DJIM #31 2009

Every trading cliché in regards to ..'go away in May' and 'summer doldrums' has been thrown away in 2009.  But considering, we’ve gone through extraordinary times to the downside starting in late ‘07, we shouldn’t be surprised that none of the past cliches have held to form as we enter the month of August. We concluded July by painting a Bullish outside month of 869 on the monthly chart and we should try and break 1k early next week just because of this fact.   At DJIM, we had a successful July calling 2 breakouts, one was the break of 884 ES to start the rip and one last week to take out the Bears last line of defence this summer at 956 to come arms length of SPX1K.   Now entering August, we feel most of the work on the broad indices may have been done ST,  maybe one more push and break of SPX 1k like we said Friday to ..say to 1014 as 1st possible R before a market reversal.   In our view, the SPX is setting up to blow off some of the premium steam  after it breaks 1k into the employment report week.   Before or after the report, a good or bad report is probably going to be irrelevant.  It’s just going to happen we think.  

Considering, we’re not invested in high beta names now, like commods, casinos, we aren’t going to be too worried if a ST top occurs or if the market just motors up because we’ll be should fine with stocks we are closely following and trading. 

EPS stocks like FIRE  initiated on Friday, it jumped another 5% after posted and naturally settled on some profit taking after a 2 day run by close.

As we’ve noted in Journal recently,  we don’t plan on occupying a level over SPX 1000 for too long this summer, we prefer to make a strong bid to occupy the 1000++ for good in the latter part of the year when a powerful growth spurt will finally be evident to all, including those who are still Bears now.  We think rotation into and leadership will be from the Banks-Brokers later in the year to signal the next move.   This 1000 level is pretty well priced when you take in consideration a stronger than expected EPS season so far as a reasonable multiple.    It is hard to imagine a late summer-early fall overshoot, but these are not normal times and upside risk remains for anyone not participating or on the wrong side of the trade so far.   Fortunately, we don’t have to worry about all this,  life just goes on as we’re about picking stocks and we just need a few like STEC, DDRX from last Q this Q to trade for the next month or two.   So, as we enter August, we’re not in a position of Performance anxiety like many out there and can almost relax after being on the right side of the trade for months now.   We think the upside is limited here ST for the broad market in August, but not for individual plays as we enter the July Q end earning reports that kick off with CSCO on Wednesday night.   As we’ve been saying recently, we favor small caps over big gaps as a general tone for the market going forward and this plays right into our DJIM niche, if right.   The premium is pretty well used up now for the broad market, but this premium is probably going to be there for the taking as the mid-small caps reports continue to flow in August.

PMI's = SPX 1k = Market too giddy

Normally, you’d think we’d be in a celebratory mood seeing SPX crossing and finishing over the 1K level.   Today's jump in index is the direct result of various encouraging PMI readings around the world.    The ISM (PMI) number in U.S shows rebound in IP and new orders rose to levels not seen since the summer of 2007.   This has been an integral part of our trading methodology/ premise.  All you have to do is click the search link on site and type in PMI and /or IP to see how we fit this PMI into SPX1k you could say.  Simply, to us at DJIM, these numbers have been expected and now we wonder with all the giddiness today on the subject of PMI’s was the investor really that behind the curve and/or will the smart money now use this to sell off to all the Johnny -come latelies just over SPX1K?

Also, not that long, on March 6th,  we hit SPX 666 and soon after named it, the ’Mark of the Beast'. Wow, what a devil of a beast up 50% now from those levels.  Today's finish brings us exactly 50% higher off the recent low.   Regardless the type of rally we just had, the action we've endured during the last six months will be talked about and studied many times down the road.   However, there's one thing that kept on hitting DJIM traders' mind today as the previous 2 Journals.     Now that we've crossed SPX 1000, is the end of this special rally near us?    For the longest time,  we've been the out spoken bulls on this rally and it's gotten us nicely thus far this year.   We thought the best case scenario would be around SPX 1000- 1050,  provided this quarter's earning reports hit the market and latest Eco. trends follow the recovery path. 
 
Now that the majority of big earnings are out and we are entering the last stretch of the summer trading with SPX over 1000, we are wondering if this market has any more juice left to go much higher.    Personally, we prefer this market not to go much higher because it'll only lead to the other extreme of the exuberance.   

We feel it's definitely best for this market to settle down and digest its gains.    It isn't just our wishful thinking though.   We are seeing signs lately  that things may not be as rosy as SPX suggests.
There's no doubt SPY'der is doing all of the work lately.    Commodity (the group which has pretty much the worst earning reports) has been on fire lately due to USD$ failure and is all the talk today due to PMI,  but it's the earning plays on our list that are catching our attention on this market strength as they don't seem to be catching the pace with the SPX action.   It seems we get a kick right after we alert of ~5% like on FIRE  (Friday) , today even VIT  (non earnings) and than its flat line action from there on in.  This is frankly a bit worrisome.    For us at DJIM, if good earning plays, particularly small caps don't tag along with the index action, it usually signals a top is near for us.    This doesn't mean that we are turning super bearish and going short at this point.     We just wanted to point out that going heavily long at this point on presents a considerable amount of risk.    It doesn't mean that we won't go long, we'd only go "extra" long on those that behaved the best, but, most of all we are preparing for a pullback.  

Bottom line, market is doing its best to give both Bulls and Bears a challenge at this point as to what's next.   It's absolutely crucial for us to stay cool and rational.

...How'd we get here?

‘Here“…is seemingly nowhere as we sit below SPX1K again and many jumping on the train last week are asking this question.   Before the 1st trading day of August, we discussed a break of SPX 1K was inevitable after painting a Bullish outside month to conclude July.   Once we accomplished this feat in short time, we immediately warned that an overshoot spike would be the beginning of a reversal if 1014 was hit and the market would “blow off some premium steam”.   Since Fridays intraday high spike to todays low..(26 pts < 3% has been blown off).   Today as the SPX futs touched down to 990/ 993 Cash important support, we were in danger of this reversal continuing to next 982S and than even 970S later on.   Simply,  we feel stops are laid out just below 990 and this would induce a further drop.   We’re watching this level closely this week,  today’s volume was quite low in all probability awaiting FOMC.   FOMC, not much is expected,  still it should swing the market either way just because we sit at support.

The Friday SPX failure to close over 1014 is reminding us of the June attempt to get over 950.  A break to SPX 956 and than a close of 944.  We think the trade going forward may resemble the aftermath of that day.  Have a look at the daily.

What’s important to understand for future reference are some points to recognize as a trader to be a head of the curve.   Once we broke SPX1K, we titled a journal “ PMI= SPX1= Market too Giddy”.  That day global PMI pushed the market higher as all of a sudden these PMI’s were the holy grail as seemingly every  Johnny come lately’ was coming in bullish.   We wondered if this investor was really that behind the curve and now the smart money would begin to sell off to them over SPX1 (Aug 4).   This relates to the overall bullish sentiment getting too high, thus too giddy.   Other bearish points we have discussed recently are the mid/ small caps earnings winners not going higher which signals a short term top for us and most recently the failure of the COMP all leads to our cry here…’we want broad particpation’ and we’re not getting it.   Also our NYSE A/ D line is turning.

A few earning plays from this Q did look good today.  FIRE  continues to make new highs,  PWRD  made a nice one day reversal after selling off on excellent earnings.  EJ  beating on top of Aug range ahead of EPS.  ABVT, consolidating, flat lining well since EPS.  SXCI  and even STEC  is starting to shake off the offering.    But as noted yesterday, breakouts are a concern and just as we noted TBI  breakout was vulnerable as it gave it all back.   We’ll feel much more comfortable with our niche once this action stops. We also added some TXIC  today due to earnings, China and business related make the float even that more attractive to go higher.    Anyways, today a few more of our niche plays are looking better, hopefully a sign of things to come.

Today,  financials down 3% with banks down 5% being the weakest sub group, we have Tech doing nothing since MSFT earnings and Commods  needing a well deserved rest all intertwining here.   Not simple to figure out we need someone to pick up the slack.  

Leveling out....

It was the message from both the Fed and market.    While our economic activity is levelling out, the stock market seems to be doing the same.    In both case, it is good news.   From the Fed perspective, they are believing that the recession is coming to an end (only slightly raising growth).   This belief is followed by their announcement of Fed's end of purchasing long bond in October instead of September.  They`re being as conservative as possible, just in case.   Basically, if the mighty Fed is giving us the indication that we are done going down with pace of contraction slowing,  why shouldn't we listen?    The truth is, we should listen.    Some people may not agree with Fed on the current state of the economy,  so what?   Last time we checked, Fed's still running the show and anything they say and do are impacting our market, greatly.    So the conclusion is that we have to be confident going forward.

From this market's perspective, today's event provided a positive catalyst to squeeze the ‘stops’ out of the previous 1007 stiff R level after finding solid support at SPX 993.    Even though the market was up quite a bit before the Fed decision, importantly, it doesn't get ‘sold off ‘either after the decision came out.  We discussed someone needed to step up, early on Financial, Tech, Commods all stepped up together.  This early move definitely caught many by surprise even though we had some positive catalysts spread out, including TOL #’s.   As we said, odds were for a swing on FOMC day in either direction because we were on important support.

We wouldn't worry about the "weak" finish because no matter how you look at it, we still closed deep in the green.   The finish today erased all of yesterday's loss and puts us right where we were a couple of days ago.    It does feel like this market wants to level out a bit longer before making a big move.  We still favor a pullback before heading much higher.  This move today may put a scare into the shorts once again of trying to press new positions.  A close over 1014, even 1010 Fridays close would be looked on positively. 

In addition, we'd like to see more of our earning plays participate more on the green days.  Up until now, we have quite a few plays we are following after their earning reports.  So far, none of them have made any significant progress since their earning pop, except maybe HITK MAIL FIRE, but that`s not really the momo`we`re looking for, maybe too greedily after STEC DDRX and a few others last Q.  We believe some will eventually pop out of the range and challenge new highs.  Those are the ones we'd be chasing aggressively.  Still, a few bolded yesterday performed decently, FIRE  STEC  PWRD  EJ ( did same as PWRD following EPS, rising higher and selling off later).   A few liked stocks in July 28th alerts, PFE, RKT  had nice days as well.   So far, there's really no point betting heavily on one play or the other.   We simply have to let the plays behaviour dictate our funds.   In our opinion, every earning play has a chance to do well unless it breaks down badly.    Things are moving along somewhat slowly recently and it's fine with us.   The next couple of weeks may be a good test for some of our earning plays and we'll see if anything gets to be favoured by this market. 

Here's some Honey...

Are there really Bears who don‘t like honey?.   Well,  it seems the ones in the stocks market these days just don’t, even when it’s handed to them on a plate overnight at SPX ES 1030.   Yes.. that's about 20 points from lows to highs the Bears got teased and than dragged by an underlying bid of swarming Bees!.   What had the makings of a 1+% down day due to world markets feeling the US-China trade wars,  turned out to be just a regular ordinary day in this Bull rally.....Bears not pressuring new positions….Bulls coming in with an underlying bid..new cycle high being made.    The Bears just can`t conquer their fear of upside risks and really who could blame them after the 2 recent slides that ended up disappearing by short covering with new highs being made both times.   Today`s upside risk is not really the Retail report, this report tomorrow has been a time shorts position themselves prior to this summer, which led to sell offs on day of.  

In our view, today`s upside risk is something you probably didn't hear much about in the media.  It is the Barclay`s conference tomorrow/ Wednesday, where banks will start updating the markets on Q3!.  We discussed the positive tone coming out of the conferences last week, notably the Tech`s sending a positive tone that helped the market make new highs.  Well, this week, this financial conference is fear for Bears!.  We all remember what the Bank- Broker tone did for the market to start this rally!.  Simply, the shorts were reluctant and covered in case things are upbeat leading to SP financials ending up 1.4% on the day.    Early in the summer, we said eventually after this initial rally, we anticipate the Banks- Brokers to lead the market higher in Q3-4.    Is this the beginning of this or are they going to be the reason we pullback and correct.    Simply,  this conference is important to the Bull cause and we'll monitor closely…(sell off on good tone or will market run higher?). Still, there is other data points to watch for, inc retail sales and earning from some notable names this week.

As far as individual earnings linked stocks, we had a few more hovering around and/ or making new highs like SWI,  which has had consecutive up days.   FIRE  alerted again last week is capable of duplicating such a move.   UTA  continues to find a bid, but after being alerted in $9.30`s recently, a run to 12.60 is not a bad excuse to take some profits as it just clears 50ma (even though today it had its best bid day).   A stock like this is one we'd be buying prior to its next earnings report due to its China and business factor.    VVUS,  showed it's capable of moving fast on any given day, we have no hesitation holding it long term as we originally said.

A Snoozer

Despite some early volatility to the downside, the market was generally a snoozer today.    Perhaps, no news is just good news at this point.   Heading into Friday’s trade, we noted technically, as long as we closed above 1055 it would be a bullish sign heading forward.  Today, we found the ever present underlying bid just above at 1057.

Best Sector, tech looked as if it’s done consolidating after 7 days, so we’d look here tomorrow for possible follow through.  Of possible positive interest for commodity sec is the CIC (china sov' fund) getting in the resource game with a 850mln stake in Noble grp (commodity trader).

As far as individual play goes, other than a couple of plays such as SXCI FIRE OVTI  making a new closing high's today, most plays are in a nice consolidating pattern.   What's most likely is going to happen going forward is that we'd see more HITK, DDRX  type of pre-earning run up.  Simply, we may get better pre-earnings moves than post earnings reports this Q.   We have quite a list of plays on our screen at the moment that will undoubtedly have some kind of pre-earning setup.

Other than a couple of Eco' reports, the most anticipated event will be the FOMC meeting on Wednesday and IPO‘s later in the week (list below on site). We don’t expect any surprises from the Fed. but we will keep a close look on how they interpret the recent economic activity or exit strategy. This will be closely watched as a sure sounding Fed gives market participants confidence.    In the meantime, there's really not much we are expecting from this market other than keeping our eyes on some plays that are poking with recent highs/