

But could we see 14K by year’s end?  It could happen. Consider the strong corporate earnings, the strong overseas fund inflow, the positive news that India will spend $350 billion on infrastructure, and a confident Finance Minister P. Chidambaram, who believes India could expand by 10% in “the near future and poverty afflicting millions be eradicated in the next 10-20 years,” according to FinancialExpress.com. 

However, does the latest Sensex run through four psychological barriers overvalue India stocks?  Nope.  The economy is running strong.  Corporate earnings are good.  And, considering the historical bull runs witnessed by the likes of American and Japanese markets, there’s no reason why the Sensex run couldn’t be sustained.  Welcome to the Indian bull market.

A certain decline?

by Ann Sosnowski

When I said that this market looked extremely “toppy” and was in for a correction, you may have been right to doubt me. Maybe my prediction is only a month and a half early -- but it’s coming true nonetheless.

Yesterday, the Dow Jones Industrial Average fell below overbought territory. As is customary when such a signal occurs, the Dow will drop fast and hard below the 10-day Moving Average.

Last time this happened it wasn’t pretty. The Dow was overbought at 74.01 in May 2006, and then quickly dropped to 59.47 in only one day. The Dow dropped from 11,630.48 to 10,700.93 by early June. That translated into a 7.99% correction in a little more than a month, taking the Dow down to the 200-day Moving Average support.

Last Thursday, the Dow was valued at 12,134.84. It was overbought at 81.3718, the highest level since 1999. Today, four trading days later, RSI is below overbought on a steep decline at 62.56.07. The Dow is now valued at 12,045.

Although the Dow broke above the mental 12,000 mark, as we didn’t think it would, it appears that it won’t stay above 12,000 for long anyway.

When the Dow drops on this steep Relative Strength decline, then an 8% correction similar to earlier this year would mean Dow 11,069. That’s well below the 200-day Moving Average. I wouldn’t anticipate a correction extremely below that strong support, so my downward target on the Dow in the next month is 11,254 at the 200-day Moving Average.

There’s other support for this decline: put/call ratios.

On Thursday, the put/call ratio on the DJX (the main proxy for trading the Dow Jones Industrial Average) was extremely low at 0.55. On Friday, the put/call ratio rose slightly to 1.23, indicating that money managers were hedging their portfolios. But yesterday, the put/call ratio skyrocketed out of control, coming in at 3.37, an increase of 174% from only a day earlier! This means that individual investors are boarding the nervous train.

Oh, and don’t forget to factor in that only a handful of the 30 Dow companies have yet to release third-quarter earnings. That means that much of the 9.69% rally we’ve seen over the past month and a half was fueled most importantly by investors’ anticipation of great earnings and the Dow companies’ ability to follow through on those expectations.
So now what?

A cyclical pre-Christmas correction is what. In 2004 and 2005, the Dow dropped substantially in October. This year, October constituted a rally, so the month of November should see weakness, which will provide lower prices for equities going into the Christmas season.

Granted, in 2003, the Dow continued to climb through October and November, not correcting until the end of February. But it’s important to note that RSI levels are higher now than they were during that 2003 rally.

When the Money Flow index begins to fall off dramatically, as it is on the DIA, it’s time for puts. There’s no ifs, ands or buts about it. This market will fall going into November, and we all better be protected.

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Earnings Announcements for Thursday, November 2, 2006

Acorda Therapeutics, Agrium Inc, Alliance Imaging Inc, American Superconductor, aQuantive Inc, Argonaut Group, Avanex Corporation, Big Dog Holdings, Caremark Rx, Cincinnati Bell Inc, Coinstar Inc, Credit Suisse Group, Digi International Inc, Dollar Financial Corporation, El Paso Electric, Encysive Pharmaceuticals, Gateway Inc, Immersion Corporation, International Paper Company, Jacobs Engineering Group Inc, LeapFrog Enterprises Inc, MarineMax Inc, Microvision Inc, Midway Games, Nektar Therapeutics, Repligen Corporation, Pioneer Drilling Company, Scientific Games Corporation, Sina Corporation, Six Flags Inc, Station Casinos, Talisman Energy, Telular Corporation, Tesoro Corporation, Therma-Wave Inc, Trammell Crow Company, Vical Inc, ViroPharma, webMethods Inc, Whole Foods Market, and Williams Companies Inc are releasing earnings.

Brought to you by http://www.AmericanCapitalist.net

Unlock Dates for October / November 2006
10/31/06 – Delek US Holdings is unlocking 10 million shares.
11/8/06 – Basin Water is unlocking 6 million shares.
11/13/06 – Restore Medical is unlocking 4 million shares.
11/14/06 – Burger King is unlocking 25 million shares.
11/21/06 – MasterCard is unlocking 61.5 million shares.
11/29/06 – Luna Innovations Inc is unlocking 3.5 million shares.

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Upgrades and Downgrades

Altera downgraded by Matrix Research from Buy to Hold.

Omnicare downgraded by JMP Securities (Market Outperform to Market Perform) and by Morgan Stanley (Overweight to Equal Weight).

Plantronics downgraded by Bear Stearns (Peer Perform to Underperform) and by Kaufman Brothers (Hold to Sell).

Ryder System downgraded by Matrix Research from Strong Buy to Buy.

Sanofi-Aventis downgraded by Bear Stearns from Peer Perform to Underperform.

Trammell Crow downgraded by Morgan Stanley (Overweight to Equal Weight) and by JMP Securities (from Strong Buy to Market Perform).

Baidu.com upgraded by Goldman Sachs from Sell to Neutral.

CEC Entertainment upgraded by Merriman Curhan Ford from Neutral to Buy.

Chipotle Mexican Grill upgraded by Wachovia from Underperform to Market Perform.

Honda Motor upgraded by Banc of America from Neutral to Buy.

Martha Stewart upgraded by Credit Suisse from Underperform to Neutral.

Omnicare upgraded by Stifel Nicolaus (Hold to Buy) and by Bear Stearns (Peer Perform to Outperform).

Brought to you by http://www.vixtrader.com

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