DJIM #4 2011

Talk of correction picked up late in the week.  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 downside…shallow or deep.   In other words,consolidation or correction?.   The pick up in correction noise stems from something DJIM has been noting since Jan 7th..”RUT of a day’.. Wary-  the ‘big’ underperformance today of the “RUT”, which had been the leader during December’s grind higher… the RUT has now lagged the SPX for consecutive weeks and could be foreshadowing ‘tiredness’ for the rest of the market..(Jan10th )…and before Friday’s trade…”You could see this by the RUT underperformance( down 1% to the SPX.).  Friday’s trade gave this market fault more life.

In reality, the market is still in the same place today‘ inside the 20’ having just tested the 20ma and now sits only a few points over 1280 as “RUT” talk generates interest.  On Friday, Briefingcom was really touting this point…(click chart on site) . Simply the underperformance point is gaining heavy exposure amongst traders and should be monitored closely.

http://www.djimstocks.com/storage/thumbnails/Rut_underperformance.png

All in, China expanding tightening policies, a hawkish Europe, a technical negative bias and the broad market is simply signalling it’s tired and overbought. We’d welcome a correction and in the meantime concentrate on fresh earnings to trade as in selective stock picking instead of being exposed to holdings in number or size.

• Q4 Earnings update: As discussed last Journal, earnings reactions may change due to bar being lowered. It’s really been sloppy so far on reactions with mega momo caps selling off (AAPL, GOOG) on high expectations build in, while mega caps like IBM and GE perform well.  What we want to see is small caps react well and be tradeable. Friday wasn’t bad as ISRG, PLCM, MXIM were some of the best performers on NDX following earnings giving ‘hope’ for names ahead. 

drifting into support..

As the market entered the month of April, we cited..”Note, we are another “R” cluster to low 1330's-1335, still a break is clear sailing to years high’s”. March 31.  Immediately afterwards the market had 5 consecutive closes just below 1335 (between 1132-1335) failing to breakout and close above 1335.   After so many failed attempts, it is hardly surprising the market is drifting lower last few days as traders become generally fatigued waiting on catalysts, any catalysts.  Now 12 days into April and the market hasn’t even tested 1344 high.  There is simply nobody home to play this trading game so far this month,  it’s excruciatingly painful to be part of it as scarcity/no supply of buyers see stocks drift lower because there is simply no bids.   Due to this, quite a few stocks are looking oversold as individual stocks are looking worse off than the major indices and may attract dip buyers soon.   Indices are looking like they will play catch up to stocks beginning to test the gap where all this began late March(SP1319-1322).  Just below is our benchmark level for the market since 2009 and that is the 20ma at 1310.  The 50Ma is somewhere in between gap and 20ma making this a cluster of “S” Support for the market to monitor.

Ahead of the open (14-12)

A puzzling early upward bias on what was only incremental news, if not negative (retail #’s lackluster, BBY earnings) had the market rallying.  The pre-market can be explained by a better sentiment overseas (decent auctions, but were only 3mth ones), the gains afterward left one dumbfounded. This was followed by a dramatic fall in the euro in minutes with equities scaling back all gains and more on a report Merkel said no to the ESM being topped up. Really?. Didn’t they just move up date of ESM with no extra firepower talk speculation? Market seems to be getting greedy and jittery at the same time. This ESM top up and Merkel’s repetitive response to it was not an immediate market expectation post- Summit or a surprise.  The upside or downside made no sense as there was no ‘real’ news.

The process of writing daily Journals begins with sticky notes you can say throughout the trading day as the paragraph above written in the morning. It’s not to recap the events for the next day’s journal as it’s never been the intention to recap here, but instead a ‘mentality check’, methodology, a look into what’s on the mind of a trader(s)during the day. The reason behind mentioning this now is the above paragraph can be repeated for the big sell off post- FOMC minutes. Last month, a lead into FOMC and possible MBS whispers came to an abrupt halt and was put away in this view into this FOMC meet up.  How the market or why the market responded the way it did leaves one dumbfounded again as it was not expected. These moves are always telegraphed. The only noise of FED action was a rumor of such floated in the morning.  (Statement was inline, so it was pure QE speculation).  Is the trader becoming naïve too, besides greedy and jittery.  It doesn’t happen this way, if anything was to happen it would have circulated around institutional desks days before and you would have heard about it here. The morning ramp and sell off was repeated in the afternoon on empty speculation. If there was no QE from ECB, why would the FED QE now?

All in, the trading action is signalling a lot of uncertainty and jitters, it all goes to show yesterday’s lead of ominous signals in the market are not be taken for granted …”..but break of 20MA (closed just above) is ominous when paired with Euro and Gold selling off today.( today,Euro slid to Jan lows ~1.30 and heading lower it seems 1.28 to start, Gold liquidating,off 5% on the week)… 20MA held today thanks some late dip buying, (again) but a potential close below it in the days ahead will dampen any hope of a risk on seasonal rally and instead a sell mode effect will prevail. A nearby cross of 20ma/50ma is ominous as well.  Fears are seemingly accumulating now as INTC (BBY today) woke up those not “paying attention”,(SMH hit hardest vs. other important indices)….  The stress of Europe on others is beginning to show it’s hand.

Let’s add the weakness in financials and the seasonal rally of 9% looks to have hit late Nov/early Dec as any idea of a rally now into year-end is cooling off.