DJIM 17, 2009

Coming into this earning season, many of us just did not have a good understanding on how the corporate America performed last quarter.    Two weeks into this reporting season, now we have somewhat a better idea on how things have been with the economy.    Unfortunately, it's not as easy as a black and white kind of conclusion. Some companies gave encouraging results while some gave a so so presentation.    Overall though,  we have to be pleased with the quality of the reports.     As far as stock reaction goes,  we are even more impressed!.   In last few trading days,  we've spotlighted this broad corporate trend and the market players caught on to it judging by the action.   The SPX climbed from 836 overnight levels to a high of 872,   pretty impressive melt up led early by EPS's like AMZN.    Even,  XLF made nice gains and looked like it would break this formidable low $11's levels,  but came up just short by close.

Sure,  we are still facing all kinds of hurdles from this market.    Everything from the result of "bank stress test" to any unstable corporate outlooks that can derail the optimism that's currently bidding this market.   Frankly,  we'd rather see a balanced market sentiment going forward.    It keeps things in check and keeps extreme end of the emotional reaction out of the picture.    We hope this will be the case from now on.    Without much guidance offered by many companies, market participants can only cautiously proceed with their stocks.    This is just fine by us as we like the idea of trading off "hope" rather than "fear".

Lately,  we have had many beaten down stocks that are showing some incredible sign of strength.    This is completely understandable given the recent development of this market.   At DJIM,  we are continuing to focus on strong earning plays and strong sectors that are benefiting from this new trading environment.   The game of earning plays are slowly creeping back into trader's playbook these days and we are constantly keeping our eyes open for good opportunities.   Also stocks do follow sector breakouts (eg. materials XLB), so watching for sector breakouts going forward as well.   We have tons of mid- small caps this week out with statements.

Bottom line,  we remain buyers off dips on those plays that exhibited strong strength recently.   The earning season still has a few weeks left and there's potentially quite bit of good setups ahead waiting for us to take advantage of.

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Brake on or just a break?..

While it looked like the market was having a bit of trouble making any kind of rebound through out most of the day, it did manage to climb up and close near the best level of the session at the end of day.    However, there's really nothing to cheer about because we still ended down almost 15 pts on SPX and closed below 1001.   The  Brazil ‘threat’ noted before the trading day pumped the USD at the open (unexpected) as the futures did not point to such and we went through a sinkhole to about 1090 in the first 15 minutes.  Another big catalyst was the BofA downgrade of chips which is really no surprise because their reason was speculated right after INTC’s report. 

Recall, many times, we’ve said when Bulls are hit by a fast and deep sell off, they do not put an underlying bid/ support until things cool and settle down.   A technical breakdown like today is not the same as the previous days shallow dips that are bought up.  Note, there was not a lot of individual stock hits, usually means mostly a ‘futures’ ETF technical fast money trade.  This means holders were not dumping stock.

Yes, we closed below the 1001 level which invites room for potential further downside.   Will today's move signal some more turbulent days ahead?    We'd think unlikely as today's move may have taken most of short term excessive bullishness down to a reasonable level.  Still, we'd preferred to have tested 1085.

After today,  it does feel that we are not obligated to chase some plays at an extremely uncomfortable level anymore.   In a way, it's somewhat of a relief to see this market come down once in a while.    Remember, healthy bulls runs will consist of many up days and a few down days.    Even though the down days may be dramatic in action, it is a natural occurrence as we‘ve all witnessed.    What we have to do now is to take advantage of some of the pullback to add to our existing position or start new positions on those plays we'd feel uncomfortable to play a couple of days ago.

Story is the same and strategy is no different.   There may be some headlines out there blaming this and that for this particular day but end of day it’s really not relevant as market will forget and move on to new headline.    Also, everytime we have a down day, you'd hear more cautious comments from analysts, but they always quickly disappear once the market resumes the uptrend.     Like we said in previous Journals, we strongly feel that investors, and especially institutional investors, are locked in their mind to bring this market to a higher level to finish up their year.    There's really not many potential negative events between now and end of this year that can come in and change the amount of bullishness we have out there.    The once in a while profit taking days are merely acting as a reminder that this is still a risky business.

As far as plays wise, of course, the safest thing to add on a day like today are the mega caps like MSFT and AMZN.   Still, we aren't excluding smaller plays that have taken hits lately like PEET CTRP GMCR (new adds to DJIM, AIXG RINO ) to our dip list either because we know what they are capable of on a good day(s).    Bottom line, tomorrow is the option expiry day for the month and there isn't anything on the Economic calendar.  A close over 1093 escapes a downside reversal week,  break of 1085 and we may eventually be testing the gap of 1070-1072 discussed a while back.  We’d watch 1085 to bring out the underlying bid if it has time to flatline there and not be reached because of a negative catalyst.

Yesterday's alert 'short' on shippers produced some ugliness in the group eg. GNK -11% EGLE -13% EXM -12% DSX -7%,  we would stay clear of being long and/ or anticipating bounce in this group for the short term.