David Fry's Market Outlook for Thursday

Despite the upbeat headline index advances, the advance/decline data sucked. The only conclusion? Distribution is still a happening thing.

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The other big news is the collapse of the Chrysler (DCX) deal debt structure. This is an important event because of the banks unwillingness to take on the leveraged debt necessary. This could be the first sign that the private equity/LBO binge, one of the important props to this bull market run, is over.

Both Cerberus Capital and Daimler Chrysler said they intend to see the deal through, which must be what caused the common stock to rally nearly 4%.

As the DJIA moved higher today, only six components were up more than 1% [BA, IBM, KO, MRK, T and XOM]. And, volume on the NYSE was heavy at 4 billion shares.

The other newsworthy items were a rally in the dollar, a sell-off in gold, a continuing rally in Treasury bonds and a big jump in energy.

Despite the crummy news from the housing sector, good earnings are still driving stock prices higher. But it's a very company specific affair.

Early, BA's good earnings drove prices higher by 3%. And AAPL reported excellent earnings [up 3% in after-hours trading], and Chinese internet company Baidu.com (BIDU) reported excellent earnings [up 18% in after-hours trading]. So earnings rule, but selectively.

Other markets of note:

Let's move to global markets.

Aside from normal Fed activity, the Treasury Department is adding funds in what seems a well-timed cavalry charge. Maybe they'll take the Chrysler debt that the banks won't now take, ya think?

Two days -- $16.5 billion direct to the primary dealers and their trading desks.

Is it just us so focused on distribution and the obvious divergence between negative breadth and higher index headlines? A good dose of liquidity from the Treasury helps traders bid stocks higher. And good earnings can relieve what ails breadth data ultimately. But can half a dozen stocks make the difference? We'll see.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: SPY, UDN, GLD, USO, DBE, QQQQ, XLF, IYR, RCD, EEM, EWZ, RSX, INP, FXI, EWY and TKF.

Comments

[gordon:]

Many thanks David, thanks to people like you, I sold all indiv stocks Tuesday. I wasn't able to stay in the inverse etfs (stomach acid) to enjoy the drop, but I protected my net worth. Can't thank you enough.

2007 Jul 26 02:04 PM

[David Fry:]

You're welcome. And, hopefully it all works out for you. Thanks for your kind comments.

Dave

2007 Jul 26 07:53 PM

[hpski:]

Thank you for your now quite prescient analysis! As a biotech investment adviser, but not a technician, I have lately been rotating in out of stable companies on dips and positive news respectively, e.g. CELG and GENZ, so I was unscathed by today's correction. However, I own INP & FXI in my IRA. Perhaps tomorrow's activity on the other side of the planet, about to begin shortly, will answer my question, which is; should people who have substantial unrealized profits in these 2 high performing funds take some or all of it off the table in their tax sheltered accounts at this time? Or, will $$ being held back from US equity markets drive these funds even higher? Thanks again for sharing your analysis with us!

HP

2007 Jul 26 08:48 PM

[David Fry:]

We lightened our FXI and INP positions on Monday. As to any forward looking analysis, I'm as good a fortune teller as the next. World markets still seem highly correlated. It's just as likely to find underperformance on the downside relative to US markets for the hottest markets at least in the short-term.

Good luck and thanks.

Dave

2007 Jul 27 08:03 AM