DJIM #25 2010

Early last week, we noted ..’it’s technical matter'…” We should just be happy we closed above the 20ma for a second day and the fact we are basing in the 1040-1110 day now for 4 weeks (21 trading days),  which will make any breakout to the upside that more important and credible".   After the breakout from this range, we got  a bunch of lacklustre days that many were knocking.  To ‘us’..the flat action and dips that started Wednesday was…“perfectly fine with us.   Actually, even better than fine if you consider the 200ma provided support.   Even though, we didn't see a lot of new buying/ conviction to push this market even higher (let’sbe realistic short term..digestion needed),  it is almost as good because we saw dip buyers  come in".   The action following up to Friday close was perfect digestion, consolidation  action despite clusters of  'softer`eco data and corporate data that couldn`t derail the recent push because Euro land calmness, manageability was more important for the market. 

So, the ducks were lining up and tonight we got an unexpected Yuan decision from China and ES is up nicely.   This is going to become part of the global rebound we are in the midst of, since May's derisking.  This is definitely a US TSY- China co-ordinated move as relations had recently been heating up.  This relieves "overhang" tension.    To us, this duck lining up is the effect on commodities and commodities linked stocks it will have over the longer term as the significance is the probability of more China purchasing power.   Now, we can look at trading commodity stocks as early as tomorrow.  

As far as the rest of the week,  last weeks 'softer' data will be followed by much more important data from both eco/corporate fronts this week.   As with every catalyst, the market has short term memory and if we get soft data this week, the market will re-focus on this noise.

Yuan Effect..

Well, that pretty much lasted about an hour.   Even though market's reaction today is a contrast to Asian markets' reaction last night, we think it actually makes sense on a few fronts.  As pointed out yesterday, market has a short term memory and could've been already worrying about this week’s FOMC and more ’softer’ data coming.   Stocks that appreciated early actually held on to some partial gains at the end of today, they were the most beaten up (commodity/material ) group recently.    The strongest sector of the recent rally (notably last week), technology, pretty much went down the hill from the first tick ahead of a slew of earnings this week.    

Yesterday, “ ..To us, this duck lining up is the effect on commodities and commodities linked stocks it will have over the longer term as the significance is the probability of more China purchasing power..."  Remember, key words are ‘longer term”, it’s not a one day ‘soft landing' scenario.

We can see how the rise in Yuan might be hurting some technology stocks because pretty much all of the technology product we know these days are "Made in China"!   A rise in Yuan may hurt the cost side of things of American firms.    Of course,  it's really premature to even give any analysis to that aspect of the effect as on the other hand Semi’s should have had a better reaction as many semi’s are shipped into China to be included in these electronic parts.   Right now, nobody knows how far the Chinese Govt. would let the Yuan rise and the kind of time frame it is required to do so.    In all fairness, the move by China might just be a political stunt to please the G20 crowd a week ahead of their meeting.    In addition, the move in Yuan is not a huge surprise to many because the pressure has been onto China for many months to raise the Yuan.  The timing (expected later this year) was the surprise not the idea.   The rise of Yuan, may also ultimately benefit none other than China itself to combat its inflation.    It would surely benefit many commodity based names here, but it's really hard to tell its effect on rest of our sectors.

So what other message is there from this news?   It does give us a sense that China is doing what it can to stabilize its Economy and allow it to grow at a healthy pace.    No matter what, this news should be viewed as a really good thing for rest of the world.    Unfortunately, it's just not the sort of catalytic event people are looking for to break out further ahead of a busy news flow week..   Simply,  investors took the early strength to reduce the exposure and even more when the Euro weakened.

Ok, let's just move on!   This is actually a busy week on our home front.   There's the FOMC. meeting, a couple of Eco. reports and a few notable earning reports.    All these can be a catalyst or another to drive the market either way because the volume is still relatively thin out there.    In addition, we have this "end of quarter" trade going on here and a lot of the "good names" can be potentially pushed up to appear on portfolio managers' book.   To keep trend in tact,  we need to hold 1106SPX and 200MA.

...speculation

If what seemed like market digestion over the past week, we’d have to call today a ‘puke’ of that digestion.   What’s disheartening is….“We just haven’t seen those explosive breakouts of years past, instead those wanting to be in the market..buy the dips. “ …Yes, we don’t get those breakouts to the upside and than we get these extreme sell offs that are seemingly so easy.   This one breaking up consolidation, breaking 200ma and than the 1106 and even what’s so supposedly is a psyche’ level of 1100.   Add the fact,  dip buyers were no where in sight made this even more hard to watch.   At least, it’s mostly an ETF selling program as individual stocks held up quite well.

What tipped the market?   There was no one catalyst, but a very strong 2yr auction maybe be cited as it shows de-risking signs and more ‘softer‘ than expected data was revealed.   But, the overwhelming reason in conjunction with the ‘softer’ is probably the FOMC and speculation of change  of language (“mild downgrade“) on the growth of the economy.   You can connect the dots by seeing the TRAN  down >3.5% today.  This is probably not a coincidence as the transports are a major gauge for the economy.    If this is true, it only re-inforces no hikes for a long time.  This is fine, but what the market maybe showing is it’s getting impatient here and saying the economy needs to do it on it’s own w/o their help! (low and long for rates).

If this speculation doesn’t come to fruition the market has reason to snap back hard.  If a mild downgrade does come, it may be priced in after 2 days of hard selling and we could snap back just as easily.  All in all,  this shouldn’t be a surprise as we’ve had a slew of reasons in the past month to think this was a probablility!.

AMC, we finally got a piece of 'stronger' than expected data after days of 'softer' corporate data from JBL, which bodes well likely for the RIMM/ CSCO's types.

New catalyst required...

Now that we have seen the high for the recent range, we definitely need a game changing catalyst to break through it this summer.   Market closed relatively unchanged today on the back of a slightly dovish FOMC and a disappointing New Home Sale report (builders rallied 2% ).   For some reason, this market has been able to shrug off a number of disappointing Eco. data lately.    Although this may seem positive,  we don't believe this is the kind of trend people like to see as this week is proving to be a set back (not holding 200ma).  Our most important gauge is the 20MA and the market is toying with it today.

The longer we spent the trading in the current range and setting up more mini support/resistance levels, the more distant the April high feels.    Essentially, market needs to prove that the recent Eco. data is nothing but a "hiccup" along the recovery in order to convince the market participants to fully get back into this market.   Today,  FOMC speculation came to fruition as eco growth/ inflation risks were ‘mildly downgraded”.  The earning season is almost upon us and unlike the last quarter, nobody really knows what to expect.    For the last earning period, we know that it's almost too easy to beat the estimate.   We just can't say the same for this round.    The only play on our list that we are confident that'll crush the estimate is "Apple".   However, there's really only one Apple out there.   Normally, we'd start looking at some plays for a potential pre earning run.    Given the uncertainty of the overall market, we don't think it's a good idea this time.    Like many others, we wanted to see if the recent weakness in Econ. reports are really suggesting the Corporate America is having a slowdown.  So far, we’ve had ‘softer’ reports, but the companies reporting have not been the best ‘barometers’ to measure things by.

For the next few weeks, it's probably safer and easier to play the current range as oppose to wish for something magical to happen.    Between the recent lows and highs, we are currently a tad above the middle point.    We know which plays are capable of bouncing back into Q end, so there's no problem of play selection if this is still to occur.   The only thing you’d have to watch is your position size, notably in what you know are high bet/high volatility stocks.

Where are you..Dipper?

In a complete contrast to last week, 'dipper' buyers are simply away this week.   It’s not that selling pressure is extreme to suggest a fall of 60SPX points from highs attained from the beginning of the week is the reason.   It’s just a buyers strike that is grinding the market away.  Any other time when we’d see a >5% skid in a span of a few trading days,  we’d expect individual stocks to get clobbered 2x that figure.    We don’t see this happening.   This is clearly another sign this is mostly an ETF sensation where the majority of trading is taking place.    Fast traders are controlling the game while there is no buying by MF’S/HF.   It is not an exodus out of stocks, but it doesn’t mean it won’t become this if we don’t get a reprieve very soon.

How soon is soon?.  Well, let’s just say we’d use ~1072 as the benchmark, so soon.. is very soon as we hover around those levels AMC/ tonight.  A close below and it would seem Bulls have lost total control and recent lows would be attainable once again..if not lower.  Considering, we are heading into a vacation/ holiday weeks and a few days of Q end to trade,  this may not be achievable for the Bears just yet.

..and yes, we did feel the earthquake in Toronto.. Let’s just say the wheezy feeling was reminiscent of the recent “Flash Crash”.  

DJIM #26, 2010

It seems like the stock market isn't the only place that's getting drama lately.   For those who've been watching the World Cup football tournament,  you know there's been plenty of drama every day.   Here on the north side of the border,  we've had all kinds of drama this weekend because of the G20 summit.   All in all, this world just can't live without some drama!

So... back to the stock market drama, did anybody realize that we dropped as far back as >5% SPX at last weeks low?   YTD, SPX now off about -3.5% once again.    It just seems surreal that things can turn so quickly.    After all, market looked pretty steady right up till last weekend.   A week later, we are back in no man's land.   This is not necessarily a bad thing though.   The index level and as well as the price level for our many plays are more attractive now than a week ago.   Keep in mind, we are heading into an earning season with attractive price levels and lower expectations.   This bodes well for positive surprises.   As long as there's no major negative catalyst for the next while, the same trading range beckons.

One thing we are looking at heading into the new week is the performance of the financials- XLF.   Now that the financial reform bill is pretty much a wrap, we want to see how the major financial plays react to this.   Weeks ago or is months ago now, we were thinking a FinReg pass would be a start of a new leg up,  we can’t say that is a game changer now, but it's an important piece of the puzzle as investors want and will take clarity above anything else at this point.   Simply, market cannot move up without the participation of one of the key sectors and this would be a start with the financials.

Right now overall, it just feels like there's lack of real catalysts,  the hope here is earnings season will surprise the Bears and even the most pessimistic Bull.
  
Bottom line,  all focus will be on Friday’s NFP report , while the World Cup provides a distraction until.  The are no ‘barometer’ corporate reports this week to note ahead of the holidays.    We'll likely just have kick around in between the matches like everyone else.

.."yellow card'" for the market

It’s become overly apparent the last 2-3 trading days, the only potential catalyst for the Bulls is potentially earnings season.  Only problem is it really does not kick off till July 12th with AA, so far we’ve been noting there is no’ barometer’ type corporate report recently or upcoming to change this premise till 2 weeks from now.  The idea stocks are cheap and pessimism abound may prove to be a catalyst in the making here.    Until, what we’re left with is no reason for buyers to step up just yet, thus leaving room to meander and potentially break our recent set 1072 benchmark.   The overall range low of 1040-1050 is still very much in play.

Today,  volume was non-existent and a tight SPX range has drawn up a ‘technical’ triangle over the past few sessions.  Even though light volume, a pre July 4th holiday week, end of Q are the perfect ingredients for an upside break to the upside most years,  the individual stock action so far is indicating the opposite (downside break).   In all honesty,  downside may be the only alternative to get some buying and a trade into NFP# at least.  Downside break here would not be that hurtful,  if it continues to be a fast traders market where ETF’s are the only thing being traded.    Afterwards,  this may allow a short lived trade before or after the NFP if surprisingly positive.   Hey… it’s better than any set-up we`ve seen for a trade in a long while.  Not a single sector is worth a look/ trade recently, commodities are terrible showing some are not ready for a possible China PMI  Wednesday to come down.   This would be natural at this stage, but the market may think numbers go up forever and if not, it's all over.    A smelly  problem is one we noted before last Wednesday trade  is the TSY action.   Today,  we set record low's in the 2 year and this de-risking is indicating something is fishy out there.  

If this is only due to pessimism in regards to earnings coming, this can bring a quick reversal into risky assets (equities) than.   If it's indicating something else, such as something Geo-political..more European mess..etc,  we won't know till it's too late, so be cautious. 

.. 'red card' day

Heading into the day with World Cup fever we gave the market a “yellow card”,  citing it for bad behaviour with a ‘so be cautious’  final words.    Well,  let’s just say, it didn’t change it’s ways and only exuberated it’s ‘pessimistic’ tendencies garnering a ’red card’ and a cleat to the groin.    In essence this ‘red card’ was rudely given to investors who were forced to leave the market game with heads hanging down in defeat.  The investor has been given many reasons to leave the game in the past few years and go find a new game to play due to no trust in the system.  Most recently scared from ‘Flash crash’ to today’s revised US Conf. Board revision to China’s economic index  (The Conference Board Leading Economic Index (LEI) for China increased 0.3 percent in April to 145.0. The LEI for China was previously reported to have increased 1.7 percent in April but has been revised to correct a calculation error) ,  the investor is befuddled as to the fair play rules of this investing game!.   A ‘smelly’  problem bolded last Journal was the highlight today for media as all discussion centered around the TSY’s !.   We’re not overly concerned about the CCI # , just because ramifications of all activity from Europe to BP to a bad stock market in May had to have ramifications sooner than later. 

Only last week, we discussed the ‘disheartening’ nature of being a ‘long investor and how ‘these extreme sell offs that are seemingly so easy”.   Today, unfortunately it all played out as the ETF trade of over a week turned into selling of individual equities with reckless abandonment.   The exodus finally happened.    Nothing was left out, no sectors at all . ….Unbelievable carnage today as every play was seemingly off 4-5% minimum and many at /or near a double digit gain loss by lunch hour…industrials, Financials, tech 4% (SOX just under 5%), Discretionaries, Materials 3.5%, Steels issue as much as 10% some, and even defensive Health care was off nearly 2%.   Investors seemingly work for days/ weeks to get a nice run in a stock of 2-3-4-5% and than in one swoop it’s all taken away and more as today proved, especially in high beta/ winners…into 24th “The only thing you’d have to watch is your position size, notably in what you know are high bet/high volatility stocks”.  This fact never changes in the game as money flow in the best,  leaves the fastest.

What’s occurred here in June is a head fake has been manipulated.  Essentially, what has happened is the recent move to 1130 on ‘softer data’ was orchestrated to get out of the market and than use this usual Q end week to markdown.   This recent action exemplifies the market should not have gone up on ‘softer data’.   Why should it have, it is the opposite of what it should have been doing, yet it grinded higher.  …“For some reason, this market has been able to shrug off a number of disappointing Eco. data lately.    Although this may seem positive,  we don't believe this is the kind of trend people like to see as this week is proving to be a set back (not holding 200ma).  Our most important gauge is the 20MA and the market is toying with it today.”.    So, that’s the No-trade clause for anyone thinking of being that investor who is thinking of holding onto stocks for a while.  Need to get above this bear gap formed now to think long for long.

As far as that 20ma, since we noted this last week, the market has closed below it every day and as of close today, we’re something 45 pts below it.  Simply..the rule here is if you’re being toyed with, it’s best to exit before you become a toy puppet yourself.    Now, as the 1072 has fallen and the 1040-50 IS in play again.   In discussing 1040-1050 in play yesterday, we also said the only alternative for the Bulls to get some buying is a ‘ downside’ break.   Well, we got it and unfortunately it was hurtful as it wasn’t just ETF based.  It did take valuations down quickly on individual stocks, which is not so bad going into earnings.

Now..as far as a tradeable play, 3 hopes  for such...

• China PMI Wednesday is 'fudged' and makes this revision today questionable
• ECB liquidity tender expiry coming up, which is a monetary tightening fear comes out not as badly as feared.  If demand smaller tomorrow than feared in 3mth, it should be somewhat of a relief.
• NFP# comes in the top range est., ADP may give some light tomorrow.

Into the trading day...

Heading into the day with World Cup fever we gave the market a “yellow card”,  citing it for bad behaviour with a ‘so be cautious’  final words.    Well,  let’s just say, it didn’t change it’s ways and only exuberated it’s ‘pessimistic’ tendencies garnering a ’red card’ and a cleat to the groin.    In essence this ‘red card’ was rudely given to investors who were forced to leave the market game with heads hanging down in defeat.  The investor has been given many reasons to leave the game in the past few years and go find a new game to play due to no trust in the system.  Most recently scared from ‘Flash crash’ to today’s revised US Conf. Board revision to China’s economic index  (The Conference Board Leading Economic Index (LEI) for China increased 0.3 percent in April to 145.0. The LEI for China was previously reported to have increased 1.7 percent in April but has been revised to correct a calculation error) ,  the investor is befuddled as to the fair play rules of this investing game!.   A ‘smelly’  problem bolded last Journal was the highlight today for media as all discussion centered around the TSY’s !.   We’re not overly concerned about the CCI # , just because ramifications of all activity from Europe to BP to a bad stock market in May had to have ramifications sooner than later. 

Only last week, we discussed the ‘disheartening’ nature of being a ‘long investor and how ‘these extreme sell offs that are seemingly so easy”.   Today, unfortunately it all played out as the ETF trade of over a week turned into selling of individual equities with reckless abandonment.   The exodus finally happened.    Nothing was left out, no sectors at all . ….Unbelievable carnage today as every play was seemingly off 4-5% minimum and many at /or near a double digit gain loss by lunch hour…industrials, Financials, tech 4% (SOX just under 5%), Discretionaries, Materials 3.5%, Steels issue as much as 10% some, and even defensive Health care was off nearly 2%.   Investors seemingly work for days/ weeks to get a nice run in a stock of 2-3-4-5% and than in one swoop it’s all taken away and more as today proved, especially in high beta/ winners…into 24th “The only thing you’d have to watch is your position size, notably in what you know are high bet/high volatility stocks”.  This fact never changes in the game as money flow in the best,  leaves the fastest.

What’s occurred here in June is a head fake has been manipulated.  Essentially, what has happened is the recent move to 1130 on ‘softer data’ was orchestrated to get out of the market and than use this usual Q end week to markdown.   This recent action exemplifies the market should not have gone up on ‘softer data’.   Why should it have, it is the opposite of what it should have been doing, yet it grinded higher.  …“For some reason, this market has been able to shrug off a number of disappointing Eco. data lately.    Although this may seem positive,  we don't believe this is the kind of trend people like to see as this week is proving to be a set back (not holding 200ma).  Our most important gauge is the 20MA and the market is toying with it today.”.    So, that’s the No-trade clause for anyone thinking of being that investor who is thinking of holding onto stocks for a while.  Need to get above this bear gap formed now to think long for long.

As far as that 20ma, since we noted this last week, the market has closed below it every day and as of close today, we’re something 45 pts below it.  Simply..the rule here is if you’re being toyed with, it’s best to exit before you become a toy puppet yourself.    Now, as the 1072 has fallen and the 1040-50 IS in play again.   In discussing 1040-1050 in play yesterday, we also said the only alternative for the Bulls to get some buying is a ‘ downside’ break.   Well, we got it and unfortunately it was hurtful as it wasn’t just ETF based.  It did take valuations down quickly on individual stocks, which is not so bad going into earnings.

Now..as far as a tradeable play, 3 hopes  for such...

• China PMI Wednesday is 'fudged' and makes this revision today questionable
• ECB liquidity tender expiry coming up, which is a monetary tightening fear comes out not as badly as feared.  If demand smaller tomorrow than feared in 3mth, it should be somewhat of a relief.
• NFP# comes in the top range est., ADP may give some light tomorrow.

Broken?

It is a bit of an odd feeling witnessing the market taken a 180 degree turn (-10% SPX off highs) in just over a week,  breaking below the recent low as of the close today.  On the other hand, it's hardly a shock...last week, .."It is not an exodus out of stocks, but it doesn’t mean it won’t become this if we don’t get a reprieve very soon".  In the last few seesions, we've seen just this as individual equities play catch up to the previous week's negative ETF trade.  Whether this is appropriate reaction or not, we have to give respect to the collective action of market participants and accept what is happening on what is generally supposed to be a ‘quiet’ period before a Q end / holiday trading.

Fear can be a powerful thing!   The fact that the market participants can't wait till for this earning season to kick off to vote their action is a very distressful sign.    The recent batch of soft Eco. Data along with the persistent worry of Euro debt and Chinese Economy are enough of catalysts to finally give people a reason to give up.    If there was a slight hope that yesterday's close would be defended, then today's last hour action simply confirmed that our recent low is broken and perhaps a fresh leg down is on the way.   We have an important NFP report this Friday, but all signs point to the conclusion that market does not care about it one way or the other.    The NFP report will be bad, and there's really no need to anticipate anything positive from it following ADP# today..    This is the kind of message that's circulating among people's mind out there and we have to go with that.

So, lets get a few scenario’s going here!   The only positive thing for a long at this point is that market has been oversold since a week and half ago.   There may be some relief bounce here and there, but it looks as though we can't avoid the inevitable of going down further.   This brings up a point of where the reasonable support level is for this market.    Right now, we are eyeing 1020 as a short term support and 1000 as a psychological support.    The ultimate support level may be at 980-950 assuming there's no big fundamental change in the Economic recovery.    Yes, we are still talking about recovery at this point until we have a few months of data suggesting otherwise.    There are also events out there that can cripple the Economic recovery including the further erosion of European debt and a real and dramatic slow down of Chinese Economy.    Both of these issues are highly on people's agenda these days and this is something we have to closely monitor.    The U.S. corporate earning season is only two weeks away and this can be a positive ‘only imaginable' catalyst for traders as we recently noted at this point.    Hopefully price levels for many plays are so attractive by that point that an encouraging report from a couple of key players can spark some push in our equity sector.

Unfortunately, this market can be so emotional these days and we can not control how much further it can move down off fear.    All of us have to be very cautious playing this tape even if it's just a flip.   We’d probably be more inclined to trade ETF’s until possible new earnings stories come up.   We’ll definitely keep staying away from the commodity and financials at this point and technology stocks have a lot to prove from this earning season.   Many have said the wonderful tech earnings have peaked last quarter and this is something we have to verify with our own eyes. (MU), Micron didn’t help just the other day.

Bottom line, things do seem pretty rocky out there and we can't rule out some dramatic action coming the market’s way.   However, as always, we still have to keep our cool because like we have said before, this is merely one of the stage in a long marathon we are dealing here, not a sprint.  One possibilty now is that this markdown liquidation at Q/mth end is very reminiscent of things we've seen before in this market.   It has been followed by an uplift into a new month.  Now, take this with a grain of salt as this previously has happened without the global turmoil we have now.   Still, it's a possibility into earnings season as sentiment must be near previous reversal bottom lows.