Shore Capital Management LLC

For the last few weeks the equity markets have been stuck in a very choppy trading range. However the market has formed a pennant formation and its nearing the tip of the formation.

This formation would imply a breakout is nearing, but will it be to the upside or downside? In the past few weeks, our signals have been mixed, thus showing their is confusion in the markets. We do have some longer term overbought signals and short term signals calling for a bottom nearing.

As the world appeared to be melting down in February and early March, a behavioral perspective would indicate almost any kind of good news became great news. Now that the economy is starting to show some stability, more solid news is needed to prove we are moving forward. As we noted in an earlier comment, confusion has been the name of the game as we have been getting better than expected and less than expected reports. This past week has been no exception to the choppy action. For instance today at 8:30 am, the Q1 GDP preliminary number was released and it showed a better number than was originally released, but not as good as expected. Original report was -6.1%, Market expected -5.5% today and it was reported at --5.7%. The GDP deflator reported 2.8% and near expectation of 2.9%. At 9:45 am the the Chicago Purchasing Manager's Index was released with an expectation of 41 and it was reported at 34.1. At 9:55 am Michigan Consumer Sentiment index was reported better than expected at 68.7. The market expected 67.9. So what's a trader to do?

From a technical aspect, it would actually be healthy to see the market break to the downside to about 7,700 with a first level of support around 8,000. The market would do its consolidation thing, cleanse itself and then make a move towards 9,000 if more stronger economic reports are released.

Keep that seat belt on, more turbulence may be ahead before we land.

The month of May started off as continuation of the rally that bottomed on 3/6/09. However, as the rally became tired and showed more signs of oversold, its taken on the personality of a yo yo or as some would say, a drunkard's walk.

The equity markets have been stuck in a trading range and each time it appeared to break out either up or down, then it would turn around and go the other direction. For the last several weeks, we have talked about a possible consolidation. And that the news maybe a combination of good and bad thus causing confusion in the market. It appears the market is now seeking news that is more solid of the economy turning around.

The trading range is a definite part of the consolidation process. This is normal after a market moves by a large percentage as we we witnessed in March and April. But the real question still remains; will we take out the recent lows of this month or be caught in a roughly 400 point trading range in the DJs.

The DJs (basis the June futures contract) has support in the 8200 to 8150 area. If this is broken the next level of support is found in the 8000 to 7910 area. If the market continues to sell off we could see it test the 7720 to 7660 level.

The S&P 500 (basis the June futures contract) has support in the 890 to 880 level. If broken, the next level of support is 873 to 867. If the market does continue to fall we could see it test the 840 to 820 level.

You better tighten that seatbelt over the next few weeks.

Due to the Memorial day holiday, the Crop Progress report was released today. Once again, the report suggests a bullish sign for soybeans and spring wheat. Corn continues to get closer to its 5 year average. This can be seen as corn has recently been caught in a 12 cent rally, while wheat and soybeans (especially soybeans) continues to rally.

Corn:
82% planted
62% last week
86% last yr
93% 5 yr average

The largest delays for corn are found in IL and IN:
IL- 62% Planted, 96% 5 yr average
IN - 55% Planted, 89% 5 yr average

Soybeans:
48% planted
25% last week
49% last yr
65% 5 yr average

The largest delays for soybeans are found in IL, IN, KY and ND:
IL- 12% Planted, 69% 5 yr average
IN - 25% Planted, 64% 5 yr average
KY - 13% Planted, 43% 5 yr average
ND - 27% Planted, 67% 5yr average

Spring Wheat:
79% planted
50% last week
97% last year
95% 5 yr average

The largest delays for wheat are found in MN and ND:
MN - 71% Planted, 96% 5 yr average
ND - 69% Planted, 94% 5 yr average

Oats:
95% planted
88% last week
97% last week
98% 5 yr average

Today the April Housing Starts report and Housing Permits report were released at 8:30 am (EST). On first view of the headline news, it appeared relatively negative as the market was seeking an increase in both reports. Instead both reports announced negative statistics and actually reached record levels of the last 50 years of data.

The construction of homes and apartments fell by 12.8% in April to a seasonally adjusted rate of 458,000. However when looking at the various components of the report, it showed that while apartment and condo (multi-family) construction was down, the construction of single family homes actually increased 2.8% or 368,000

The Housing Permit report showed applications for new housing dropped to 3.3% or 494,000. Once again single family housing actually reported an increase of applications to 3.6% to 373,000.

Keep in mind the multi-family reports tend to be volatile from month to month. When you parse the data, it may be showing one more data point of a stabilizing economy.

After the markets closed today, the USDA released their latest Crop Progress Report for planting. As this planting season has been hit with a lot of rain, the farmers have found it difficult to plant for this season in a timely manner. The below stats are still showing bullish figures for the grain markets. Although corn seems to be getting closer to where it should be at this time of year. Soybeans and wheat are still far from where they need to be. If overseas demand should increase and planting doesn't near the usual percentage, we could see much higher grain prices later in the year.  Stay tuned.

Corn:
62% planted
48% last week
70% last yr
85% 5 yr average

Soybeans:
25% planted
14% last week
25% last yr
44% 5 yr average

Spring Wheat:
50% planted
35% last week
92% last year
90% 5 yr average

Oats:
88% planted
80% last week
92% last week
95% 5 yr average

On 4/29/09 we received a buy signal in the Canadian $ (CD) futures contract (basis the June contract). From our signal the market rallied about 400 points to its high on 5/11/09. As a commodity related currency, its not a surprise to see it bottom in early March and then rally along with many commodities.

On 3/9/09 the market bottomed at 76.66 and found a recent high on 5/11/09 at 87.17, a 13.7% rally.  During this two month period we had a few signals to go long.

On 5/13/09 we received a sell signal in the CD. Whether this is a short term consolidation or something longer in term will depend on exterior components such as the move in commodities. The end of last week witnessed some consolidation in the energy and grain markets.

There is support in the 85.60 to 85.00. If this level is broken, the next level of support is 83.50. We do see a major resistance in the 90.00 to 95.00.

On 5/10/09 we noted the equity markets may be nearing a short-term top as our pricing models were converging between 8300 and 8700 in the DJ June contract. On 5/7/09 the market made a top and since has given back about 300 points as of this writing.

Today's retail report was a definite negative surprise. This is adding to the fact that the stocks were overbought and we may see more of a mix of reports that could confuse the markets in the short term. This would take us back to earlier this year of a feeling of uncertainty. In times of uncertainty the market sells off or at least moves sideways.

In the short term there is support in the 8250 to 8100. If it breaks this range, the next level of support would be 7975 to 7852.

We maybe within a day or two of a short signal.

Since reaching the lows on 3/6/09 to the high on 5/7/09, the equity markets have rallied (basis DJ June futures contract) almost 34%. Not too shabby for a two month rally. On a technical basis, we are beginning to see some indicators showing overbought in conjunction with several of our pricing ranges converging between 8300 and 8700.

Fundamentally, the economic news since March has continued to show either less negative rates of change or some positive improvements. The April Unemployment report, released on 5/8/09, demonstrated a mixed picture of the economic situation. The Bureau of Labor Statistics reported unemployement increasing to 8.9% from 8.5% and a less than expected number of job losses for April. But the underemployment rate increased from 15.6% to 15.8%. (We will be discussing the underemployment rate in a future commentary). The March figures of job losses were revised upward to 699,000.

The economic reports do not imply  the economy is necessarily recovering, but it may imply we are at least beginning to bottom. Stabilizing may be considered one of the "12 steps" of recovery. Last fall may be considered a step towards recovery when the Fed and the Treasury were no longer in denial of the decaying credit market situation. To a certain degree one could compare the recovery of our economy to the recovery of an addict, as the economy was addicted to leverage, debt and speculation.

If the DJ contract continues its rally, the next level of resistance is 8570 ( the recent high of 5/7/09) to 8670. Beyond that we are looking at 8900 to 9100 as major resistance level. We do have pricing in the 9600 to10300 area. However, we believe some consolidation will need to occur before the market will reach those prices and there will need to be more confirmation of the economy recovering. If the market begins its consolidation, initial support is found in the 8470 to 8380 range. If this level is broken, the next major support is 8270 to 8100. Very strong major support can be found in the 7800 to 7500. A major consolidation should find a bottom in this level. It was only a few short weeks ago that we were in the 7500 to 7800 range.

The S&P 500 (basis June contract) also made its recent high on 5/7/09. If the market continues the rally, 945 to 986 would be the next resistance level.There is support in the 919 to 912 level. If this is broken our next level of support is 891 to 871. If a major consolidation occurs, the 800 to 825 level should be the bottoming range.

Keep in mind, on Thursday the equity markets sold off prior to the announcement of the stress test results, although a lot of the information was already leaked out prior, so it wasn't that much of a surprise when the news was released and the market rallied a bit on the news. And it slowly moved higher overnight and into the morning hours just before the jobs report was released. Once the jobs information was released, the market was in a trading range until the last hour of trading. Could the consolidation have already started on 5/7/09?

Since first writing about the S-ratio in the paper "Skewing Your Diversification", we have received a number of questions on this ratio. Many have agreed that its an interesting way to look at volatility and skewness simultaneously. Very soon, we will be writing more on this topic to give a better understanding about the ratio. In the meantime, you can read about this ratio in the paper "Skewing Your Diversification".

Unlike Modern Portfolio Theory that assumes normal distribution. This ratio does not make that assumption.

From the USDA planting progress report of 4/27/09, the data showed that many of the markets are lagging behind the 5 year average of planting progress. Weather has also played a part in the market's recent rally. With the heavy rains in recent weeks, its been difficult for farmers to plant. If heavy rains continue after planting has occurred, than there is risk for flooding the fields. This could support higher prices of the grain markets even if the global economy remains negative to flat. The bullish bet on grains is for the planting progress to still be below the averages. The next USDA report will show if this is true or not.

On 4/28/09 we noted that if July corn should break above the $3.95 level we could be witnessing the next upward leg of pricing. On 4/29/09 we received a buy signal for the market.  On 5/1/09 July corn hit a high of $4.1575. There is resistance in the $4.13 to $4.19 area. If this range is broken, we would be testing the $4.30 to $4.35 as the next major resistance level. On the downside the next support level is $4.04 to $3.98.

Soybeans (basis July) received a buy signal on 5/1/09. The next major resistance area is $11.25 to $11.35. On the downside there is support in the $11.02 to $10.97. If the market falls below this range the next major support level is $10.70 to $10.40 range.

On 5/1/09 wheat (basis July) received a new buy signal. The next major resistance level is $5.92 to $6.05. If the market continues to rally, a very strong resistance level is $6.29 to $6.54. On the downside there is support in the $5.50 to $5.30 range.