Menage a trois...

Recent macro/micro developments on the ‘soft patch vs. double dip’ off soft eco data and EPS season has switched focus from the many headwinds feeding the market previously, including this threesome…(Gov't Fin Reg, GS, BP) .   

If today’s late news flow was a few weeks ago, the market probably would have rallied some 300/400 points!.   Yes, market bounced, but it was mostly a concentrated move that was really no big deal, except for fast traders to have some late day fun!.   The news flow today is something that had to happen sooner than later,  it’s not a new catalyst likely for the very short in our view.   It’s mostly media drama for the masses,  unfortunately the scars left by Gov't/GS/BP on the public will take much more time to heal.  They won't be jumping into bed with them any time soon.

The only positive is it put some more “bull mud’  to cap the 1080 support level for dip buyers to move in. Unfortunately, we all know from BP how effective mud has been.    We’ve done this hit off support numerous times since hitting the 1098 April to June trendline that we put up as a resistance level here a few days ago.  This is the first "R" since the rally began that is not 'glass'.   Also, market is hanging over 20ma which is critical for more upside during EPS early stages,  but the range is getting tighter and something will give sooner than later, either the upside or downside.  

Problem arising with upside is if it’s not broken soon,  Bulls will give up for the time being (take profits) and allow 1080’s/20ma to falter.    Simply, even though we are the high end of recent range,  we are seeing fatigue set in after this 9% rally.  

Chart below on 'gap' hourly support:

SPX breaks hrly gap support / 20MA

Friday, July 16th-7:00am

Menage a trois...

Recent macro/micro developments on the ‘soft patch vs. double dip’ off soft eco data and EPS season has switched focus from the many headwinds feeding the market previously, including this threesome…(Gov't Fin Reg, GS, BP) .   

If today’s late news flow was a few weeks ago, the market probably would have rallied some 300/400 points!.   Yes, market bounced, but it was mostly a concentrated move that was really no big deal, except for fast traders to have some late day fun!.   The news flow today is something that had to happen sooner than later,  it’s not a new catalyst likely for the very short in our view.   It’s mostly media drama for the masses,  unfortunately the scars left by Gov't/GS/BP on the public will take much more time to heal.  They won't be jumping into bed with them any time soon.

The only positive is it put some more “bull mud’  to cap the 1080 support level for dip buyers to move in. Unfortunately, we all know from BP how effective mud has been.    We’ve done this hit off support numerous times since hitting the 1098 April to June trendline that we put up as a resistance level here a few days ago.  This is the first "R" since the rally began that is not 'glass'.   Also, market is hanging over 20ma which is critical for more upside during EPS early stages,  but the range is getting tighter and something will give sooner than later, either the upside or downside.  

Problem arising with upside is if it’s not broken soon,  Bulls will give up for the time being (take profits) and allow 1080’s/20ma to falter.    Simply, even though we are the high end of recent range,  we are seeing fatigue set in after this 9% rally.  

Chart below on 'gap' hourly support:

DJIM #29 2010

The surveyors at University Michigan (MCSI)  must have caught some folks at the wrong time early in July.   A one time drop (nearly 10 points) in the consumer sentiment reminiscent of post 911, post Lehman, post Katrina soured investor tastes.    Add some bad BAC  and investors fled the market in numbers.     How much weight do we put in the number?.    Well, the question is post-( what? ) is this number all about?.    Nothing new as far we can see!    Also, recall a big reason for the 9% rally starting …Sentiment was already known to be horrid and at historic lows, so this shouldn‘t come as a complete surprise and so we‘re just going to move on.   (“The doom and gloom is excessive and most measures of market sentiment prove it as we are at March ‘09 lows or at 2010 low's in other sentiment readings“).

The sticker shocker of the MCSI played right into the market’s fatigue and failure to get over the April/ June/ July trendline we’ve concentrated on here.    The break of the hrly gap at 1078-1080 played to perfection as we closed SPX1064, almost halving the rally gains! …“Problem arising with upside is if it’s not broken soon,  Bulls will give up for the time being (take profits) and allow 1080/20ma to falter.” 

After the initial hit of the April- June trendline on July 13th, our strategy here was to throw out what holdings we had and concentrate on fresh plays entering EPS season.   Right now, macro is overwhelming the micro camp, but with the majority of SP corporations reporting in the next 2 weeks, we don’t think the fight is so easily won by the macro’s just yet.    By concentrating on fresh EPS, we can avoid the overall market fight.    Even if the macro’s win, we shouldn’t be hurt by only concentrating on the EPS winners as they come.  If those plays don’t come, you’re simply flat a market that is dealing with a loss of global growth momo' that  is greater than anticipated half way through this year.  That's not a bad thing to be.

*Euro Stress tests to be published this week.

Earning digestion...

If today’s buyers knew the IBM number in advance,  they would have simply stayed away from buying up the market today.    It's just amazing how one tech giant (INTC ) can produce such great results while another tech giant (IBM ) can produce results that are so lacklustre.    Of course,  it's unfair to compare the two as they do represent two different segments of the tech business in many ways, but still TXN report AMC made sure to show  Semi growth momo’ is demonstrating some weakness ahead.  Unfortunately, the semi’s (>2%) were the best group today,  but tomorrow will face selling pressure with the overall tech sector, instead of follow through!.

So, this is how the Economic recovery playing itself out?.    Some companies are benefiting and executing well while some companies just aren't.    This creates all kinds of confusion as to where the state of the economy is, besides the macro pressures already present    Is it going forward still, stalling or going backwards?    Maybe in a few more months the picture will become clearer,  but it doesn't feel like the odds are overwhelming  for any camp at the moment.    So, what the traders do and keep doing?   Regardless of the events that take place, fading the big moves is the game keeping the market in this summer range.   What it means is that people sell into extended strength while buy into extended weakness and shorts cover.    While you can say that we've had some lower lows in the short term, it hasn't really changed the fact that market can move nearly 10% from the recent high or low on a moment's notice.    In other words,  it's very tough to trade in this environment and we can't fool ourselves by saying it's an easy game.

Thankfully, as big of an impact as IBM or BAC represent to this market,  they don't paint the picture of the whole Economy or even the micro picture fully.   We have many more big name corporations to report and we shouldn't assume "SPX 1k here we come", just yet.    What we can do to help our trading setup is to enter trades after an earning announcement slowly.   If a stock gets a very rosy and strong reaction after the report, chances are, they can potentially move even higher after the initial pop.    

AAPL, GS, and JNJ are on deck for tomorrow.   After tonight‘s reports, we need a good surprise report or two to have some ammunition to debate the Bears with.

20MA recaptured

Despite Friday’s swoon below our critical 20ma ,  we managed to eek back over it twice on Monday and today as soon as a 3rd try ensued,  the market breezed through and staged an impressive reversal day closing 15pts above the 20ma.   This has been the ’Bulls’ benchmark here and it remains so!.  Looking at today’s action,  we think the April/June/ July trendline that held the Bulls at bay last week is much more vulnerable now and should be easier to crack.   So, what brought on today’s impressive comeback.  

• Despite all the critique about disappointing  'revenue'  lines in earnings,  you can only beat a horse so bad after a gap down.   A change that continued today was these gap down earnings beatings were getting ’bought’ up the last few days.   Examples were HAS and DAL.   Today, the same was happening early in IBM, GS  early and in a smaller name CRUS ,  which raised revenue guidance, but was knocked down to mid 15’s(->10%) before climbing to flat and than a 5% gain by close.   Simply, the market was overreaching the ‘revenue’ misses mostly and this proved to be buyers delight as they step up at these exaggerated gap downs.

• If you have your DJIM shadlowlist set up like shown here,  you could clearly something out of the ordinary early on.    The commodity linked stocks were outperforming the market in a big way. Question was why?.    As we all know if China goes, commods’ go.   Considering the Shang was up 2%, (2 days straight), you knew there must be China talk.    And, there was talk, talk of China ‘easing’ measures and also noise about better margins for the steel co’s in Q4 from China companies.    Most importantly, Shang is over 20ma and should be watched as we could be off the ‘bottom’ in commodity linked stocks.   We all know even when the overall market doesn’t give you gains, trading the commodity linked stocks is all we need if a trend is beginning.   It could be a little early, but the train may be leaving the station and buying the pullbacks gradually is probably the way we're going to go now.

• Lastly, we asked for earnings ‘ammunition’  yesterday and without going into detail, we definitely got some from AAPL  and VMW (nice chart set if trendline broken) to fight the Bears.

http://www.finviz.com/quote.ashx?t=vmw&ty=c&ta=1&p=d

"Nothing new", Bernanke

If people are puzzled by the drop today after Mr. Bernanke's testimony to the congress, they have every reason to be.   Frankly, we are somewhat confused too as to the reaction.    It was in-line to recent FOMC and every other FED member comments lately!.   Only difference is the media has been harping on that they are considering options for a bigger downturn and there was some speculation he would announce something today.   You know what?…Thank god…he didn’t!.  We don’t want to be surprised by such an announcement for market's sake at a testimony that things are getting worse and steps might be needed soon.    Something’s are just left for FOMC meetings and for hints to the market proceeding one to be prepared!.   This doesn't happen at hearings just after FOMC and their minutes. This would signal something drastic happened the last few weeks to change the tone and market would sink to new recent lows!

Well, uncertainty, fear mongering has been the theme for this market during the last couple of months.   The recent "soft" eco. data, mixed results from various Corporations so far, the still uncertain situation from Europe, and coupled with the "always fluctuating message" from China,  just make this market a big ball of uncertainty.     We don't blame Ben for testifying what we traders feel everyday.    However, this is why we still really like this market because no one has the upper hand and nobody can see things any further than the next guy.    The drop today is a bit silly since most of the earning reports came out earlier have been pretty good.   You can clearly see this was an ETF / Futures driven sell off.   Individual equities lost gains, but they were nowhere no close to showing a <20 pts SPX drop by being deep in red.   Good sign.   As we all know from previous experience here, these ETF sell offs are easily reversed the next day.   Also, we held 20MA!

Both MS  and WFC  delivered some good reports that are offsetting the less encouraging results from BAC and GS.    AAPL...KO, ETN  and other industrials... all came out with very good results. QCOM  tonight.  This is exactly what we have been saying the whole time.   The current Economic environment is an ideal playground for companies to show their execution.    It's a tougher environment now compare to the 1990s or the mid 2000s where everyone is printing money one way or the other.    Right now, only those well ran companies with a great global strategy, and coupled with a great cost control measurement, are able to stand out from the pack.    When the Economy is running great in full mode, every company delivers.    When the Economy is running on a cautious mode like we have now, only the better companies deliver.

Bottom line, there are enough companies out there that are coming out with better than expected results which will keep this market in check.

Is it tough enough?

Is it tough enough?.... Bulls and stress tests!

The puzzle reaction that was to Bernanke’s address was quickly solved by the market after a night cap or two.    As we said, “thank god” the monetary policy statement didn’t just change overnight since last FOMC/minutes and instead disappointed those looking for much more.   Those looking for much more maybe just don’t realize the Bazooka has little left to launch at the economy!   What’s left is pretty clear to market observers.

We would love to discuss the rally that moved through the April/June trendline, but by noon Friday or earlier in the morning,  we’ll all have to shift our focus.   Also, once again the ETF/futures downdraft reversed as speculated!.  This (black box initiated) phenomenon is easily noticed if up against the DJIM shadowlist intraday.

Still, we’ll repeat the important catalysts that were noted in premarket alert that we have going forward after we get through the ‘stress tests’  mania.   Actually, we can make it three!

• Euro eco data points strong and the big worry of slowing across the pond is abating due to these numbers.

• China went above 50ma is confirming a bottom now ….as noted a few days ago…“Most importantly, Shang is over 20ma and should be watched as we could be off the ‘bottom” in commodity linked stocks.   We all know even when the overall market doesn’t give you gains, trading the commodity linked stocks is all we need if a trend is beginning”

• Earnings, Earnings!  UPS,MMM,QCOM etc.

Okay, the shift tomorrow!.   Maybe, miraculously all the ‘good things’ across the globe today will mute the stress tests outcome and maybe it is ‘priced in’ or will be 'tough enough' to satisfy.   If so, we'll break the top.   But, we know this market near a range top has a habit of finding a reason to fade,  so we have to be prepared!.   If  today‘s ‘good things’ and ‘priced in’ don’t work,  we hope there is more than 1 bank (Hypo) failure or the rigor of the tests will be questioned.    Yes,  the market wants to see failure, but leaks this week have shown this not be the case,  so we'll need the tough enough angle most likely.

Watch $TNX  for first signs of a lack of investor confidence in the transparency of the tests,  the market will follow. 

DJIM #30, 2010

European stress tests have eased investor anxiety by providing more transparency than expected, Corporate America has shown some decent reports (overall reports are tracking better than expected),  China may be backing off on their tightening to some degree !  Does this mean the market can move up now and is the low for the year put in?   This is particularly interesting now because we have finally managed to close above SPX 1100 as of Friday.    In the past couple of months, this usually means the current leg up is nearing its end.   Can we break the recent "trend" for a change?.   The answer seems to be ‘yes’ as risk is likely to the upside now after all the recent developments.

Currently, there are three things investors' minds are focused on.   They are Euro area,  China and U.S. Economy.     While Euro land and China have not proven enough to all investors just yet,  the perception is likely changing to the positive side as Western Europe’s economy is accelerating (last weeks data) and China has most likely ’bottomed’ after a year long slide.    All one has to look at is the recent performance of Euro and Commodity plays as growing optimism toward global growth has appeared.    We don't really don’t need dig any further, we just have to see people voting with their money as Industrials/ /Materials /Transports  sectors were the best performers last week.    As far as the U.S. Economy goes, a lot of people seem to be confused with the unemployment rate vs. the profit of Corporate America.    Both are giving conflicting signals to the well being of this Economy.    Of course, we have been arguing all along that this is the kind of Economy that rewards the better executed strategy and corporate management.   The unemployment rate may stay at a high rate, but it doesn't mean that many of our favourite companies can't churn out some mouth dropping profits.

Ok, we are barely two weeks into the EPS season and we have already had some great reports from the meat and potatoes players.  Now come the smaller caps.  We're really looking forward to the remainder of this earning season and won't be hesitant to buy quality plays off pullbacks.   Overall,  things do look pretty interesting in the coming weeks, we have a good probability to give the most recent high a run for it’s money.

SPX ~60 in 5

It’s been nearly two weeks since noted..”Earnings, if they keep at this pace 'will trump' any Eco data-FOMC statements..”..   

Immediately, following this statement we ran into a few days of roadblocks where earnings were missing the revenue top line and most proclaimed Macro victorious over Micro (corporate) as the SPX dropped to 1055.    Now 5 trading days later, yes only 5, the SP hovers near 1115, some 60 handles  higher on the heels of Micro winning out.    Of course, this stands till August …“….because eco`data will be sparse until August hits and we see how July was.  Starting next week, we will live by the guidance from the CEO/CFO`s."    In other words we have some time to climb higher if we get through a boatload of technical ‘R” numbers around today’s close, but once August hits it will be eyes on US eco data’ starting with ISM’s to verify what the corporations and global markets are saying. 

The good part is we have good things on the Bulls back coming into August data...Micro (earning) fundamentals,  Western Europe accelerating into 2H and China ‘bottoming’, plus FINREG/ Stress tests over with.   We didn’t have any of this when the market was toying with a potential summer under 1K SPX in June.

Today, market had FDX  add some validility to the global picture,  but we’ve had this already here at DJIM 2 weeks ago as part of an improving global snapshot.. “EXPD , bot some, 30% upside is a great pre-announcement, should help FDX -transports”.    

A few other earning highlights noted VMW , CRUS, also making NCH (New highs).  Past DJIM Q's/2010 plays, AZO, RBCN, OVTI, NTAP, ROVI, CRM  continue to grind away at new highs.   We also have APKT, DLB  on 5-6 trading day moves that we suggested as potential run ups into their earnings this Thursday flirting at NCH‘s..“Look at tech reporting soon on sell off..APKT DLB etc.on this 20 day hit. Apr 16.     Also AMC,  VECO  report shows DJIM LED stocks (CREE AIXG RBCN ) still have momentum in ‘10.

In conclusion, if the breadth of the market stays on par and/or performance chasers come, a try at the 50% retrace would be in the cards.  This is also where we have June peak to contend with.  Still, don’t think these levels should cloud our thinking with new earning plays emerging and getting some recent ones back on pullbacks remaining the premise.   Starting tomorrow, looking for a close over June high close of 1118 for ~1130 sooner than later,  otherwise a dip is probably in order.

Work it off...

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.