Before you know it, we're here sitting at the high of 2008. How'd that happen the Bear is left scratching his head!. If you have really followed all of the news events up to now, things are still pretty much the same as at the beginning of the year. We still have potentially more write downs from the financial sector and the economy is still in a recessionary mode and inflation worry keeps on making more noise by the week. Yet, we just finished the hottest trading week in 2008 so far and traders are more excited than ever to look for action in the coming weeks. This is of course, assuming that you are trading on the long side of things. So why isn't the market crashing given all of the negative news we had do endure the last few months? We have already discussed this topic many times at length the past few weeks, but we'll sum up the points again just in case you missed the various highlights.
The reason why we think this market has turned positive lately is as follows...
1. Commodity plays! We think commodity plays are the #1 reason why this market just wouldn't be pulled down any further. If you have followed our journal from the beginning of the year, you can tell how much emphasis we have put on the commodity sector. Oil, Steel, Coal, Agri/Chem, Metals, Shipper, Solar... and all of them have provided leadership at one point or another for the hot money. You can say this is the year of commodity and if you've only traded these from the long side as the premise has been here, you'd never have to care about anything else in this market. We believe the collective bullishness among the various commodity plays are helping the sideline money to be busy at work. Basically, as long as one's willing to commit capital into this market, it's just a matter of time before one's willing to "diversify" his/her portfolio.
2. Earnings! At the beginning of the year, we all believed that a recession or at least a slowdown in growth is inevitable with our economy. We just didn't know how bad things would get. But, one thing we emphasized here is the market wouldn't get beaten down as we went into earnings. It didn't, did it? It is true that companies like GE and many financial companies don't give us a bright picture to look forward to, but we still have companies like IBM, INTC telling us that things don't look that bad. Also, when you completely write off GOOG going into its earning, what you potentially get is an 80 point gainer day after it delivered a not so bad report and the $500 we said it would possibly hit off such. So what it means is that not every company is going to be hurt badly by the slowing economy and when you cut a company's stock by 40%+ in as little as 3 months, you're only setting the stock up for positive surprises and therefore big moves. This is simply what we are seeing!
3. Fed! Mr. Bernanke and company mean business! They have shown us that they'd do everything they can to protect the integrity of our capital system as hard as it might seem. Even though the system needs lots of improvement and reform, it is just Not likely to fail under Mr. Bernanke's policy. Let Bear Stearns be the first and last major victim from this financial crisis. Basically, even as a trader who doesn't really have an opinion on how things should be run in the financial sector, the trader or anybody else doesn't want to see a failed system either. It's in the best interest of all.
4. Idle Cash! Basically, with the rates already so low and more rate cuts on the way, it's just absolutely ridiculous to keep your money in money market account or treasury. When you take into account the potential inflation, it's even more pointless to keep your cash in cash. So, money has to flow somewhere right? We think so! If you are afraid to invest in the banks, there's always one commodity sector that can attract your dough. Now that some of the companies have reported some not so bad reports, there's even more reasons to get back into some selective plays in this market.
Now that we have listed these four major reasons why this market would not go down the last while, does it mean we can go back up and challenge last year's high? At this point, we think it's not likely that we even have a shot to get back to last year's high. For DJIM, we try not to look too far ahead of the curve and we try to take advantage of the current opportunities. That's always the motto here, we let others worry about the consequences of this and that. We're traders and we trade, it's quite simple. It means that we play what's working NOW as opposed to what might work 2-3 months down the road. By having an active watchlist, shadowlist at DJIM, where we constantly update the play selection through Alerts'Comments or daily Journal, we all should have a very good feel what this market wants and what it likes. This is a pure game of psychology. Knowing what other people want makes our trading decision a lot easier. As is the case with DJIM in the past, we try to catch the obvious and easy plays. Instead of figuring out what may work down the road or go nuts with charts, we simply capitalize on what is working now.
Technically, we broke above major resistances on past Friday thanks to the Google report. Since we are somewhat in unchartered territory, we now have to move our resistance level to the next stage. The words Bull trap will be bellowed out now by the Bears, hey what choice do they have. Bull trap or not, we've been enjoying a Bull run here at DJIM to get to this point to trap money in our pockets. Dow 13000, SPX 1420 and NASD 2475 seem like a good area of resistance to us. It is hard to say how fast or even if we'd get there, but we think the best opportunity for the market to get those levels is within next couple of weeks as the earnings keep hitting. We feel we are currently in this earnings' "honey moon" period on the heels of Google, IBM and Intel reports, so now is the best time to take it higher. In the coming week, we have quite a few interesting reports from commodity sectors we need to keep our eyes on. Some of our favourite plays like FDG, AKS, POT... are all set to release reports in the coming week. Also..with a good trading environment now, we may see momo money come back for those cheaper EPS play we all have enjoyed for years together. So, let's all keep our eyes wide open for that potential coming to fruition.
A note on SOL! We were anticipating an IBD100 inclusion last week on this play and it debut at #27 this weekend. We really like this play at this point because of its recent momentum and now added IBD exposure. If we get an IBD induced sell off in the coming days, we'd be almost surely buy that dip. We already had one late last week to possibly take advantage of. Based on its recent news events and the rosy outlook of solar sector, we think it has a lot more upside momentum to come.
If you think some of our hottest plays are extended, that's fine, we can always take profits right and move on. Right now, we are about to be flooded with earnings this week and we're looking for fresh meat with possibly more upside potential than what we've already been extending for a few months.
Happy trading!