Your Personal Trader - DJIM Journal 2011

“… The question is will it be a standalone technical correction for the right reason (consolidation) or will it be accompanied by ‘ bad news’. This will determine the scope of the correction….shallow or deep. In other words, consolidation or correction?. (Entering last week’s trading).

Well, less than a week later investors are asking this same question!. DJIM’s view is this Friday’s sell off is very welcomed by both sides ’expectation of a correction’, as discussed in the Journal trading lead into Friday’s trade. SPX is now a grand total of 9 points higher in a strong earnings season. That’s good for longer term view as there is room for those underinvested looking from the outside into this market for 2011.

As traders we’re all used to ‘sell on the news’ last few Q’s after INTC earnings. This Q it took a little longer as in ‘peak’ earnings hitting Thurs night/Friday BMO and used Egypt’s misery to ‘excuse ‘ a sell off and rid of the market ‘froth’. The market knows all it needs to know as the bulk of earnings were in on the important, “BIG’ banks BIG industrials, BIG techs. The end result has been a ‘strong EPS Q. Investors/ managers know the trends, so it’s time to take the froth off. That’s the broad market, it has nothing to do with ‘individual stocks we are looking for in the upcoming days/weeks to play, so trading life goes on. Also, playing a part is what was touched on late last week after a good market day, simply it is very much technical related… “All in, the RUT excelled, but this is only a dead cat bounce until it at least makes it back into the Sept – Jan TL closed at ‘R’). The NAZ faces the same ‘R” in its chart and both are hovering around 20ma.“ . Basically all the ingredients have been in the market for days. Friday the ‘soup’ of all these prevailing issues just boiled over. As SPX made fresh highs, the transports / RUT were not participating signalling divergences once again. We’ve been talking discrepancies in the indicies consistently.

In all, as alerted late Friday as a precursor to the weekend Journal, the supposed ‘panic’ was not in individual stocks and definitely not in the recent emphasis of stocks/ groups from the Shadowlist, but in the ES ETF scene. Therefore, it’s not real panic as investors held long positions. If we breakdown the lists…the momo clouds were all green on the day, the Ag’s and coals were also predominately green. Anything down was more of an individual issue like AMZN related to earnings and not ‘Egypt’. Of course, if things escalate and investors get nervous in days to come, we will likely see this spread to single stocks. Today, if you wanted to get out, you could have done it in one piece as most Shadowlist were hardly touched. Of course, we don’t want tensions to heat up in the Middle East, but if this is quickly resolved the market will unfortunately (yes, unfortunately) bounce (probably ES ETF mostly) and smart money will sell into the strength and into singles stocks. This will show it wasn’t geopolitical tensions that caused the 2% sell off, but all the underlying issues that were already present. Also, it will show the market made a short term top on 01/28.

Technical – as noted in last alert, SPX 1260 is a high possibility in days to come. This would represent a ‘shallow’ correction and therefore ‘consolidation.’ If 1260’ish taken out, we’re looking at a long term trendline break from Sept break and the likelihood of December gains evaporation (deep correction).

Shadowlist

Momentum/earnings/“winners of ‘10 – The ‘cloud/data and momo earnings scene was immune to the Naz 70pt/ >2.5% sell of as the M&A activity(TMRK) trumped. If this restless environment continues this may have only been a hiccup day as shorts may look to take high beta down as (it’s the easiest.)
Commodities – As noted above, the Ag’s ferts/coals also outperformed and a rescue of MEE by ANR(speculated for weeks) finally occurred this weekend and shouldn’t dampen the coal space heading into the trading week and more cyclones (AUS). Of course, the notable trade off Egypt was a rush into Gold/Oil. We’d stick to oily related ETF’s , if the situation escalates, but a few single stocks may work for other reasons as well. CRR, gained up to 4 points intraday, ( a earnings addition to trading list as it continues to make solid earnings in the O&G equipment sec.( previous day). FLS, an old DJIM play is one to look at from a chart perspective.
Q4 earnings update – What we want to look for early this week is if excellent reports get bought or if this trade dies short term?. In other words protect yourself from gunning what look like good reports early and risk being a new holder at the days early highs off a report until we see the markets mood. If earnings are no longer bought, it likely signal more downside in the broad markets. This relates to ‘earnings sell on the news’ premise above and would indicte a shift from MICRO to MACRO for the markets ahead.