DJIM #29, 2009

It is just simply amazing what 5 days worth of trading can do to this market.    Even as those who've been doing this for a while, we never cease to be amazed by the extreme unpredictability of this game.   Fortunately, being on the right side of the trade will always put a smile on your face after a week we just had.    Heading into last week,  we felt July’s technical trade will come to an end as the earning season will change the storyline.    It all changed as a technical driven market turned into an emotional driven market dictated by various corporate news.    Of course,  there could always potentially be bad news to burst some air of this, but what this has importantly done is put in a new higher low for the market this summer.   Unfortunately for some for the Bears/ Shorts,  they probably forgot what it is like for companies to report blowout earning and guiding higher.   You can't blame da' Bears for having these kind of thoughts.    After all, how many quarters has it been for dismal reports and disappointing guidance?    Yes, in a typical Bear market and a recession, companies are "expected" to release discouraging results that give a continuous negative growth trend.     However, at DJIM, we've been working the trading thesis of a potential recovery trend trade.     We've been working on this trend really ever since the TSY news back in late March.   This week so far has just reaffirmed that thesis and what happened this past week has reaffirmed our recent thesis that one bad US employment report is not a disaster for companies here while we had a thriving Emerging market.

There’s a lot to like so far this Q’s EPS.   Top lines and bottom lines are coming in with sequential growth and guidance is getting better!.  We are not looking Y/O/Y comparisions, but sequential numbers here.    INTC, a company that's well known to just about everyone, came out with a report that simply dazzled everyone.    Nope, we aren't exaggerating because you simply have to look at INTC's stock and the action from the entire market that ensued with help of more solid reports later in the week.    Of course,  we’re only a small fraction into the reporting season and nobody should get totally carried away, just yet,  but it is acting like a tradeable market once again.    Still, we have too much sideline cash out there that is desperately looking to be put into work.  If reports keep surprising, who knows where this market may go with such help entering the market.   Also, helping sentiment last week,  we had the first important noted hurdle jumped as banks brokers reports have been favorable, plus we had long time Bear analyst MW putting out positive calls on a few financial firms helped to lift the financial sector.   We also had the markets refusal to let a ’credit crisis' reminders in CIT break it’s back or even a fingernail.  We noted early,  market was showing confidence the gov’t will get this worked out.

All this favourable corporate news flow has put SPX right at 940,  a level we haven't seen in about a month and it took only five trading days to go from that 884 SPX futs level we all had eyes on here at DJIM.

The bar has definitely been raised higher by the INTC report.   However, what has NOT been raised are the companies' estimate.   In other words,  if many analysts didn't get INTC's estimate right, chances are they may not get a lot of other companies' estimates right.    This pretty much leaves room for many companies to potentially beat the expectation and guide higher and stock action follow through.    We are talking about a recovery process here so analysts had to be conservative and cautious on the estimates.    This simply makes things very interesting because nobody really knows what's going to happen in the latter half of the year as far as economy goes.    Of course, companies still have to perform and come out with good reports to prove that they are doing everything right in this environment, even if it involves more cost cutting.   In our opinion, any company that shows that they can execute a very good quarter during the last three months deserves a full pad on the back because it was not easy.    Also, these companies will be picked up by fund managers as they look ahead in terms of what these companies may deliver when the recovery does kick in full force?

For DJIM, we are excited to witness and participate the frenzy of last week and we've become even more optimistic than before.     We are glad that this market continues to reward those companies that do well.   Even last week, we had past DJIM shadowlisted Q plays putting in new highs at some point ( STEC STAR CVLT EJ).      For us, we are feeling that the small cap world may give us a surprise or two in this quarter.    The next few weeks may be the most intense trading period of this summer, so we have to be on super alert at all time.  It will be a Small cap vs. Large cap trade this summer, you will hear these musing from analysts as we go forward.

The index may be hitting the near term resistance,  but we can hear market's whisper of  "where's the next winner?"   A few more big reports, in our opinion, is enough to set the stage to potentially break out of the recent high.  This week has everything in respect to EPS,  Horseman stocks reporting…Small caps like RVBD STAR and a load of commodity linked stocks.   Most of the latter , specially in Steels will report losses and it will be interesting to see the reaction even if they do stack up the losses.