Shifting Focus...

In a way, this market is getting extremely difficult to lean heavy in one direction at any point.    Even if you are a super bear, and with every economic indicator going your way, you still want to arm yourself with enough hedge to deal with a day like today.     This market started off just as everyone suspected but the turn of events in the afternoon astonishes even the most optimistic bulls.    Did it really matter what S&P said in the morning with regard to the conclusion of writedowns from major financial institutions or the housing rescue plan?    We think the market rallied because a lot of people believe that our Fed. will do anything creative to keep this market afloat, while delaying the inevitable indefinitely.     Of course, any policy announcement by Fed these days is greeted with warm welcome.   We just had a super 200 billion "cash for trash" injection announcement and now people are asking for more, at least they are hoping so.

More importantly, we have to understand why we gapped down earlier in the first place.    Perhaps our market here is solely focused on subprime and credit crunch crisis the last couple of days, while the rest of the world is however, only focusing on the weakness of the U.S. dollar and the strength of Gold/Oil.    The weakness of U.S. dollar basically hurts all those countries who export a great deal of stuff to America, which is just about everybody.    The high oil is also increasing the cost of doing business because a high percentage of fixed cost in transporting goods is the fuel.  With the dollar getting trashed, as traders, the only protection and hedge we can use is to buy gold and other base metals.     All of these factors are creating what we call an inflation environment here.     This is still in addition to the credit crunch crisis we are dealing with here that is still months away from being resolved, in our opinion.     The more Fed tries to save the capital market by boosting up the lending programs and lowering the rate, the worse it gets with the inflation as traders use every Fed policy to sell the dollar off, hard!

Fed right now is in a very difficult position as on one hand, they want to stop the bleeding in the financial market.    You have to give Fed credit these days as both the surprise rate cut back in Jan. and the recent 200 billion lending program came when the market is about to break new lows.  Basically, it feels that there must be a chartist out there working for the Fed to try to kill the bears in a timely fashion.     Oh yes, we forgot that this is an election year too.   The last thing Fed or the government wants is a financial market in total disarray going into the election.     This may sound like a conspiracy theory but you just have to admit the impeccable timing of both Fed's announcement the last two months.

Now that we know Fed can and will rescue the financial market, is there anything they can do about this inflation or the recession we are facing?   Absolutely nothing we think.    Both the inflation and recession are part of the economic cycle and it just takes time to get through them.    However, now that the Fed has signaled their intention with the financial market, the focus will be on recession and inflation going forward.    This is why we think the volatility of the market lately is the result of crosswind between Fed and economic events.    To sum it up, people are buying this market because of the endless bailout attempts from Fed while people are also selling at the same time because of the poor economic indicator which points to both a recessionary and inflationary environment.

With DJIM, we'd keep monitoring any ongoing events while keeping score of which sectors are getting bid up and which sectors are getting sold during this volatility.     Looking at today, Oil , Agri/Chem, Steel and base metal were all getting bid up aggressively.  

Just to highlight some of our favourite buy on dips play here, we like Oil stuff such as EOG BZP HES, Agri/Chem POT MOS CF, MTL CLF X STLD from the steel sector.  

On the short side, we still like the idea of shorting tech, shippers and solars on strengh only when fading the move.

Going into the trading day, the focus will rest solely on CPI and inflation.  The market seemed to have a memory lapse going into it.

A welcomed pullback...

We are glad that the indices pulled back 'some'.   It definitely takes some heat away off the overextended rally we've wanted to avoid.    Oracle's earning tonight isn't too inspiring and coupled with the always potential negative economic reports, we may see some further pullback.  This is all good news in the grand scheme of things.   One thing we may simply see Thursday is a disconnect between the DJIA and NASD off ORCL, if ECO data doesn't hurt the whole market.      The reason we keep saying this 'good' is that the further away we are from 12700 Dow and 1380 SPX, the less pressure it is to buy on the dip.     Market is actually in an interesting juncture here because we think it would take a lot of negative headlines to push this market below last week's low, which is still 700 points away for the Dow and 65 points away for the SPX.     That is a lot of ground to cover which means the chance of it happening within the next little while is slim unless something dramatic happens.  Oracle is not dramatic.

The thesis of DJIM here, is to buy on weakness while trimming some off on strength.    Unfortunately, the trouble we are having lately when it comes to work this thesis out is the fact MOST if not all of our favourite plays just refuse to come down this week.    If you look at today, and from the watchlist which we posted over the weekend, over three quarter of the plays still ended up green!   Takeaway the banks, which is something you can't play every day and the list is looking even better.   This is actually in fact scary because you can't imagine what can possibly happen to these plays if we are up triple digits.

What can we do?   Basically, not having any positions in your account while watching some of these plays like X, CLF, EOG, BZP, RIMM, AAPL... rocketing away in a down day is simply, unsettling.    So, at any time, we'd at least carry 100 or 200 shares of each just in case we have a type of day like today.     Honestly, without looking at the final box score, we really couldn't tell if we had a bad day simply by looking at our primary watchlist.

To review some action here...

Oil, today's surge in crude price not only broke the short term down trend, but it feels it has legs to challenge its recent high.    This is shown in pretty much all of our oil plays here.     We like EOG, BZP and HES the most as they are pure play here.    BZP also has a fresh breakout and notched a new closing high, the technical looks very good on that one.    RIG is another one we are now watching in addition to the above ones.

Steel,  this is the group which we are currently in a love/hate relationship.   We love it because it is the absolutely best performing group out there.    We hate it because we simply don't own enough of their shares and there has been literally no dip opportunity to add in the past few days.     This is really a pity because the higher it goes without any pullback, the more likelihood we wouldn't buy on its first dip.    In the group, we like X, CLF and STLD the best but just about every other name is also kicking in the sector.  This is the one sec you've noticed we've stuck with as the commoditity crunch came last week and our most mentioned X is becoming a darling with CNBC talking heads and last night it was Cramer pet rock.  Hopefully that doesnt ruin the group.

Agri/Chem,  as early as this Monday, we even had the idea of shorting this group as the technical picture just looked downright awful for the group.   However, one pre-announcement from MON changed all that.    The sentiment is again that this whole group will crush the number and guide higher.    We'd be very aggressive in buying any dips in this group including MON MOS CF and POT.    However, as most of you have noticed, there really isn't any dips offered in this group in the past couple of days so in a way we are kind of hoping market pulls back some again tomorrow.

Shippers, this is another area which we are taking some interest lately as the prior downtrend seemed to be over.    We aren't being aggressive in buying up the strengh last couple of days but we are rather taking opportunities to add when they get sold off along side the market.    We like DRYS the most but we also have EXM TBSI on the watchlist.  GNK another we may consider that's been here before if the sector runs and you want to purge.

Solars, this group has take on some very nice gains the last few days and we couldn't help but wonder how much further it can continue up.   The only play in the group that really interests us is FSLR so when it stops going up, we generally just wait and see what happens next with the group.

Techs,  not all technology stocks are the same and it pays to follow what is going on in the market right now.    We are staying away from the internet group in general except for an occasional intraday flip from the likes of BIDU and GOOG.    We'd be playing some RIMM/AAPL but feel the recent surge in price has been too much too fast.    RIMM's eps is only four trading days away so it's best to take it lightly at this point.

Other than the plays above, we also have ISRG, V... FDG JRCC (Coal plays), AEM (gold) that are performing well in this market.     In addition, it's getting closer that we can also give GS MS type a try on any further pullback.    Bottom line, we have some economic reports tomorrow that could give this market some cause to move and if some of our favourite plays pullback (keep our fingers crossed), we'd be there to lineup the bids.   Keep in mind, nothing is for certain in this market so we'd keep our sizes relatively small and spread out the purchase just to be conservative.   Lots of names in bold here, but that's simply because things are working off the list.