DJIM #24 2011

Although all market noise is about an elongated 6 week SPX decline (8%- peak to trough), what’s even more abysmal is the 6% decline (peak to trough) since June 1 to put the market misery in perspective. That’s 6% in just 8 trading days through June 10 and as noted intraday the market has equalled it’s Feb 18- March decline in terms of SP points at ~1275 (support?). The fall culminated to fresh lows Friday with a ~1.5% loss in every index, a surprise for many participants because no negative market ‘catalytic’ wire was present to account for such action leading into the day.  In reality, it’s not a surprise, if you round up all the factors just discussed again heading into Friday's big losses…(Underlying trends persist..)

• A general ‘strike’ with no dip buyers appearing at any level, technical or not.
• Any intraday rally (again exemplified Friday on Sifi/ Financial speculation) is only a first layer of short covering that gets exhausted with no follow through from buyers stepping in to carry it to more upside.
• Every intraday move faded in the last few hours of the day. We’ve said watch for a good close to possibly change sentiment, well since we’ve had more than a few fade jobs by close.
• ‘No man’s land’ for Bulls because no major eco’ or corporate data (quiet period ), leaving the market vulnerable with nothing to cue off.

Unfortunately, we head into another ‘quiet period’ (only minor eco' data, nothing corporate) week and so the factors above have no end in sight, hence market can go even lower extending the correction. Speculating on a bounce here as many are doing is almost irrelevant as it will likely bow into ‘selling’ within this quiet period without a true 'positive' catalyst. DJIM is only interested in a longer term trend change for Q3/Q4 and this may begin with major eco data and upcoming earnings being the driver, otherwise ‘Sifi noise’ like catalysts will eventually be sold off.  Technically…1279-1249SPX has a plethora of potential buy points (now charts dating back to March 2009/rally trendlines are popping up all over the place), so eventually a decent reversal should originate somewhere in this range, but to chase immediately you be better be certain about eco’ data/earnings ahead. Nibbling is what many will probably do without waiting on Fukishma low within the above range in anticipation of better data ahead.

Still, a few things to watch as potential drivers ahead of June 20 week, a few noted last week..debt ceiling progress, any seemingly minor data coming in better than feared before major PMI's early July and a few more in TSY's bottoming at these levels/ reversing and crude capping intervention.

Shorts provide 'relief'

A relatively quiet weekend left longs with little to reason to step up with conviction and left shorts with little reason to press with conviction. 

Unfortunately, it’s not only the fact we’re dealing with a buyers strike, its also the shorts, who don’t put downward pressure when seemingly they have the upper hand as they did after Friday’s sell off.  If the shorts weren’t worried about upside risks, the market would have capitulated by now instead of just another slow bleed day extending the decline.  Today’s major excitement was a batch of M&A activity (TBL off Shadowlist), just before the open that caused a morning blip higher due to short covering.  This is not one of the catalysts we’ve just outlined and the fact the batch of deals were small <2bln of nature, it definitely wasn’t going to be a game changer.  So, again a little short covering in the morning and the fade job begins. Different day, different time of day occurrence, but still the same market intraday trend we keep discussing.

Interestingly, a big upside risk for shorts is the market nearing SPX1250’s and the fear of another ricochet bounce.  At this point shorts prefer to cover what they have on any sign of a bounce and reload higher ie. SPX1295.  The ingredients are there for an oversized short covering with idle longs and scary wary shorts in the same mindset. The set up argues for a partial recovery/bounce from the consensus masses.

In all, the correction has been investors not waiting to find out if it’s only a ’soft patch’ in economic data, hence, any related surprises (inc.not worse than feared data) should provide a nice lift eventually.

Minor eco' data provides 'relief'

Although, stocks slid off day highs in the last hour, it shouldn’t be characterized as just another ‘fade’ job (profit taking/shorts getting busy) like we’ve become accustomed to lately.  The overall intraday action was consistent/ steady for a long enough time (5-6hrs) to give some hope.  The upside was also broadly ‘cyclical’ based which is usually a good sign.  Still a repeat of last Thursday’s upside move/ Friday sell off was likely on investor’s minds(caution) in the last hour.  All in, rally was essentially ‘oversized’ just from short covering as buyers didn’t really show up, notably in the last hour, but it could be said they have ‘nibbling’ in as noted >1249 zone recently to offset the sluggish finish.   Enough was enough you could say, considering 1292.50 was hit just below ie.example of SPX 1295 noted on shorts wishlist.   In all, it’s probably best market didn’t touch 1295 in one big swoop and closed off high at1287SP.  It gives some room and chance to built/accumulate on today’s action for a chance to blow shorts away waiting for 1295/1300.  Simply, oversized can become even more oversized with doubters (long and shorts) abound to todays rally.

Why the move?...

Quite simple, a few of the catalysts looked for here this weekend were touched today…1) Better than feared  eco’ data, China and US eco and corporate (BBY) and Japan capex survey 2H guide up… 2) TSY selling off / out of safety from under 3% to 3.10 just this week so far, 3) just plain old relief technical bounce... "The ingredients are there for an oversized short covering with idle longs and scary wary shorts in the same mindset. The set up argues for a partial recovery/bounce..."

It’s going to take much more to kick start and resume the long-trend, today was hardly perfect…but at this point the Bulls will take anything…

Big retreat

Greek turbulence spilled into a Wall Street beating with fresh SPX lows being hit.  The market is on a newswire watch and there is not much you can say or do about it in respect to a huge risk off trade in all related asset classes.  The fear headline today was any Greek resolution could be delayed till July 11, which could cause IMF/EU aid payout to be delayed until such day, but what was not widely reported is there is a meeting scheduled for Sunday and a Eurozone finance minister gathering Monday and a leaders summit 23-24 June. Hence, today’s fear could reverse at any minute, but the market jitters will not be soothed until something concrete emerges .   As an add-on, a risk of Greek gov’t collapse which would mean new elections and thus slowdown everything is now on the table.

If the above fears weren’t enough, the market got back to a ‘slowing economy’ due to the negative Empire PMI and Thursday is the Phily #. These are first June #’s. 

All in, essentially these are the same things we’ve been dealing with days, if not months and so the question is how much of this is baked into the 7.5% correction and if today’s VIX climb of 18% suggests capitulation was/ is close.

..moving pieces every hour

Just like yesterday’s lead into the trading day, Friday’s lead is the same as all eyes are on what may materialize over the weekend or even overnight …”.there is a meeting scheduled for Sunday and a Eurozone finance minister gathering Monday and a leaders summit 23-24 June. Hence, today’s fear could reverse at any minute, but the market jitters will not be soothed until something concrete emerges”.   Today’s volatile action is indicative of the market hanging onto any ‘newswire’ hit. If anything the possibility of news over the weekend hampers the shorts drive and the late day bounce off 200MA may continue with a little short covering.  It is hard to see buyers stepping up as uncertainty over meetings this weekend plaques them as well.

A few notable takeaways besides the 200MA SPX push /VIX pop everyone will note was the poor afternoon action in ‘momentum’ names that preceded the bounce.  Besides AAPL $318 low, PCLN, NFLX, TZOO, CMG , China’s SINA, BIDU hitting fresh lows and many other smaller names were bleeding points before being saved by the broad market SPX hit on 200ma. Why this is notable is it may have been another sign of ‘capitulation’, otherwise, it’s a bad omen of another round of liquidation in the future.

DJIM #25 2011

Any ‘ Greek’ market relief given Friday morning quickly dissolved during the last trading day and now weekend headlines have alleviated investors nervousness again.  Rinse and repeat . Firstly and most notably, any package rests with a ‘vote of confidence’ of the PM this week in Greece and that is the overwhelming moving piece (Gov’t collapse or not?). This is a volatile situation for the market and is all that matters to start week. Final vote looks to be Tuesday and market will act upon outcome.

Any hints of bottoming, possible signs of capitulation seen last week is irrelevant until there is clarity on the Greek gov’t. To put this ‘vote of confidence’ into perspective, recall the day of the TARP vote and the volatile reactions.

..real buyers still absent

A negative ‘Greek’ tone over the weekend carried into European bourses down >1% and US open.  Numerous wire hits related to European sovereign issues started to peter out early morning (some positives on Ireland/ Greece /Italy ) and European markets reversed/ Euro rallied and US market followed to day highs by lunch hour.   Simply…that’s all folks!.  Nothing else and nothing more.  Although, wires headlines were positive, there was nothing substantial in respect to Tuesday’s ‘vote’ or anything new and/or significant on bailout package. Market traded sideways once Europe was closed.

All in, the same trends exist  - buyers are not going to work (volume was ‘holiday’ like )and market couldn’t push to day highs by close showing single stocks are still not of interest.   Still, some nibbling is taking place 1279-1249, so a constructive bottoming process continues seemingly.

It seems there is always something curtailing a broad sector move, today it was tech (SOX) related as far as important leadership sectors go.  DJIM’s 20% +EPS growth retail plays ( LULU, UA, FOSL>4-5%) were outperformers.

If market gets through Greek ‘vote’ safely (optimisim grew today/ PM securing support), focus hopefully will turn to FOMC /Bernanke press conference and afterwards a kick off to some earnings (FDX, ORCL types) to monitor corporate America for a change.

now the hard part....

Finally…a bid prevailed throughout the day on the market as players decided to have some hope for a day, but now the hard part...holding it!

 …” If market gets through Greek ‘vote’ safely (optimism grew today/ PM securing support)… As noted this weekend, “market will act upon outcome".   Clearly, the market players grasped the ‘vote’ outcome by the positive morning headlines and proceeded to ‘risk on’ into the 5pm event with a rally.  Market as always anticipates and doesn’t wait for the inevitable to make its move.  As traders we just need to know what a likely catalyst for any move might be, instead of being surprised when a move does occur.

So…what’s the next hurdle to coming out of Europe??. Surely a fresh one will be on the agenda shortly after the Greek PM /gov’t survived.  In other words, we’re hardly out of the woods.

As far as the actual trading environment….it was just yesterday we complained it’s always something (sector) that keeps a broad rally away.  Well, today...a rally ensued because all the right cyclical groups were moving in tandem…tech, materials etc. and that is the best market takeaway along with high beta/ momo / small caps types leading the trade. 

Wednesday trade is quite critical because the last 2 (1-day rallies) have been wiped out completely the following day and this definitely kept some fresh buying away by market closing time.  We’ll see if the ‘broad’ rally is a truly a positive bias indicator as it should be.  Bernanke’s press conference late afternoon should soothe the market some more and market can use this and today’s action into Q end.  The fact it’s Q end with a holiday weekend coming up should keep the market from faltering till June PMI’s/ corporate earnings start deciding market’s fate.

..frustration continues

“ Now the hard part...” , of holding a sizable SPX gain literally failed for a third time in recent trading as the market gave up half of previous day’s lead just in the last hour or so.  It wasn’t as bad(yet) as the previous rally day wipe outs, but still it was disappointing as buyers weren’t willing up to the show up with any long conviction after Bernanke said nothing to soothe market jitters on the economy.  What’s actually even more disappointing than the last hour was the fact the market flat-lined all morning off an important and solid overall report from FDX  considering everyone is waiting on corporate America’s reports.  This FDX report is probably the best earnings indicator market will get on the economy till earnings really kick off in a mid- July, the fact market couldn’t add any momentum to the rally off the report was likely a tale sign for end of day. 

All in, yesterday’s hesitation here coming into the day played out and we could be back to square one shortly. Upside room is clearly limited for now as many underlying trends recently noted still prevail. Longs lose recent 4 day control with a close below 1280.

comedy series..

Due to a slew of headlines bringing on volatility, we probably just witnessed a day of short covering like not seen in ages.  Long only investors continued to watch from sidelines, while fast traders/ shorts acted as if they missed their schizophrenia meds for the day.

Firstly, shorts were covering to take profits on the way down to 200ma off IEA news …secondly, shorts were covering in a wild scramble to stop losses on the way up off ‘Greek austerity’ news.   In all, a whole lot of intraday ranting and raving that was highly undeserved as longs stay clear and/or nibble on dips.  Reasons are the only action was really in the ES/SPY- ETF’s, individual stocks were really not involved as they held tight ranges throughout the volatility , even single commodity linked stocks off our list held in well off initial IEA shock.

Also, intraday volatility likely just made a market comeback as the main headlines ie. IEA effects may end up being insufficient to spur growth, but is still a ‘relief’ to the consumer while ‘Austerity’ news should’ve been considered a non-event because we’ve seen this song and dance before.  In reality what should have occurred is for market to rally off crude intervention with rotation into consumer stocks and probably shrug off austerity consent news in the afternoon.  In this view, flash PMI’s and robust May end earnings (FDX BBBY RHT ), emerging markets action were completely overshadowed today/week, we’ll discuss the mostly positives (even seemingly weak China’s # is an ‘inflation’ positive) this weekend as this is what really should matter today and for the short term to investors.

All in, all that matters is market held 1280 at the close, hence, market can still use Q end/holiday week ahead to its advantage as discussed over last 2 Journals in respect to these items.