...what's it going to take?

Tuesday, March 10, 2009 at 08:02AM

Despite a broken tape in Asia/Europe overnight that had the US futs looking broke as well in premkt, the opening bell provided a quick squeeze that led to a flattish day till late as we closed off -7 SPX points.  As the case recently, every uptick succumbs to a supply of sellers.    Simply once again, no conviction buying follow through.    It seems those expecting a bounce that see a mkt going down later in the day,  just use the next uptick to get out their supply of shares and sell instead of waiting with another night of overnight holds to chance again a real move upwards.    Patience is slim these days.   One good thing we are seeing is a pickup in M&A activity, recently we had some potential deals in the AG-chem, the MRK deal and DOW- ROH went through.   Of course, most of the rumors deals will be of the prey on the cheap side,  but at least some noise is visibly back.   We also like less noise from D.C the past few trading days, maybe the less they do say or try to do, the better chance the market can bottom on it’s own.   

Usually,  we have a case of mouths calling the market bottoms, nobody is doing that now at this level and instead calls for 500-600 gravity pulls are all over the place.    We like this as well for a better chance to get a meaningful bounce from the 'Mark of the Beast' 666 level  and so the same premise exists as in yesterdays Journal of sticking to the SPY/SSO/OIH  trades.      As far as the OIH trade, energy is the best performing sector on the day outside of Financials (S&P Energy+0.5%) as Crude ran up nearly two bucks to $47, main reason being cited is speculation of upcoming OPEC cut.  As far as the recent stalwart tech, we can only hope TXN  mid Q report is decent enough to get this sec going on.

Sooner than later this week,  the hope is the House hearing on Mark- to Market (M2M) should make for a pre-earnings type move in the financials/ brokers ( the laggers JPM, GS  eyes on) with market in tow.   The anticipation trade is our hope this week.   We also have G20 meeting this upcoming weekend that could make for some favorable action later this week.

DJIM #11 2009

Since the start of March, we were highlighting on the Journal.. ."the shorts have no reason to cover and take profits as they see a market with no buyers lining up.   Shorts just press until proven otherwise“.    This all changed as the covering started off an internal Citi memo and continued with more of the ‘2 month profitable’  headlines thoroughout the week from the banks-brokers following up on the previous Fridays postive report from WFC.   We headlined a “squeeze lurks” and were positioned well as we started to get a meaningful bounce from the "Mark of the beast 666SPX",  unfortunately being positioned in advance of the rally led to taking lots of the chips off the table as the first 300+ / 4% day occurred.   Of course, in trading there is always the ‘could’ve..should’ve..would’ve’, second guessing yourself game,  but after so many feeble short covering rallies in the past weeks that ran out of steam hours later,  we can’t really blame ourselves or anyone in taking profits as they come in this environment.

So, where are we now after a sigh of relief in the markets last week?.   Well, the sigh of relief is not because the outlook has improved overall,  it’s simply because equities rebounded 10%.   The pronounced weakness of global goods demand continues as all indicators are down in industrial/ international trade meaning the global GDP will show similar traits as the recent Q’s decline.    Also, the consumer is under extreme pressure, the bounce of retail numbers, household spending last week does not mean the labor markets are improving!.    We have to be cautious as we start the banking earnings season this week as this move can reverse at the slightest newsflow excuse to do so.    Last weeks bank-broker newsflow is not enough to change our sentiment on the sector so quickly.   Understand, nobody is all of a sudden turning positive, ‘Bulls’ and 'Bull markets' are not made in 4 days.

A busy week ahead with news flow to be coming from all directions…will FOMC respond in any unusual way to a deepening recession?….will the alerted Credit card Master trust data figures to be released this week bring the financials back to earth? ( remember the Jan. # crushed all financials after, inline #'s probably won't cause the same)….will the seemingly lacklustre G20 finance meetings disappoint as the communiqué really says nothing concrete or respond to U.S wishes or anything else.   Will the market like the toxic asset announcement this week?.  This might be the big catalyst to direction of market this week.

Again,  despite the huge squeeze in the most beaten sec’s,  the laggards were quite noticeable as they comprised the tech and commodity sectors.   Even though, we closed higher Friday with the big 751 SPX holding,  it was done in what seemed like a holiday trading session.   Some profit taking was beginning and fatique seemed to be setting in.   The reason we are drifting higher is because shorts were/ are not lining up new positions just yet.   See Chart Section for SPY chart as to level we are looking for a potential top to this 4 day move(circled).   Downside 740-ish SPX is where we’d want to see support to remain in this positive trend.

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.