DJIM #42 2010

A look at the majors weekly closes,  SPX +1%, Dow -.5%, NASDAQ +2.8%, the mixed results exemplifies the ‘funky’ market tape noted mid week continued on.  Money flow circulated from one leader group. There were as many as 3 ‘group’, 1 day moves this week that kept the market a float.

• 1-’Clouds-Virts’ on Tuesday-  5-7% gains in momo names like FFIV, VMW, CRM after alerted here for a possible catalyst this day. (VMW  EPS on Monday will be important for group, many names reporting later in week)

• 2- Transports./Industrials/ Base metals  rallied huge on Wednesday.   Money flow was discussed previous day and this was the outstanding group coming off CSX earnings, FCX, WLT rallied in the base sec’ …“…Monday, it was the casinos, today the clouds.   Tomorrow, who knows...Commodities?..Banks?..or some EPS stuff.”.   The commodity base material trade bullish call from 2 weeks ago is working, but with USD biggest day in weeks on Friday, this trade may rollover some in the next few days until this minor corrective USD/Euro phase ends.

• 3- Mega caps- it was noted  before Thursday trade…“.the answer is money is also flowing into the ‘safe havens mega caps  like MSFT, CSCO etc".  This premise was only solidified 48 hours later, post GOOG  earnings as it and AAPL AMZN  all ran large on Friday.   So, yes the broad market may have ‘blinkers’ on for GOOG as seen by a flat SPX on Friday, but the ‘groups’ associated  with the catalyst still get the liquidity/mo’ flow.   At least 50% of the small gains in SP this week can be attributed to 4-5 mega cap stocks.

In the middle of all this were some timely words on Fins’  as 2 days of intraday losses of 4-5% followed hitting the money center banks and JPM etc, that also helped the ’rotation’ picture as money flowed out of this group.     A wild underlying market week on the micro side and the macro side was just as wild.  

Since the FOMC minutes a shift to selling TSY’s is probably underway,  which would signal that QE2 is selling on the news.. (USD just doesn't go up any more right?)…The fact it did Friday after Ben's address and inflation data, this is probably the case, but still equities did not sell off on the higher USD.    This could be because rotation/liquidity into stocks from Treasuries is the natural course, even if it signals QE2 is selling on the news.   How’s that for confusing?.   It actually might not be as the market remains steady because individual groups get enough liquidity to sustain it.    Only thing to do is go with the ‘premise’ discussed into Wednesday…“As the last few days point out, it’s very possible to trade from a defensive posture (as in not being heavily exposed overnight mostly) to avoid any surprise sell off and to have money available to jump on new company specific earnings.   It also allows you to use that money to play groups moving on a particular day , if no earnings plays show up".   It may not be perfect the action for broad market follow through, but it gets you through day to day.  Like every other trade that gets crowded and fatigues, QE2 is also such a trade is something to keep in mind!.

So, just sticking to this trading methodology as it’s "sell the news"  in TSY, which interwines to QEII, but it’s "buy the news" in particular sectors/stocks off earnings.  How long can this daily rotation keep up until the 2 major groups (Fins’/Semi’s) struggle wear down the market?

Speed bump...

In typical ‘resilient’ fashion, market came off overnight lows to not only recoup those losses, but make fresh new high ones.  Once again, the broad market kept steady on the back of rotation into a different group (Fins’)  as value seekers/and short covering came in after last weeks shellacking, post C  EPS .  Despite a >8pt gain in the SPX, the broad tape was quiet unless you’re into defensive groups (utilites/healthcare).  At least some action nice early action in SIGA  and rare metal plays like MCP.

AMC was the action for the day as fans became fickle and threw away AAPL, IBM, VMW  and those guilty by association due to (lighter Gross margins/ipad #'s, soft software segment and bookings), respectively, not meeting expectations despite the ‘headline’ numbers being fine.   The excitement of the Bears to see momo names- groups/ mega caps off many points individually AMC is probably going to be short-lived as far as the broad market is concerned.  It’s nice the market had a ‘useless 8pt' gain that can be evaporated as if today(inc.AMC) didn't happen and we can start fresh.   Either, we will see bargain hunters go bid out on tech and/or we will see another group pick up the slack to keep this market steady as been discussed here.   If this happens, the market clearly than has its eyes set on SPX 1200 by QE2/FOMC date. 

..too much too handle...

Once again, as yesterday, “In typical ‘resilient’ fashion, market came off overnight lows”.    Market was almost done erasing all the AMC tech sell-off when the PBOC ‘surprised’ with a rate hike and ES spiked back downwards.   Still, by early morning most of the momo- high beta’ rebounded and came an eyelash of closing their ‘gap-downs’ (eg.AAPL ~$314 as ‘bargains hunters go out in bid’ and fast trader shorts covered.   Unfortunately, short covering only lasts so long before longs only have to step up. The realization that earnings were not up to snuff and China just did make a rate hike that spiked the USD curtailed any conviction buying.   As far USD, this weekend‘s warning came to fruition, someone always knows something.."..with USD biggest day in weeks on Friday, this trade may rollover some in the next few days until this minor corrective USD/Euro phase ends".    Of course every commodity and the underlying stocks (materials, energy off >2%) took a beating as the DXY jumped 1.6%.

All in all, just to many moving pieces hit the tape and more came during the day, notably, the BAC /NY FED ‘repurchase’ headline caused a late day swoon.  This one was actually floating around overnight, but it gave sellers-shorts a chance to bunch all today’s moving pieces together in the afternoon for a selling spree.  There was no one group to rotate into today too keep the market steady as has been the case discussed last week.

As far as PBOC,  it’s really not bad at all and probably positive for their equity markets as it‘s a sign of official confidence and will not cause China to slow.(definitely good for their big banks).  It will be interesting to see how their markets react tonight and rest of week when their data/ inflation hits their market to get a clear read.  It would not be a surprise to see US markets act favourably, if Shang puts in a green day tonight.  

Yesterday‘ Journal, included MCP ’s nice action and today it had an exploding breakout on it’s biggest up volume day following a China Daily report of cutting exports.  This was actually denied by another gov’t official, but nobody cares to point that out when momo hits.  Any Chinese changes to quotas etc and this will reverse the trade, so this one is speculative at these valuations.   Only brought it up yesterday because it pull backed recently and came back up to breakout levels.   Another volatile one is MOTR  in the software tech/ based on cloud computing that should be watched now that it has pull backed to 9ema levels.  It will definitely move on new carrier contract news from emerging markets in the future.


In conclusion, today likely only a temporary pullback (much needed), if China hike becomes a positive.  Otherwise, it’s looking like August top on the charts.   This weekends G20 meetings are also going to become a headwind this week.    Unfortunately, earnings keep coming a little light and short of expectations tonight to give the market a lift, daily rotation will be tougher.

Quick fix..

After the largest one day loss in a few months,  it’s comical to see CNBC Amercia spin on why the market reversed all it’s previous losses intraday.  This spin consisted of Airline, KO, BA etc. earnings, USD, Beige book!.  Oh Please!.

Just 24hours earlier, the sell off in reaction to China hiking was all the news and today’s it’s how great the US  economy is!.   The overwhelming reason for today’s reversal is the fact Shang’ made it back form losses and eked out a green day as reaction to the hike turned ‘positive’.    This was the lead here at DJIM to look for a sentiment change with US markets acting ‘favourably, if we got it ..

…”.As far as PBOC,  it’s really not bad at all and probably positive for their equity markets as it’s a sign of official confidence and will not cause China to slow.(definitely good for their big banks).  It will be interesting to see how their markets react tonight and rest of week when their data/ inflation hits their market to get a clear read.  It would not be a surprise to see US markets act favourably, if Shang puts in a green day tonight".  

Of course,  this leads to a Euro strengthening/ USD weakening, reversing yesterday’s big USD up day in response to the hike news.  This dynamic reversal didn’t just come out of the blue air, it needed the China sentiment change to reverse the initial response of USD gains/ resources losses.  Last week, said 1.43~ Euro is in the cards, we’ve probably got the early week corrective phase discussed over with.  Now, with most recent developments, G20 is looking to be more of a USD weakening story.

The other overwhelming reason is MGA , one of the top influential global firms on “Macro Intelligence” for the world’s top HF’ Institutions made a gutsy QE call!.   According to MGA,  the FED will set forth a $500bln treasury buy program on FOMC day and leave it room to buy more in the next 6 months!.  This brought back the QE2 risk trade, thus also helping USD dump.  Why gutsy?.  Well, we better get the 500bln in November as that is the expectation today.   Back to Beige book in the afternoon, this did nothing but hurt stocks and strengthen USD as it upgraded the economy, so how it supposedly helped the rally is a mystery here.

As also pointed out,  China macro data (GDP CPI etc.) coming out overnight will be important because it will likely show the hike was a vote of confidence in China and not a change in policy sign.  Still, no matter the data, interpretation will be subdued now with the MGA-QE in the background.

...holding it's breath

The market continues to hold it’s breath at ~1180, Euro at 1.405,  letting the latest noise on QE and now G20 control emotions.   The up and down gyrations is just proving many can’t sit comfortably. Unfortunately, the earnings story can’t take shake the markets up as there is nothing substantial to move the tape.  Today, all the good reports sold off from highs as Fed  ‘Bull’’ards ‘100 bln comments rattled the USD and markets did their usual tandem move.   All in all, the market is still showing ‘resiliency’ by finding a bid on any shallow pullbacks.

A little excitement today away from the broad markets was in the speculative space, (which is not the gig here).   We’ll, guess it’s not excitement if your stocks drops 25% in one day as in REE  and BORN’s case.  DJIM’s avoidance is based on not buying first and asking questions later, but the other way around.  BORN, supposedly re-discovered how to make moonshine;), almost the oldest profession in the books /  REE, from Canada where we have always had the biggest speculative west coast market relying on promoting ‘swamp land’ companies/ penny stocks with minerals underneath are of no interest to promote here now or ever been.   (At least, MCP  is real,  if you want the hype of the rare metal trade.) Most of the 'Shadowlisted' stocks last a year or more/ or before they are taken over as has been the case time after time, not a month.  An example is tonight, FTNT  an add here at $18 before it was discovered as a play in the space anywhere, showed something many can't and that is accelerated growth.  It's potential takeout price just zoomed to over $30 on this report.

DJIM #43 2010

Market’s G20 headwind kept the market at par late in the week.  This weekends G20 produced a status -quo communiqué, no headline risk/ not hawkish to USD and all focus goes back on FOMC/QE date.    In last weeks case,  it was more of the market holding it’s breath at ~1180 levels despite a slew of earnings exceeding forecasts/ China surprise hike while USD consolidated.   The ‘little surprise’ over the weekend should put the risk back on to start the week,  so we’ll likely have some commodity linked stocks rotation.  

Away from the broad market dullness, (SPX hit 1084 on Oct 13th) most of the trade leads/alerts here last week were on ‘set ups’ instead that worked quickly..MCP  for Tuesday $30L-35H,  MOTR, (9ema) $15L to near $19 AMC on Friday, KH , (9ema), 18L to 19.50H.  So, despite a flattish market for awhile now, we have those ‘daily’ sector rotations and/or earnings (below note)/ set ups making for a good traders environment, while the QE2/election outcome is being waited on.

You can already paint a macro picture from earnings as the notables in each sector have reported,  now it’s gets into being more of an individual game as 2 DJIM stocks showcased on Thur/Fri. ..FTNT, RVBD (+~20%).   This may help rejuvenate the ’cloud-virt’ space, but this week’s up coming names need to keep this out performance up with their reports.  * A good thing to see is there was upside from open gaps of 7-10% from their upbeat earnings for this Q and next, plus, many techs that didn’t ‘guide’ well for next Q,  traded well anyways!, (eg INFA,PMCS,CTXS,SNDK)  is a good sign for the market.   This is a change of pace this group this EPS season.

..underlying stocks

Today might be looked on as a blown oppy’ for the broad market after it closed near the low’s on the heels of the risk trade put back on globally, following weekends go ahead to weaken the USD.  U.S market’s couldn’t carry what was put in other markets globally off the G20.   Add some M&A activity, decent eco’ data here and you see,  it just doesn’t really matter now to the broad market ahead of the early November catalysts.  So, instead,  let's decipher broad market from individual stocks.  The underlying stock tape is where there’s light and life.

As pointed out yesterday, the reactions of individual equities is something that can keep us traders busy while market stalls and today was a good follow through/ confirmation on this front.  This falls into DJIM’s trading methodology, instead of the ETF trade that has been ongoing.   First, we had commodity linked stocks here like eg. FCX/WLT  do the sector rotate game off the FX game.  Secondly, it was  pointed out that earnings are getting a good reaction and today SOHU  was a prime example…traded low $70’s premarket after EPS and made it up to $76’s intraday, exactly what was pointed out post FTNT/ RVBD, stocks still have leg room to move after gap ups.  BIDU/SOHU's  results are also helping the China stocks move, so we have more individual names moving within a group.

Also,  the Virts’clouds extended off the RVBD/FTNT  reports with CRM, FFIV SVVS RDWR  having good days with RDWR earnings helping/ and M&A noise coming back into the group as well.   Also, you`re seeing some individual names  go without catalysts like BID (alerted Sept 27) at $35 hit about $42, MA,   (alerted Sept 16, $210 hit $248 (both >20% since) made fresh highs and fresh names like MOTR  got a Cramer fix supposedly and ran another ~15% to $20.70H , KH  made an early intraday H/ NCH.  PCLN  running off and with good ole`TZOO  earnings.   Geez, even RIMM  made a new high since added back to list (Sept 21).   Simply, there is plenty to trade off the Shadowlist, while 'broad'  market still struggles with SPX ~1180’s. 

In the end, you can’t expect the market to do much as a whole before next weeks FOMC/Elections, so don’t worry about it.   Just fixate on individual stocks as this trade has come back for now.  Nothing broke out today like USD to new lows, Euro, Gold to new highs, so nothing has changed to give this broad market a shot in the arm. 

..underlying stocks again

Oh, those shorts, who tried to press the issue of a Bull ‘blown oppy’  yesterday were rudely (once again) beaten by the ‘resiliency’ of this market as it bounced fast off the opening bell SPX 1178 touch(off ~20 points since Monday’s fresh high).  

They were broken by using the old adage of a stronger USD/weaker Euro = lower equity prices,  ignoring what was pointed out recently here that rotation from TSY’s was going to happen as QE2 expectations gets priced in.  (see DJIM #42...“..but still equities did not sell off on the higher USD, This could be because rotation/liquidity into stocks from Treasuries is the natural course…and market remains steady because individual groups get enough liquidity to sustain it. ).   This was overwhelming theme today as 10yr TSY’s made a big move crossing a trendline at 2.65% from April, while USD got a bid, but  the market ‘surprisingly’ to the Bears did not drop.   This is quite positive to hold up as we did.
  
As noted,  fixate on individual stocks and not the stalling market for oppy’s to trade.  So, while the SPX traded in a very narrow band after 10am, our DJIM listed stocks, including some bolded  yesterday added strong follow through.   Notably, RIMM  powered to a 10% intraday H, our little MOTR, motored another 15% before running out of the 9ema play, right back down the hill.   BID >3% and MCP  to a NCH.   BIDU, NFLX, post -EPS were making fresh NCH‘s.  The clouds-virts were strong with RVBD, FTNT extending post earnings gains as well.  The group was also helped by CML  retaining advisors for a possible sale (v.nice earnings AMC was a no brainer, if you announce such a deal possibly in the making hours before). AMC,   FFIV,EQIX  helped out the group some more.  The premise here that there is room to run after a gap off earnings was shown  again today in MIPS ( it’s another stock that has been mentioned in M&A discussions).   Also, note if the market gets into any defensive rotation soon LIFE, ILMN  are two strong earnings today to go to,  probably even right away tomorrow. 

Clearly, if you want to outperform now, it’s primarily selective earnings stocks we should be driving as broad market’s uncertainty is abound around next week’s catalysts .

..you can taste the difference

As the broad markets tumbled with enthusiasm dampened for QE all the way to SPX1173, (WSJ says the Fed will “unveil a program of Treasury bond purchases worth a few hundred billion dollars” over “several months”, the Fed is opting for a more measured approach vs. the initial “shock and awe” of QE1),  DJIM traders should have hardly noticed, if following the premise layed out all week of fixating selective individual equities (earnings) vs. broad markets goings on.   

Yesterday, the lead into the trading consisted of 5 EPS linked stocks (CML (the highlight ,+30%), FFIV, ILMN, LIFE, EQIX) from the previous AMC.  As noted, EPS stocks ‘have room to run’ after gaps premkt and/or post opening bell.  Again this aspect pointed out early in the week worked again, notably with CML and FFIV, ILMN.   Another on AMC off our list, LVS  showed there is room to trade to higher after the initial bump off earnings.  As far as the overall Virt-cloud/M&A gang shooting higher, remember this note following the huge sell off in the space.."To put this 'cloudy' day into perspective, ask one question.  Do shorts or the acquiring executives at IBM, HPQ DELL, CSCO know better???.   Easy answer, cloud is the only growth shift going on, besides anything smartphone related.  One good report, one acquisition and it will be sunny and not cloudy days in the forecast".

This EPS has seen over 80% of reports beating expectations, but the macro/QE2/ FX trade is the number one issue today.   Once again the early foucs was USD was stronger/ Euro weaker and the bond sell off continuing.    By end of day,  maybe some are finally getting drift that a strong USD/weaker Euro does not necessarily mean lower equity prices and that there is actually an allocation shift from TSY to equities to sustain the market as alluded to earlier this month as a possibility.   This last minute Briefingcom day trader headline shows the bewilderment, a little too late for those shorts who tried to press the issue again early, only to be squeezed out again by the ‘resiliency.’ of this market…“Squeeze off the lows continues as we approach the close..The dollar is off its highs, but its pullback has not nearly been of the same magnitude as the bounce in stocks”.

What’s interesting now stems from what was noted here following the beige book which showed eco’ is getting better.   Since, we’ve had some more good data points, including China/UK GDP numbers, better than expected earnings that is showing things are ‘stabilzatizing’  here and globally and thus QE2 is becoming less relevant in the size scope the market wanted days/weeks ago.   The expectation today should be what ‘Bernanke’ likely leaked to WSJ to cool the enthusiasm beforehand and just maybe the equity market is not about to sell off on the news like the Bond market has judging by the reversal today.   The more pressing issue for the broad indexes is the signs of tiredness at SPX1180’s for what seems like all of October now.   All in all,  this should not matter to how we all go about trading the market day to day with the noise getting more nauseating as we get closer to FOMC date.  We can avoid this noise and not throwing up over ourselves and our accounts in case of a sell- off by staying selective in stock picking and by switching those names/taking profits as new oppy’s come up.  

*Again you can follow additions to our Shadowlist by visiting the on site 'Playpen'.

http://www.djimstocks.com/djim-journal-2h-2010/2010/10/11/on-site-playpen.html

..no courage

Let’s face it, the Bulls and Bears don’t have the courage do anything substantial ahead of next weeks catalysts and you can’t blame either side.  Today, marked the 3rd day this week where the market shoots up at open, but lack of courage (conviction) weighs on any further upside.  On the flip side, following the shallow intraday dips the Bears/shorts don’t have the guts to press positions due upside risk fears from next weeks.  The tension leaves the market at par for the week..SPX1180’s .   

Seemingly, the last resort (USD/EURO) to go by for traders, (the USD/Euro= direction of equities failed miserably today).   This was no surprise here, we’ve pointed out the inverse relationship breaking apart the last few days and the importance of watching the Tsy’s (TNX) possible allocation shift.   Anyways this was pointed out in post lunch comment and the market shook off the ‘bad’ looking reversal and inched up into the close.  Tomorrow, with month end at hand, which always has some bearing in the FX universe, may put the 'inverse relationship' back on with a slew of US eco' data on the agenda.