DJIM #23 2008

Lets just say the past week ended in a pretty gruesome fashion.     When both the economic worry and surge of crude oil hit you in the heart, pocketbook there's really no chance this market can be bullish in anyway.     In any case, this market might have just over reacted a bit over the Friday's news.   As traders looked to a modest job losses number, the attention turned to he unemployment rate which jumped quite a bit.  There is two arguments to this as expected.   We think it's an aberration, reminiscent of the ISM plunge in February to 41+. The market overacted in regards to the employment situation, the big picture here is the job losses are holding up.    As far as oil price jumping over $10, that should not come as a surprise because we all pretty well agree it's going higher.   Simply, we think the market has underestimated the rising risks to crude oil demand.

Is this market in trouble?   If you look at the technical, we are really just a couple of days away from the March low, as far as DJIA is concerned.  However, both QQQQ and IWM are still far off the March low.   So in another words, the broad market isn't in as big of a trouble as the Dow suggests.    Of course, if you look at many plays on DJIM shadow list, it really wasn't until the last trading hour on Friday that some of the plays just gave up some gains due to the overall pressure and natural profit taking.     We think last Friday is more than likely a one time event.    Adjusting to high oil price isn't going to be done with one day and the volume isn't suggesting any sort of panic.    We have mentioned before that the likelihood of sustained high oil price is pretty high and the market will have to learn to deal with it.    In fact, there's an article in this weekend's Barron's that talked about the oil situation.    The same analyst who called the $150 oil price a few weeks ago from Goldman is seeing the peak price of oil between $150 to $200.    The one point he remained unclear though, is that how long the high oil price will stay with us.   

For DJIM, the focus on oil these days is very good for us.    The more media and analysts talk about the surge in oil price, it probably means more commodity plays will benefit as well.   Coals were upgraded again on Friday.   At this point, we have come to realization that some of our plays, including the coals may not give us a good pullback we had hoped for.    What we hope now instead is that some of our plays slow down so we can simply catch some on a pause.    We added a new play IPHS on Friday and we have noted that it held up extremely well despite the weakness of this market.    We are looking to add more in the coming week if it stays this strong.

Besides the Oil, spotlight will be on LEH this week to see how much they cut their leverage and what losses they'll report.  It won't be rosy, but if they throw out the kitchen sink finally, it 'may' help the financials in days to come.   In a low volume environment as we have now, we have the same ability to take a run to the upside just as quick.  Be prepared early in the week, if a turn comes it will likely be a pretty good one.  We definitely think volatile days not seen since early in the year are back for the short term.

The Haynesville Shale play is not going away.   PVA was only the first to release results and the market has responded very well.  Many more will and this will idea will remain in play as results will be catalysts.   So as solars, shippers etc, we think the shelf life on this play will continue and DJIM will be all around it.       HK, GDP, XCO, GMXR are the other operators in the area we like.

Big 15..

Today's the kind of day which you can just sit back and relax.   Ok, maybe it's just a little wishful thinking here as traders hardly ever relax.   The truth is, there is not a lot of news headline today and market behaved with very low volatility.    We like this!   Why?  We just can't help but noticing that whenever market is low on volatility, our playlist is almost always high on greens.  Just check out the "BIG 15" from yesterday making new highs off our Shadowlist.   Go to Shadowlist link and change signal box to new high.

With the turmoil in financial stocks and this being a supposedly "tough" trading year, how often do you get asked by friends/relatives that if you are doing well with your portfolio?    Instead of a straight answer, we simply tell them that we've been trading the commodity stocks, which is the same reply a month ago, two months ago, and three months ago and the lead into 2008.

As you can see, this game still rewards the mentality of "it's better late than never"!    However, if you are stubborn enough to refuse to accept this fact, then a lot is being missed out on the table.     Sure, playing some commodity now definitely does NOT give you the same kind of risk/reward ratio compared to a months or two ago.    It just doesn't mean it won't give you any reward.    In fact, we like to trade stuff with the greatest visibility.     If a stock has great earning report, it gives us good visibility that it may do so again in next quarter.   This view/strategy is shared by so many and that's the reason why we have had so much success with the earnings winners in the past.     For this year, the visibility isn't with earnings plays because a lot of uncertainty within our economy is bringing a very murky picture on what lies ahead.     What is clear though is that commodity prices are increasing and at a pace we've never dealt with before.    This is just the beauty of trading world.    If we can all foresee the high energy prices a year ago, we all should be billionaires by now.    Nope, it doesn't work that way.     We have to constantly evaluate the situation and be prepared for surprises and the "unthinkable"!

Many commodity plays on our shadowlist are slowly grinding higher.    Some of you may already got uncomfortable playing some prices knowing that you were playing these at a much lower level just few weeks ago.    We say, don't ever let that mentality get into your head because that'll hurt you from making good trading judgements down the road.     Basically, trading POT at $230 is no different than trading POT at $150, as long as you are aware what the trend is and you are trading WITH the trend.    Sure, you may not want to commit the same size when the stock moves higher and that's just fine.  Maybe PCX and ANR seemed expensive in the $50's just weeks ago after introduction here, hopefully this finally confirms quality is better than the quantity of shares in $5-10 stocks.    We haven't done any major updates to our shadowlist and it may be "boring" to look at the same plays every day if your not participating.   The point is, you have to absolutely stick with what's working currently. Anyways, the most recent plays we introduced are doing great.   The Shale Gas plays and IPHS come to mind.   Even as a lousy trader, you just can't lose over a period of time with the right kind of plays.  In some cases, a DJIM investor with a longer term perspective may be doing better than a DJIM trader so far in 2008.     The past couple of years, the reason why our plays changed so quickly is the fact many if not most of those plays are "small caps earning winners" based and we know how fast flavour was changing from one to another.     This year, we are going through an unprecedented run-up in commodity prices and we simply don't want to be anywhere else, focus and/ or money wise.

"Shale Plays" got a kick start this week as the news from GDP/CHK just spread across the zone.   Also, ECA has stuck their behemoth hand into Haynesville with a boatload of acreage.  The potential for the smaller caps names noted here, is of course the better trade as far as potential percentage gains than huge ECA.  There is only about 60mln float between GMXR, PVA, GDP.   We are in a few of these Shale plays and we'd intend to add on weakness.   

Agri. plays are still working and our little IPHS has gone from $28 alert to notch another nch and the action has simply been spectacular.    There's a possibility that the IPHS is in imminent need of a pullback and we'd get on the bids aggressively when it comes.    

Coals, what more can be said?    NCH's all over the joint.

A couple of beaten down groups (Ships and Solars) also made a little advance today and we are looking at some solar plays for potential intraday action tomorrow.    ENER, a name we switched to in mid- May as far as Solars were concerned, is basically trading in the world of its own and it's on pace to become the baby FSLR.   We highlighted this a while ago as one of our favourite Solar plays and it's apparent that this one is emerging to be the "real deal"!   We are hoping to catch it again on a break , well any break really.

Bottom line, GS is reporting tomorrow and lets hope it's another none event.   Seriously, enough damage has been done in the financial sector and lets cross our fingers for some good news from this sector.