The index may show that we pulled back some after yesterday's big rally, but as we said a pullback would be healthy, mostly to digest the previous days surge. The truth is, other than a couple of big techs, most of the stocks we care about all ended in green (mostly commodity equity) as the $USD got whipped again. In fact, SPX started below 900 and fought its way higher through out most of the day, until literally, the last few minutes. This is actually just fine with us as we held 900 SPX cash / 50MA. Call this support now, therefore watch for sellers and profit takers if breached.
The big tell, once again, came off the earning reaction from Morgan Stanley. Based on its number, you'd think the stock should trade down to ten bucks. But, of course with the example from GS from previous day, MS had to rally from negative territory and shake off its early weakness and end in positive territory based on our remarks about 'going forward' before GS earnings. This is exactly what seems to be happening. If you have been buying in the financial area the past 2 days, you cannot fault yourself for cashing out some (as the 50% decline is being filled we noted as a possibility before earnings of the brokers). Even though the trade/setup calls for higher prices, it's never wrong to take profit in a bear market. As far as Insurers go, there is a SP ratings change coming tomorrow morning and we'd be keep a closer eye on a play like HIG, which may be affected in either direction.
The trend these days is definitely looking higher, but we need a further push here soon. We aren't sure what may the ultimate resistance for this particular run and we can only use previous resistance area as a gauge to plan our trades accordingly. We basically have 9200 to 9400 Dow and 918+ to 950 SPX as the next area of resistance. Right now, last weeks high of 918+ got walled today and so is the battle line. The good thing about this particular run-up so far, is that we aren't get those 900+ point rally in a five hour kind of deal. This rally, not only is fairly broad based, led by financials, we feel that it also give us plenty of time to buy on dip and cash out appropriately.
Still, we may need a 'new catalyst' to move forward it seems, 918 has to fall soon or Bears will use this failure as a reason to call an end to this rally.
Speaking of plays, as you can tell, we have been heavily trading the financials during the last couple of days. Keep in mind, we are trading the financial heavily not because they give the most bang for the buck. We trade it because it has the best probability for a profitable trade and many agree that they are the main reason for this rally. Fed's rate cut along with GS/MS earning reaction are enough to give these battered financials a decent run. Of course, when the index creep higher, many other plays tag along as well.
We are somewhat surprised by the strength of many 'Steel stocks lately. But, we really shouldn't be as we discussed this phenomenon occurring from the industry that was left for dead just a few months ago. Once again, it was because of results/ guidance that is below expectations. "HUH"?. CMC is the latest domestic minimill steel company (NUE and STLD last week) to see its shares head higher. Of course, our big steel winner at DJIM from this year, X is the other play here.
The only sector that stands out as questionable is obviously "oil related" stuff. Yes, US dollar is being trashed thanks to the thrashing of the USD. Crude price seems like it just wants to go down no matter what. We are mostly staying clear of the oil group and even the gas/coal group that may get affected by the drop in oil price. Basically, there's enough obvious plays out there that you don't need to risk for any uncertain plays. This reaction following the FED decision and ensuing USD fall is making many a trader scratch their heads. At approx. $37, many a companies will have too halt production to some degree here in Canada for sure. Right now, no matter what OPEC does, demand is just not there.
It's been a pretty good week so far and we are counting on an even better finish to give us traders a nice Christmas bonus.