Work it off...
Wednesday, July 28, 2010 at 07:32AM Time to work it off is likely the signal for the Bulls and the overbought market conditions. Working it off doesn’t mean sell-off big time, but rather pause some. Fresh money is hesitant to step up and buy up a ~8% ramp MTD, yet still show signs of buying the dips. We're in this camp. Also, we'd be careful of buying even 'good reports' till we see a change from today's profit taking actions (more later). Overall, one thing the Bears can’t takeaway is what is shaping up as an upside reversal month come end of July trading (Friday).
As noted yesterday, we were looking for a close above 1118 today or Wednesday to have a chance at ~1130 this week. During pre-market trading, Europe was up ~1% causing ES to bubble pointing to a strong US open, which did unfold. Unfortunately, the way we saw it here, the banks were really bubbling over in Europe up ~4% overall with many individual banks up 5-10%. Basic math you tells you without the banks, FTSE DAX CAC would all be down!
Simply, this pointed to a down market in the ‘broad’ sense, thus the US markets enthusiasm would likely be short lived as alerted. Most probably ignored the weakness in the heavy weighted European mining and metal sectors and just looked at the EuroBanks strength for market direction. Well, those that looked at the tape this way, lost some profit quickly after US market's opened. We had everything from steels to high beta machinery stocks like BUCY JOYG reverse hard.
The other early negative were the reversals in VECO (to $48) and AKS , which traded nicely in the green after their reports initially, but reversed very early on. This is a sign of profit taking, fatigue in the market as investors want to pocket gains in what they feel is an overbought market. Sort of… get it while you can!. Also, it’s worth pointing out to be careful jumping aboard a headline earnings number as in the case of AKS, which jumped nearly 4% off # before closing down that much!. That's a possible~10% haircut if headline bought. (AK Steel prelim $0.24 vs $0.07 Thomson Reuters consensus; revs $1.60 bln vs $1.53 bln Thomson Reuters consensus). You really have to go inside the numbers, especially in a complicated ‘steel’ business.
A question arising today likely is if the commodity driver coming over from China in July wrong after seeing X’s lowered Q3 report?. As macro concerns abated in China recently, the commodity linked equities have rallied with the better iron ore/ steel pricing news. What’s important to note is X’s Q is JUNE end, not July end when these changes have occurred. X’s management is likely just being cautious to recent changes. We don't think a few cautious steel reports change the outlook for China and/or the commodity picture, even if X is usually the trend leader. Overall, considering the strength of rally, profit taking is natural here and eventually will give nice pullback entry points. If the steel share prices hold in on modest pullbacks in the short term, its a positive for the whole market going forward.