THIS RALLY'S OVER AND HERE'S WHY

UPDATE: August Unemployment = 6.1%. Five-year high from 5.7%.


Yesterday, the markets dropped 3% on heavy volume signaling a major one-day reversal, and a break in the nice, comfortable rally we’ve had since mid-July. Investors and traders should not try to hope for anything this time. I’ve been calling for the rally to end since I wrote An Investor’s Guide to Bear Markets (Link here: http://seekingalpha.com/article/93065-an-investor-s-guide-to-bear-markets).

The Economic Picture

Unemployment/ Initial Jobless Claims

The U.S. Department of Labor reported yesterday (Link here: http://www.dol.gov/opa/media/press/eta/ui/current.htm) that initial jobless claims rose to 444,000, up 15,000 from and expected drop to 420,000, a 6% difference from the estimate and a 5% difference from a reported 429,000 reported last week. The four-week MA for initial jobless claims fell to 438,000 from 441,250, down 3,250 from last week. Initial claims were at 320,000 a year ago. Currently, unemployment is at 5.7% and the unemployment rate should be over 6% by the holiday season this year and economists need to adjust their guestimates to accommodate the increasing deterioration in employment.

The Labor Department is releasing their Employment Situation Report this morning (8:30AM EST) and here are their expectations:

• Non-farm payrolls: -75,000
• Unemployment Rate: 5.8%

Last month indicated the seventh consecutive drop in non-farm payrolls. The declines were lead by the construction (no surprise) and manufacturing industry with a total of 57,000 losses. The service industry is typically the last to fall in a recession, and that happened in July, down 5,000.

No other indicator can reveal the true state of the economy or move the markets more than the employment data on the labor market. The data is key because employers are not only showing what their current expectations are for the economy, but also their view of the future. The numbers are getting worse and the future doesn’t look too bright.

A Very Little Known Indicator: The ISM Non-Manufacturing Employment Diffusion Index

Don’t even think for a second that the ISM Non-Manufacturing Employment Diffusion Index is the “holy grail” of economic indicators. It’s not, but it’s pretty close. The index is created by survey responses as to whether corporations intend to add or cut jobs. A number above 50 represents that more than 50% of institutions intend to add jobs, and conversely, a number below 50 represents intentions to cut additional jobs. Historical data indicates that recessions began pretty close to when the number declined below 50.

This is different from the ISM Non-Manufacturing Survey that was reported yesterday with a reading of 50.6 because I only took the employment index and not business activity, new orders, or supplier deliveries. The number for the entire survey increased from 49.5%, but like I mentioned, no other indicator is more important than the employment situation.

This should tell you where we are at and where we are heading. This party isn’t over yet.

Retail Chain Store/Same Store Sales

August chain store sales rose 1.7% in August vs. a year ago, no doubt hurt by continued non-essential consumer spending. July sales increased 2.6% vs. a year ago. June sales increased 2.7% and May sales increased 3%. This trend in slower growth should continue.

Same-store sales dropped 8.3% and analysts expected a drop of 1.7%, a huge difference. Sales fell to $119.8 million from $123.5 million.

ADP Employment Report

The ADP Employment Report didn’t look too good either. The change in August was -33,000 vs. an estimate of -30,000. Large companies (500+ employees) cut 28,000 jobs, medium companies cut 25,000 jobs. This was offset by a 20,000 increase from small companies. I expect the trend to continue down.

The Technical Picture

Excerpt from my article An Investors Guide to Bear Markets (Link here: http://seekingalpha.com/article/93065-an-investor-s-guide-to-bear-markets):

In the early stage of a decline, the volume is pretty light. The professionals and the “smart” money are selling, while the public are still asleep. In the second phase, the big money is still selling, and the public starts to unload, but not entirely. The heavy volume that’s present at the third stage is due to a selling climax as now the mass of retail investors are dumping everything that they own creating heavy volume. In the fourth stage, there’s a reaction due to short covering and professional buying, however, the retail investors are still not finished selling, even at the beginning of a rally. Price tends to follow volume, and volume confirms price action.

Volume has gotten weaker and weaker since the rally started in July. Notice how the volume for each of the major indices tapered off considerably in the past three weeks:

Obviously, the volume has never confirmed price action and you’re getting this all too familiar pattern where the volume drops on the rallies and increase on the drops. Two weeks ago, volume for the up days dominated the volume on the down days. The lack of institutional demand is causing this ship to sink, and it’s going to get worse. We have now started the third primary leg of this bear market and the drop will come quicker than the previous drops.

The rally that we saw here is only a secondary reaction, a counter-trend move and not the new paradigm to a new bull market. Here’s another excerpt on primary legs and secondary reactions:

“Every bear market has always been made up of 2 or more major downward swings, or primary legs down, and at least 1 secondary reaction between 2 legs. The purpose of the secondary reaction is to correct oversold levels and to reduce speculative activity brought on by new investors. The problem with identifying when a secondary reaction begins is that a primary leg may or may not end on high volume, therefore as with trying to find a bear market bottom, identifying the start of a rally may be difficult. However, when capitulatory volume is present and the market has made a near vertical parabolic move down, then it may signal that the primary leg has ended.”

“The secondary reactions in most cases take lesser time and may swing with more volatility than the primary leg itself. We are currently in a secondary reaction due to the fact that the price is divergent with volume. As volume declines further, we should see a reversal. Afterwards, we should again see heavy volume resume on the down days.”

“A secondary reaction ends as bullish sentiment starts to wane. First, people don’t believe that the rally is ending, but slowly and surely, more and more people start to believe. Once the majority changes their opinions, the next primary downward swing is underway.”

“The rallies may end at the 50% retracement level, as most people like to believe, however, that’s not true in most cases. These reactions can be as little as 10% or 99.9%, and as history has shown me is that only 7% of reactions end at the 40-55% level. 27% retrace 55-70%, 8% retrace 70-85%, and 14% of secondary reactions retrace past the 85% level.”

Notice how the indices churned at the moving averages. The DJIA and S&P 500 have made four rally attempts at the 50-day MA and the NASDAQ failed the 200-day MA as it did in May and June. My short guidelines for any stock is to short anything that has churned at a major moving average three times or more. After three rally attempts, the chances for a move higher are very slim.

Given continued deterioration in economic data, especially the employment picture, as well as the technical breakdown in the major indices, it’s safe to conclude that the market is heading lower.

Today’s Employment Situation report (8:30AM EST) will paint a clearer picture of where we are going forward.

FUNDAMENTAL FEATURE - Hovnanian (HOV)

Hovnanian Reports 8th Consecutive Loss Since April 2006

On Wednesday, September 3 after-hours, Hovnanian Enterprises (HOV) reported a Q3 ’08 loss of $2.67 per share or $202.5 million on $716.5 million in revenue vs. a loss of $1.27 per share or $80.5 million on $1.1 billion in revenue a year ago. Excluding pre-tax land charges of $11.7 million, the loss would amount to $87.7 million. Analysts were expecting a loss of $1.57 per share on $703 million in revenue. Shares were down $0.65 or 8.4% to $7.10 in after-hours trading and should gap down today.

Home deliveries declined 31% to 2,185 homes vs. 3,179 a year ago. The number of net contracts declined 38% to 1,584 homes. The cancellation rate declined to 32% vs. 35% a year ago. Contract backlogs ended at with a sales value of $1 billion totaled to 2,976. At the end of July 31, HOV operated in 354 communities. At the end of April 20, HOV operated in 379 communities, and in fiscal 2007, 431 communities in 47 markets in 19 states.

HOV generated cash flow of $192.2 million and CEO Ari Hovnanian expects to end the fiscal year with $800 million in cash. HOV also received a federal tax refund of $94.7 million in July. As of July 31, homebuilding cash was at $677.2 million.

Management cited that the law that President Bush signed on July 30 providing up to a $7,500 income tax credit to first-time home buyers should help increase demand. Buyers must close on their purchase before July 1, 2009. The Senate Finance Committee estimated that 1.6 million people will use the credit for qualified individuals who earn less than $75,000 and couples who earn up to $150,000.

The problem that I see is, compared to housing tax credits in the past, this one must be repaid. The tax credit passed by Congress in 1975 of $2,000 did not have to be repaid. The loan must be paid back within two years, at no more than $500 for 15 years. The homebuyers using the credit are expected to save the money, rather than spend it as a down payment for a new Mercedes-Benz.

The outlook for the major homebuilders is neutral to negative. The outlook is dependent on the demand for new and luxury homes and economic data on mortgage rate increases, further deterioration in credit, a further increase in foreclosures, higher unemployment. Since 2006, the top 13 homebuilders wrote off more than $25.2 billion in land, options, goodwill and JV investments. During the 2009 calendar year, I expect to see the homebuilders stabilize their businesses as cancellations and write-offs decline.

However, the homebuilding industry has been consolidating since 2006 and many smaller builders have left the marketplace, bankrupt. Looking forward, the major homebuilders are and will continue to be in the best position over their smaller and non-public competitors.

Currently, 10 firms publish recommendations on HOV with 6 “Hold” ratings and 4 “Sell” ratings. Current revised or reiterated ratings have not been issued by the 10 firms as of this writing, so expect them to come in the next few days.

Shares have declined ever since HOV hit its high on 7/20/2005 at $73.40. Shares now sit at 2002 levels when the housing market began to pick up. For the long-term, HOV is a buy for investors who wish to hold for at least two years. HOV appears to have stabilized and is forming a multi-month/year rounded-out bottom. For the short and intermediate-term, HOV will most likely trade in a neutral-range for many months to come.

Hedge Fund Blow Up Letters to Investors: Where are the Apologies?

Yesterday’s closing of Ospraie Management LLC’s Ospraie Fund Ltd. prompted me to open up my collection of investors letters from numerous hedge funds that blew up. If you want all the letters, I’ll be happy to share.

Ospraie Management LLC letter to investors (9/2/2008):

“The losses were primarily cause by a substantial sell-off in a number of energy, mining, and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years. As the Fund’s performance deteriorated, we made the decision – despite continued confidence in the Fund’s positions – to reduce and de-lever the portfolio significantly due to concern of incurring even greater potential losses.”

“After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.”

This is one of the very few letters that contains the word “sorry” in it.

Insana Capital Partners Legends Fund L.P. letter to investors (8/8/2008):

“Over the past 14 months, Insana Capital Partners Legends Fund L.P. (“Partnership”) has faced stiff economic conditions amid an historical, and global, financial market dislocation. Despite the challenging environment, the Partnership has lost approximately 5% of its value, while the S&P 500 declined 20% from its most recent peak to its most recent trough.”

Why is the fund comparing the S&P 500 return from its peak in October to the funds performance since July 2007? This is very misleading since the time periods do not match up. The S&P 500 closed at 1,455.27 on 7/31/2007 and the S&P 500 peak occurred on 10/11/2007 at 1,576.09. If the period between 7/31/2007 and 7/31/2008 (1,267.38) were compared, the S&P 500 would have been down 12.9%. The fund still beat the index, but it was grossly overstated at 20%.

“Due to lock ups and withdraw terms of the underlying funds, liquidation is expected to take a substantial amount of time, likely to be a year or longer. Given these circumstances, we are suspending subscriptions and withdraw from the Partnership, effective immediately.”

What subscriptions? Like people are going to be throwing money at the fund. Liquidation taking over a year? No thanks. Now that’s called dead money. I’m sure investors are hurling insults right now.

Oh, and no mention of the word “sorry” or “apologize” but an “It has been an honor to do business with all of you over the last 14 months” statement.

Remember Sowood Capital Management? They sent a letter to investors of the Sowood Alpha Funds (7/27/2007):

“In light of tightening market conditions particularly in the past week, we felt it was prudent to increase liquidity and reduce levels of risk in out portfolio. We continue to meet all of our margin requirements and all of our obligations to counterparties”.

Talk about an incomplete letter: the AF Ltd. fund lost 57% in July and 56% YTD (2007) and the AF LP fund lost 53% in July and 51% YTD (2007).

3 days later (!!!) Sowood announced that they’re closing shop and calling it “a painful and difficult decision to sell substantially all the fund’s portfolio to Citadel Investment Group” in a follow-up letter dated 7/30/2007. This was contrary to the previous letter, but...

Jeff Larson said sorry! “We are very sorry that this happened”. Give him some credit.

We can’t forget Bear Sterns (BSC) former Chairman Jimmy Cayne’s letter to investors of the BS High-Grade Structured Credit Strategies and the BS Enhanced Leverage Fund (7/17/2007):

“Fund managers and account executives have been informing the Funds’ investors of the significant deterioration in performance for May and June. The preliminary estimates show that there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007”.

What investor would stay with a fund that literally lost all of their money? Couldn’t tell them sooner? I see, you didn’t want to scare them. Great stewardship, Mr. Cayne.

“In light of these returns, we intend to seek an orderly wind-down of the Funds over time”.

Wait, what returns? Didn’t you just say that there’s little and no value in these funds?

“I have enormous confidence in BSAM and the ability of our talented professionals to bring you the highest quality products and services now and in the future. You can count on us to deliver”.

Blatant lying, well-documented. Was there a “Sorry” or an apology? Nope.

Sailfish Capital Partners is another liar based on letter to investors (2/27/2008):

“Therefore, based on the above-mentioned market conditions, cumulative redemption requests and overall fund performance, Sailfish Capital Partners…has determined the normal operations of the fund is no longer in the best interest of the fund's shareholders.”

Wait a minute. On 1/18/2008 (one month before the blow up), Sailfish’s Mark Fishman mentioned that the firm never had troubles with their prime brokers like Sowood or Bear Sterns did and that “this is by far not a blowup.”

Way to go, Mark. Don’t even bother apologizing now.

Let’s take a look at Amaranth LLC’s letter to investors (1/9/2007):

This particular letter was straight to the point, itemizing each area of the remaining business (at that time). The itemized list was so boring, I had to skip to the last paragraph.

“We anticipate another round of significant mandatory redemptions/withdraws during the first quarter, after which there will be a small remaining capital balance in your General Account, and for participating investors, the DIs”.

Thanks for the crumbs, but no “sorry”? None. Do these managers know how to apologize, or are they so full of themselves?

Next up, Archeus Capital Management LLC’s letter to investors (10/30/2006):

The first three paragraphs were standard “fluff”, but the next paragraph reads: “However, one obstacle we have not been able to overcome has been the negative sentiment which has snowballed as a result of our third-party administrator’s failure to properly maintain the books and records of our funds. This failure, and their subsequent inability to property re-reconcile the funds’ records, led to a series of investor withdraws from which we have not been able to recover”.

Let’s blame everyone but ourselves! Don’t funds keep records too? Too much golfing, fine dining at the Masa, and 5th Ave shopping, I bet. I wonder why the administrator wasn’t fired when problems first arose?

No “sorry”, but two paragraphs worth of “thank you this and thank you that”

The absolute worst was Sam Israel’s Bayou Fund. He sent out three separate letters dated 7/27/2005, 7/29/2005, and 8/11/2005.

The first letter: “It is with great regret, but with an overriding sense of pride and accomplishment in a job well done to the best of our abilities, that I announce the closing of the Bayou Family of Funds at the end of July 2005”. (What the!!!)

“What has become very clear to me during this time is that the years when your children are growing from young dependent children into independent adults are extremely fleeting and precious. Therefore, it is my intention to spend some time relaxing and enjoying my children and focusing on rebuilding my personal life”.

That’s really sick. I bet your kids are really proud of you now, Inmate #84430-054.

The second and third letters were too full of it. I won’t be able fit all the lies in this article.

Conclusion

I counted two apologies out of eight. I know that there are enough blow ups to write a 1,000-page book, but it is clear that the vast majority of managers just don’t know how to apologize to their investors after losing billions or take responsibility for the losses (blame the markets, the models, other funds, the broker, the administrator, the world, etc.) After all, aren’t hedge fund managers the stewards of capital? Many of the managers even went as far as to lie to their investors and graciously documenting it on paper.

Current and future hedge fund managers can learn a lesson from all of this: if you screw up, be honest, be quick, take full responsibility, and say “I’m Sorry”.

WEEKLY TECHNICAL COMMENTARY - Sept 2nd-5th

UPDATE: As of 5AM, Crude is down over $9/barrel!!!

HAPPY LABOR DAY!

THIS WEEK’S ISSUE:

• In Play: Hurricane Gustav, Oil / Natural Gas, Gulf of Mexico Operations, Airlines
• Market Commentary: DJIA, NASDAQ, S&P 500, CBOE VIX
• Currencies: USD, EUR
• Commodities: Gold, Silver, Industrial Metals, Agricultural, Livestock
• After Earnings Review: COCO, BWS, MW, PETM, DLM, FLE
• This Week’s Watch: Economic Reports & Notable Earnings Releases

IN PLAY: HURRICANE GUSTAV, OIL / NATURAL GAS, GULF OF MEXICO OPERATIONS, AIRLINES

After reaching wind speeds of 150 mph and getting bumped up to Category 4, Gustav has weakened considerably and is now a tropical storm. This is good news to the people of New Orleans and they are spared the fate that Hurricane Katrina brought 3 years ago. Traders discounted the potential damage of the storm by selling off oil and natural gas throughout Monday.

As of 11PM (9/1) – Oil fell $4.29 to $111.17 and natural gas fell $0.393 to $7.550.

Oil prices rose ahead of the impact in the Gulf of Mexico and on August 27, oil and gas companies implemented shut-in procedures and evacuated personnel from platforms. By August 30, 76.77% of oil production and 37.16% of natural gas production had ceased. By August 31, 96% of oil production ceased.

The following public companies have oil & gas/drilling/shipping operations in the Gulf of Mexico: Nabors Industries Inc. (NBR), Chevron Corp. (CVX), BP Plc. (BP), Marathon Oil Corp. (MRO), Exxon Mobil Corp. (XOM), ConocoPhillips (COP), Anadarko Petroleum Corp. (APC), Apache Corp. (APA), Diamond Offshore Drilling Inc. (DO), Ensco International Inc. (ESV), Helmerich & Payne Inc. (HP), Hercules Offshore Inc. (HERO), Parker Drilling Co. (PKD), Noble Corp. (NE), Pride International Inc. (PDE), Rowan Companies Inc. (RDC), Transocean Inc. (RIG), among others.

Possible refinery shut-ins and estimated barrels of production cut:

• Cupet Nico Lopez Refinery (122,000)
• Calumet Shreveport. LLC Refinery (35,000)
• Valero Saint Charles Refinery (185,000)
• Valero Refining Co. Krotz Springs Refinery (80,000)
• Shell Chem LP Saint Rose Refinery (55,000)
• Placid Refining Co. Port Allen Refinery (48,000)
• Murphy Oil U.S.A. Inc Meraux Refinery (120,000)
• Motiva Enterprises LLC Norco Refinery (226,000)
• Motiva Enterprises LLC Convent Refinery (235,000)
• Marathon Ashland Petroleum LLC Garyville Refinery (245,000)
• ExxonMobil Baton Rouge Refinery (493,000)
• ConocoPhillips Belle Chasse Refinery (247,000)
• Chalmette Refining LLC Refinery (187,000)
• Total Production: 2,278,000 barrels+ (and counting)

The USO and the UNG will gap down tomorrow as traders continue to sell of the energy sector. The USO will test the 200-day MA support. The UNG, having broken the 200-day MA in mid-July, will resume its downtrend. Investors and traders looking to short oil and natural gas may choose the Ultrashort Oil & Gas ProShares (DUG) as an option.

The airlines should see a major spike as oil sells off. Airlines to watch: AMR Corp. (AMR), Delta Airlines (DAL), Continental Airlines (CAL), UAL Corp. (UAUA), US Airways Group Inc. (LCC), Southwest Airlines (LUV), JetBlue Airways Corp. (JBLU), Alaska Air Group (ALK), AirTran Holdings Inc. (AAI), Hawaiian Holdings Inc. (HA), among others.

Watch for Hurricane Hanna in the Caribbean heading towards Florida, one storm developing near the Leeward Islands, Tropical Storm Ike heading towards the Caribbean, and one storm near the Cape Verde Islands off Africa.

MARKET COMMENTARY -- INDU 11,628.06, COMP 2,414.71, SPX 1,292.20, RUT 737.60, VIX 20.65

The major indices continue to move in a secondary reaction rally. The major difference is that the volume for last week is weaker than the past three weeks’ volume. The drop off in volume can be attributed to the pre-Labor Day holiday, however, the drop off started weeks ago near the beginning of the rally. With a drop in oil prices, the market should be able to maintain their upward direction for the very short-term, while continually displaying signs of weakness in volume. A reversal is not out of question this week.

The Dow ($INDU) and the S&P 500 ($SPX) are forming ascending triangles and may be able to breakout due to the large decline in oil. Their rallies are still weak as volume continues to become more and more unimpressive. If a breakout on low volume occurs, investors and traders should see that as a warning sign. Any breakdowns from this point in the Dow and the S&P 500 will most likely indicate that the rally has ended as both indices are on their 4^th rally attempt at the 50-day MA. The NASDAQ ($COMP) has pulled back and is currently consolidating around the 2360 – 2415 area. A break below 2325 is considered a sell signal.

The Relative Strength Index (RSI) has leveled off for the Dow and the S&P 500 and is declining for the NASDAQ. This divergence, along with the price-volume divergence, is a clear indicator that the rally is weakening from previous weeks. The fundamentals in the economy remain virtually unchanged and this week’s economic reports (on page 8) should be highly noted for any surprises.

The CBOE Volatility Index ($VIX) remains in a downtrend and looks likely to continue as the drop in oil prices will rally the markets for the very short-term.

CURRENCIES: US DOLLAR & EURO

I want to use this issue to focus not on a daily short-term chart of the USD or the EUR, but a weekly, 2-year chart to show the significance of the movement that occurred in the past +/-20 days. The USD formed a perfect double bottom, effectively ending the multi-year downtrend it’s been riding. The sharp rally that we saw is an extremely strong indicator of a reversal in sentiment. Likewise, the EUR showed a reversal in sentiment, forming a perfect double top. The USD broke through 2 key resistance areas and is now clear to resume its uptrend and the EUR broke through 2 key resistance areas, effectively breaking its multi-year uptrend. Both currencies should be able to continue in their respective directions for the short-term.

What helped the USD? For starters, the July US durable goods orders came in at 1.3% vs. an expected 0.1% increase. Existing home sales rose 3.1% to 5 million sales in July vs. an expected 4.9 million sales. However, the average selling price was $212,400 down 7.1% vs. a year ago and the supply of existing homes increased to 11.2 months from 11.1 months. This is both positive and negative news as the US housing continues to wrestle with the glut of supply and a non-improving credit environment. Personal spending in July increased by 0.2% in line with expectations vs. a 0.6% increase a year ago, however personal income fell 0.7% missing expectations of a 0.2% decrease. This and other global macro factors have put the USD in a consolidation zone.

The Top 5 most important indicators for the short-term USD:

• Non-Farm Payrolls
• ISM Non-Manufacturing
• Personal Spending
• CPI
• Existing Home Sales

COMMODITIES: GOLD, SILVER, INDUSTRIAL METALS & LIVESTOCK

As the USD spikes, it is only natural that Gold (IAU) and Silver (SLV) fall in tandem. The entire commodities universe is in a correction or worse, the start of a major downtrend. Technically, IAU and SLV look terribly weak and I have reason to believe that the current rally is only a secondary reaction, a pause, for both commodities to resume their downtrend. Both precious metals face significant multi-month resistance overhead in addition to breaking both the 50-day MA and 200-day MA. It is highly unlikely that gold and silver prices will see their highs in the short to intermediate term.

For the industrial metals ($GYX) and livestock ($GVX), I have used the Goldman Sachs Commodities Index as both are reliable indices in tracking both commodities groups. The industrial metals tracked are aluminum, copper, lead, nickel, and zinc. All commodities are well off their highs. The trend for the industrial metals group continues downward.

The $GVX livestock index includes feeder cattle, live cattle, and lean hogs. Again, live cattle are at their all time highs while feeder cattle may start to correct in the short-term. Lean hogs spiked to 90 and now stands 68.42, within 3 weeks. The livestock index has broken its trend and is likely to be the next group to start a downtrend.

AFTER EARNINGS REVIEW: COCO, BWS, MW, PETM, DLM, FLE

COCO – On Tuesday August 26, before the market open, Corinthian Colleges Inc. (COCO) reported a Q4 loss of $0.01 per share or $620,000 on $274 million in revenue vs. a loss of $0.10 per share or $8.756 million on $231.62 million in revenue a year ago. Excluding charges, COCO would have earned a profit of $0.11 per share. For the full fiscal 2008 year, COCO earned $0.25 per share or $21.3 million on $1.07 billion in revenue. Shares gapped down opening at $15.58 and sold off throughout the day to close at $13.09, down 19.3% on 11.16 million shares.

Technically, COCO formed a large breakaway gap, which in this case signals the beginning of a major downtrend. The gap formed on huge volume and also failed the 50-day MA, and has now become a confirmed short candidate.

BWS – On Wednesday August 27 before the market open, Brown Shoe Co. (BWS) reported Q2 earnings of $0.05 per share or $2.2 million on $569.2 million in revenue vs. $0.22 per share or $9.8 million, a drop of 77.4% compared to a year ago. The results included a $0.15 charge for the relocation of its Famous Footwear unit’s headquarters from Madison, WI to St. Louis, MO (the transition should be completed by the end of Q3). Analysts expected earnings of $0.06 per share on $589.9 million, missing both earnings and revenue targets. Shares dropped around $15 or down 5% in the pre-market, opened at $14.95, and closed at $15.37, down 3.2% on 1.5 million shares (over 2x average daily volume).

Technically, BWS has been trading in a range since the start of this year (8 months). Bullish indicators include: a flattening of the 200-day MA, a rise in the 50-day MA, higher lows and higher highs. There is major long-term support at $12 and major long-term resistance at $17-$18. For the short-term, BWS entered into a short-term trading range and found support at $14 on August 28.

MW – On Wednesday August 27, after-hours, Mens Wearhouse (MW) reported Q2 earnings of $0.63 per share or $32.8 million on $545.3 million in revenue vs. $1 per share or $54.2 million on $569.3 million in revenue a year ago, a drop of 39% in income and a drop of 4.2% in revenue. Excluding a one-time item, MW would have earned $0.72 per share. Analysts expected earnings of $0.70 - $0.71 per share on $553.2 - $554.6 million in revenue. Shares gapped up $1.18, opened at $21.19 and closed at $21.61, up 8%.

Technically, MW formed an area gap. Around 90% of area gaps close within a week. MW still remains close to their long-term lows and has traded in a range of $15 - $26 since the start of 2008. A breakout above $26 is considered bullish and a break down below $15 is considered bearish. MW will likely meet resistance at the 200-day MA and trade in a range bound by both the 200-day MA and the 50-day MA.

PETM – On Thursday, August 28 after-hours, PetSmart Inc. (PETM) reported Q2 earnings of $0.30 per share or $37.2 million on $1.24 billion (up 11%) in revenue vs. $0.35 per share or $47.1 million (down 21%) on $1.12 billion a year ago. Results included a one-time benefit of reductions in insurance, stock option expenses, and timing of rent reimbursement from MMI Holdings. Analysts expected earnings of $0.28 - $0.29 per share on $1.22 billion in revenue, beating both earnings estimates and revenue targets. Shares gapped up to open at $26.15 and rose higher throughout the day to close at $27, up $2.58 or 10.56% on 10.83 million shares traded.

Technically, PETM showed a classic flag set-up for a long position and formed a breakaway gap in the mid-term which can also be construed as a continuation gap in the short-term. A break from the neutral trading range on 4x the average daily volume is a huge positive and PETM is an excellent candidate for a long position. PETM meets resistance at $29, however, major resistance was broken and PETM is highly likely to continue upward.

DLM – On Thursday August 28, before the market open, Del Monte Foods Co. (DLM) reported a Q1 loss of $0.05 per share ($0.04 from continuing operations) or $10.1 million on $726.2 million in revenue vs. earnings of $0.02 or $3.5 million on $626.8 million in revenue a year ago. Revenue increased by 15.9% due to price hikes, volume growth, and new products. Discontinued operations added a $0.01 per share loss to the results. Analysts were expecting a loss of $0.03 per share, missing expectations by $0.01 per share. The stock gapped up and opened at $8.98, sold off throughout the day, and closed at $8.60 on 1.83 million shares, up $0.01 from Wednesday’s close of $8.59.

Technically, DLM is down from its recent high of $12.94 on July 13, 2007 and has been drifting down ever since. In May and June, DLM suffered from large one-day drops, sending the stock in a downward spiral. So far, DLM recovered, but on Thursday, it formed a bearish gap up, which is one of my favorite patterns to short. The likelihood of a decline from this point is extremely high. Anyone that wants to short can hold a position till it reaches the 50-day MA at $8.20. Going long is ill-advised.

FLE – On Thursday, August 28 pre-market, Fleetwood Enterprises Inc. (FLE) reported a loss of $0.42 ($0.41 cont. op) per share or $29.1 million vs. a loss of $0.04 per share or $2.3 million. $0.01 was due to discontinued operations. Revenue fell to $289.9 million from $488.3 million, down 41% vs. a year ago. Analysts expected a loss of $0.18 per share on $346.8 million in revenue, missing expectations more than double.

Technically, FLE is still in a primary downtrend and currently testing the $2 support level. Any break down below $2 warrants a short and a break out above $2.80 would be considered a “cautious” long on a double-bottom. FLE has failed the 50-day numerous times and the MA remains a valid resistance point.

THIS WEEK’S WATCH:

Economic Reports: Tues. (ISM Manufacturing, ISM Prices Paid, Construction Spending), Wed. (Total Vehicle Sales, Weekly Retail Sales, Beige Book, Factory Orders, Weekly MBA Mortgage Applications, Thurs. (Weekly EIA Inventory, ADP Employment Change, Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, ISM Non-Manufacturing, ICSC Chain Store Sales), Fri. (Non-farm Payroll Change, Unemployment Rate, Average Hourly Earnings)

Noteworthy Earnings Reports: Tues. (AVA, DHT, MATK), Wed. (CWST, CASY, PSS, GES, HRB, HOV, ISLE, JOYG, NCS, SAI, SPLS, UNFI), Thurs. (ABM, ADCT, CRMT, BRLI, BTH, CAE, CIEN, COO, FCEA, JOSB, MDZ, MOV, PEC, TTWO, TOL, ULTA, UTIW, WIN), Fri. (NSM, PTI, SCMR)

Full Disclosure: None at this time.