...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.  

Headwinds comin' ..?

Surprisingly,  day after a rally you’d expect some downward consolidation to take place,  even more surprisingly is given a horrible Retail Sales the market set a new closing high SPX 1012, (yet not a new intraday high).   If there is a finally a headwind potential coming for the market,  it will have materialized from today’s Retail sales number as we look days/ or a week back from now.    Production is picking up, but consumer is a clunker still.   Remember what we said as a theme for the recovery....“ If you build it, he will come!“.   Well, ..he..she..they are not yet coming which is disappointing, we did not think we'd see a 5th straight decline.    Also, for the 2nd straight day there is a divergence between asset classes, importantly equities and corporate credit which is a negative as the equity market attempts a breakout, a breakout squeeze so far with not a lot of conviction buying.  In last weekends Journal, we talked of a stall to blow off some 'bullish' steam,  despite a seemingly volatile week we will probably accomplish just that to close off the week..a stall and consolidation period.

As far as sector performance, second day of leadership from 2 of the big 3 as Banks- Brokers and Commodity linked stocks.  Even Tech traded well, particularly the semi’s.    All commodity stocks we favor can be found on our shadow list, as always we favor X-CLF  for steel, WLT-ANR-MEE  for coal,  FCX  (copper) to trade.    As far as Ferts, bad news is being shaken off today suggesting all the recent turmoil with pricing affecting stocks may be going away . (POT MOS ).   A casino play here, LVS  squeezed today, but it didn’t cause widespread follow through action as usually seen in the group.

Some earning notables off DJIM,  noted STEC  starting to shake off its offering before Wednesday trade, well, did it ever making a NCH with a 2 day sprint.  Others on Journal this week, SXCI PRE MAIL FIRE TXIC  were all pretty solid.

Anything but conventional....

So far,  it's been concluded that 2009 isn't a normal trading year.    Unlike last year, where everyone seemed to be on the same page, this year nobody seems to agree on anything concrete for more than a day.     One thing we all have to admit and respect though, is that the market took a gigantic turn from a low of SPX 666 to what we are now at SPX 1025.     We can disagree on many aspects of the recent economic development, corporate development and policy development.     What we all have to agree though is that the public (investment) has one sided agreed that things are improving.   Investment community has been voicing their opinion through  buying and more buying of riskier assets (equities) and that's how we got to this point today.

Strangely, it's still a sceptical vision for some people (bears).    Since we can’t predict what's going to happen the next six months to a year of trading , that conclusion remains up in the air, but we cannot DENY what's happened the last six months.    If people still think it's just a conspiracy by the government and a bunch of big brokerage firm’s artificially propping this market higher, then those people seriously need to check their heads.    Politely, simply that’s our interpretation of those people who have misread the market during last six months.

Ok, having traded this market on the long side during the past few months, we do admit that things aren't easily interpretable from time to time.    In other words, this hasn't been a conventional bull market.     How?   The market itself has consistently beat our expectation and surprised even the most optimistic bulls.    It's a good thing, right?    Well, unless you are a new bull that was born at the beginning of 2009, this might be one of those sweetest year you'll ever encounter.    For those seasoned traders that have "seen it all", we feel the market has outperformed most of them.    For DJIM traders,  we trade and live in a world of probabilities.    We enter a trade often in a high probability scenario and hope to profit from it.    If the trading scenario offers a low probability, we simply wait for better opportunity.    This is our conventional way of trading and why earnings plays work either immediately or simply, sooner than later.    However, what if the market offers nothing but low probability trades and often those trades work out wonderfully?    Well, welcome to 2009!.     Having traded as many years as we have, we just have to say that this year is nothing like the other years.   In other so- so bull years, we'd have done ten times better than we'd have done this year up till now.    Of course,  we may be a bit hard on ourselves, but the whole point we are trying to make here is that this ISN"T a conventional trading year.     It's been a slow and cautious adjustment as well always still full of hesitation and tentativeness.    We simply do not want to throw away all of our previous "know how" experience in order to adjust to the current trading mentality where garbage bin stocks have worked.   This will probably be a repeat of where Joe- Schmo thinks he’s a trader now until the day comes they are taught a ruthless lesson or two to take them where they started from.   We know, down the road, this market will eventually return to the normal mode and our knowledge and experience will apply greatly.    Discipline and consisitency is still our main strength at DJIM, even if it means foregoing some of the "seemingly easy" profit here and there.

Back to this market, we concluded yesterday's Journal that we’d concentrate on individual stocks and let the broad market to what it needs to do at new 2009 highs.  A stock we alerted late last week and said yesterday it should be on top of your trading list,  BCRX  stole the show with a huge lift, we really didn’t even notice SPX action all afternoon thanks to it.   Even though we closed flat,  it's really not that big of a deal considering the week we just had and the fact this is the week people go away for one last break in the summer.    Some other plays on our list such as SWM SXCI HGSI ABVT  from this Q and those from last Q STEC EBS EQIX... exhibited some nice strength through out the day.    Other plays have been firming up the setup as well as noted yesterday.   Overall, we thought it's a pretty good day.   As the market inches higher, we are in the buy on strength mode.  Tomorrow is that 5000 household CCI # to watch for possible market direction , even though we don’t really consider a eco data point.

Intact

To kick off the week, we said we’d let the SPX work itself out at 2009 highs while we focus on individual equities.   So far, we haven’t missed much as the SPX has closed relatively flat for 2 days off best levels of day, while 2 biotech stocks we said should be on top of your trading list heading into the week have been 20%+ gainers.   The Bears will probably say the market couldn’t break Mondays highs with 3 positive headlines ( CCI/ Home prices/ Bernanke ), but as far as we’re concerned, these items were pretty well cooked into this recent rally.  The only thing that weighted on the market was a sell off in energy/ crude that took the SPX tape down with it.   This could happen on any day and is hardly an indication of where the market is going.   The rally is in intact and any weakening we're seeing this week is more a sign of the end of summer times.  The Bears are getting all riled up at the wrong time.  This market should go nowhere till post Labor day if this lightly attended market is any indication.   We’d use any surprising sell off in individual liked equities as a chance to add that position either for a quick trade or a longer hold.   

As far as those equities on our list, besides the biotech HGSI, BCRX  moves this week,  most of the stocks we’re following closely are holding up well and everyday there is one or two making new highs.eg. STEC CTSH SXCI EMS  today from our list.   Tomorrow, it might be a few others as been the case.   Off hand, we’d say there is a core of about 15 stocks that we’ve bolded  most recently in Journal that are performing just right and that's where our focus is.

We don’t expect conviction to show up on buy or sell side.  If we do a up move like today again, we would not put too much into it as profit taking will show up again and we’d use exaggerated weakness to pick up those most affected from our core. 

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/