DJIM #3 2010

Last weeks Journal tone consisted of headlines such as…digestion=tired buyers, Great Escape?, tired signs again?….that’s about as negative a weekly tone as we’ve had since the rally started in March 2009.   Does it mean we pack up the bags of cash and sit on sidelines and/ or go short?   Well,  we recently had 2 closes over the Oct Nov trendline which pointed to a test of the SPX1155-1160, which equates to same levels of this rally to the one from 2002-07.  As long as we hold the December high levels,  something we pointed to on a couple of occasions last week (Tuesday/ Friday) and proceeded to hold , we’re not packing anything away as a test 1155-1160 would seem to be the natural course first.  

Last week, the market played out to what we scribed in many respects.  We talked of the 2010 theme of selling tech, buying financials not co-operating by Monday’s trading close,  the abundance of negative news flow from AA earnings/ China policy/ Washington fiddling in financials and LLTC earnings reaction the next day to an excellent report mid-week..“but it sold off on the news after a nice run into the report. (hopefully this not a sign of things to come)”…  Basically,  INTC was a sign of things to come as it followed with same earning reaction and we got …“the market needs to do some backfilling sometime this week”.   The question is are we done backfilling heading into another  week of ‘big’ name earnings with BAC, C, GOOG, IBM, GE on deck.??

Following JPM earnings it will be critical to watch BAC and C’s reactions as parts of JPM’s report do not bode well for the these stocks.   If they can shake off what will probably be negative reports in many fronts and still not lose much in share price and/or market shrugs it off,  it would signal the market will likely go higher this week.  

The reactions to reports next week might be completely different than last weeks, ‘sell the ‘good’ earning news’ reaction.   As a trader,  you have to think this and not be filled with the anxiety the market did it’s best to leave with you by Friday‘s close.  Less than 5% of SP reporting so far does not make a earning season!.    Also, we’re watching for the weakness in Semi’s to reverse,  it’s too early for them to peak right after INTC earnings considering how bad they’ve been so far in 2010 with rest of tech.

The trading methodology remains the same until this earnings season takes shape in one form or another.  So, we keep the below always in mind…

• …we must simply ‘trade’ the upcoming individual earning surprises or sectors that get momentum.

• …We watch the December highs as important 'S' upport ` around 1130.

• …."the theme remains the same of buying on any weakness, still no conviction to chase the market too much higher…"selling was just profit taking and not aggressive selling and/or not shorts pressing"  (this will likely change if 1130 levels go, which would mean an imminent quick drop)

New SPX high

What a three day rest has done to this market, eh?   We focused last week on the possibility INTC earning may bring out the "sell on news" crowd and it played out.   Into Friday’s trade,  we noted the 3 day weekend may give this "market direction" and not INTC, JPM earnings .   The question into today’s trade is 'BROWN really GREEN' for traders/ investors and give this market direction as Washington’s messing into the markets, notably into financials, get a wake up call.   It definitely helped today after we re-tested 1130 levels pre-market and in the longer term it should as well.

More importantly to DJIM today was the expectation…“The reactions to reports next week might be completely different than last weeks, ‘sell the ‘good news earning news’ reaction” and the political hype had little to do with the change today.   As said, less than 5% of SP had reported by last weeks close and doesn’t make an earning season.  Today investors came back more optimistic as market shrugged off C   so-so call, liked an early cyclical PH  industrial upward guidance,  which gives a good read through to the recovery and sector,  EDU  quickly reversed some early selling and was one of the big winners on the day and AMC, we got a good reaction to CREE.  

Still,  a one day change doesn’t make an earnings season,  but it was good to see.  Given the reports from the likes of AA, INTC, or JPM and today PH, more should start to realize that the economic recovery pace will remain quite steady.    Maybe, we've been spoiled by last couple of quarters' surprise upside announcement by many companies.    Keep in mind though,  previously the estimate were much too low for most companies on average.      For this quarter,  we are assuming analysts' estimate are much more inline with what's happening out there and expectations are greater.    In other words,  if a company can shine through this quarter's report, it may just be a real star we are looking for in 2010.

Regardless how much upside churning we go through this year,  the trend will still be the same.   This is the most important aspect of our trading theme here.    It means that on down days and on pullbacks, we basically have to have strong faith and buy into it.    It's somewhat of an adjustment because this time around last year,  we were trained to stay away from any down day.    Any big down day from early last year would lead to further down days.    This is the reason we assume many people are still cautious about this market.
  

In AMC,  as noted CREE  came out with an excellent guidance print.   If the selloff in the stock Friday was the concern that their report won't be good, then we'd assume it can at least return to its previous high and perhaps beyond quite soon.  The collateral plays at DJIM, (AIXG, VECO ) should benefit, not just from report, but the fact they’ve gone down with the rest of the tech (SMH) weakness so far this year and we expect a rebound in the sectors.   IBM  came out with number/guidance that met the expectation, but didn‘t raise guidance enough to satisfy hopes.   In addition,  this is actually a reporting week of many financial companies including the likes of MS, BAC, WFC, GS,  but judging by JPM, C  it might be a non-event.   

Bottom line, as earning season gets busier, we have to keep our heads cool and pick the plays that stand out.   For now,  we simply have to lie back and wait for winners to come.

* Wednesday night, loads of very important China Eco data…

Earnings will matter...

Honestly,  it doesn't really matter what the negative headlines suggest,  profit taking is all we need to know.  Instead, media and analysts alike would love to pinpoint a couple of specific reasons for any day's decline.   Well, it's their job.  Today, rumor that China is tightening its lending is sending "shockwave;)" throughout the world before the release of all their Eco data tonight that is expected to show overheating of sorts.   Ummm,  unless we just heard it for the first time during last few months, we swear this is just recycled news.   Yes, they will withdraw excess liquidity, let’s get used to it. (headlines).   Also, there's always people who like to remind us that we've already had such a terrific run from last March and it's time for a meaningful pullback (again, eh).   Well,  we also like to remind people that this market has ran up so much since 1960s and it's time for a pullback now;).  The point is, you have to have a pretty good idea about this market in order to dissect what news is helpful and what news isn’t these days.

We have literally entered the second week of an earning season and we'd like to think corporate earnings should dominate the news media.   In our opinion, it should and it will!   No matter what causes any little pullback, or in some people's opinion, healthy consolidation, we have to focus on what's more important.   Do corporate earning suggest an Economic recovery?,  if so, at what pace are we recovering.  Here's the thing, we don't expect SPX to hit 1200 anytime soon and breaking over 1150-1160 would probably take some time without a “BIG’ catalyst.  In 2009,  we’d see SPX going 5-10% in either direction in a matter of weeks, sometimes days, but it’s just not likely going to happen in 2010. Why?  Things have stabilized and people will invest/trade in a much more rational way than past few years.  So, compared to last year,  this year will give us this "grind" feel.   This is just fine with us because it allows us to ultimately focus on our game, the earnings game!

CREE,  from last night, came out with an outstanding report/guidance as noted and was rewarded with some nice add on gains along with VECO,AIXG .  This morning, many financial institutions have come out with reports that have exceeded expectation and are probably the main reasons we had a little comeback in the afternoon.   In AMC today, names such as SBUX and STX, PLXS (add to list) all came out with quality reports, basically as many as 5-6 NASD/Tech (incl. FFIV  on our list) did as well.  So, trend is still pretty clear where this Economy is going.   As long as people's favourite companies come out with good earnings, you can assign a reasonable P/E behind them which in turn will give a strong support to the overall market.

Bottom line,  we may be in for some range trading (again, we bounced off ~1030 and closed on Nov trendline) until the assessment is clear that the market deserves a higher valuation.  Majority of the companies have yet to report and their earnings are an absolute key to the health of this market.  Forget about rate hikes or inflation because right now,  it's just the excuse bears use to get out of their position.

Props to the President

Yep, congrats, Prez,  you and Washington did it again!.   We could make this such a Political Journal, but we try to keep this PG13 rated.   Just in the past week, we’ve been irritated…“..Washington sticking their paws on the banks once again, saying hey pals we want more!…“..The question … is 'BROWN really GREEN' for traders/ investors and give this market direction as Washington’s messing into the markets, notably into financials, get a wake up call".   Unfortunately,  Obama got on the wrong side of the bed and gave Wall Street a rude wake up call.   Actually, it was more of a crank call as the collateral damage filters beyond into Main street, a street that encompasses investors that were looking for more stability instead of uncertainty that this is bringing with it.   How many actually know what ‘prop’ trading is outside of the trading world or think it had anything to do with the crisis?..Let’s just stop here, before this does become a Poli’ Journal.

“..The market needs a ‘BIG’ catalyst in the short term and we have no idea what this possibly could be on the positive side to go higher.  The odds are always better for a surprise ‘BIG’ negative, so we must simply ‘trade’ the upcoming individual earning surprises or sectors that get momentum…”

Well.  Now that we got the ‘BIG” negative odds, what next?   It always seems the case that when the market is treading water at an important technical level something occurs to cause a breakdown…”(this will likely change if 1130 levels go, which would mean an imminent quick drop)”.  Once 1129-1130 was penetrated a domino trip to 1115 ensued.  The reason this support held and buy dippers came out at least 3 times before was it was never touched on news such as this, buy dippers don’t come in on such events.  We’ve covered many times before here at DJIM that things need to settle down and stabilize before aggressive buyers come back.  It will take longer this time around.  In years past,  we’ve highlighted that the big shots either in Washington or corporations wait for XMAS, New Years to pass before dropping bombs.  This year is no different we just experienced.

Unfortunately, even though 1115 is next support/ 50ma , it‘s the starting point for year.  Dip buyers that come in will not be able to push this back close to recent highs.  We now can only hope for a trip back to ~1130 before encountering  ‘happy’ shorts.   Today has given them hope and confidence to finally press’ on some positions,  something we haven’t had to deal with in a long time.   Also, instead of demand buyers showing up , many investors in the market will want to use any bounce to replenish profits lost this week.  The psyche has changed for both sides!.  

Until this news fades, we can only approach the market the same way as most recently into earnings.  Even though it is pretty much a "sell the ‘earning’ news” season,  it doesn’t really affect what we trade into earnings, but the broad market.   Surprises will continue to come from the smaller likes such as CREE & PLXS  yesterday in Journal that was able to gap and still rise ~3 pts.    The good news is not priced in what we follow.    These earning plays may only be only 1 day trades to begin with at this point, but when things stabilize in weeks to come they will be once again be worthy stocks when ‘earnings’ will matter,  just as jobs and everything else that is more important than today’s ill- timed announcement with no specifics (fact sheet) that not only caught Wall street, us, off guard, but,  other politicians and regulators around the world.   No co-ordination at all!.   A sneaky ‘Drive -by’ accompanied with language, “ If these folks want a fight, it's a fight I'm ready to have”,  best suited for the streets.

DJIM #4, 2010

It's sad!   It actually pains us to write a weekend Journal after a week we just had where Wall Street became a Political target.    What started as tightening worries from China turned into anything but ordinary toward the end of the week .   We are definitely not alone to criticize the recent events that took place at Washington.    Everyone from Warren Buffet to Jaime Dimon, some of the best role models in our business, were undoubtedly having the similar kind of dinner table conversations with their friends and family over the weekend.    Honestly, with regard to the dramatic turn of events that have unfolded last week, we don't really know what to say.     We do know one thing though, it's just not right to go after personal "achievement" at the expense of the majority who live and believe in what is known as the greatest free and democratic capitalist society in the world.    So much for the new changes and so much for the promises!    At the end, it's nothing more than a desire for populist measures.

Ok, enough of bashing!   At the end, market did drop 5% in a matter of three trading days off the "wrong" reasons.    Why?   There's nothing but uncertainty revolving around last week's headlines.   Once it becomes clear which event materializes, we'll know then if the sell off is warranted.   Right now, we have faith that people in charge at Washington still have a clue about what's good for this economy and for this market.    Totally writing off this market and preparing for the worst, coming into this weekend, may just be a premature move in our opinion.   However, people have a right to decide what to do and in this case, what to fear.    Their action speaks loudly about how they perceive the danger of this market in the event if last week's headlines do materialize down the road.

At DJIM, we have to take all possibilities into consideration.    At this point, market is resting near the December low of 1090 and we feel strongly that a bounce is at hand.   It's also definitely easier to play rebound off ETFs.   No matter how much we like some of the fundamentals/stories of individual plays/ sectors, we just feel for the sake of any rebound, trading the ETFs such as SSO Q’s OIH are more practical.  We'll get back to smaller plays once the market stabilizes somewhat.   Also, it’s peak week in earnings and we’ll look here for new opportunities.

Last week was as a shock to many, hopefully the coming week will bring some more sense to the on going stories out there.    Be rational, be cool in what will be a very busy week on all fronts.  Most importantly, cooler heads must prevail  with a Bernanke confirmation.

limbo..

Even though it looks like cooler heads will prevail and Bernanke will get confirmed, it couldn’t rally the market.  We were surprised some were calling this a rally, bounce during the day.  

All signs of hesitation and a market on pins and needles was evident today before a full schedule of events..FOMC, State of Union, busiest SP EPS week and the confirmation question.  We talked of a market that will see profit takers on market moves higher and today we got it twice.  One time after the bell and a premarket gap and than near the close,  sellers showed up again.   Also, the lack of dip buyers is still around as this was nothing more than a little short covering .   All this leads to a market that will have trouble going up until we get these above events over with, hopefully on 'positive' terms.  That’s difficult to believe for the market at this stage after last weeks thunder and so it stands in limbo.  Earnings, USD, Gold, Oil, Financials, China are providing no direction/ rotation into anything you can trade confidently on the long side.

Conviction needed...

This market, the 'people' need conviction.   The sort of conviction that is needed is that things aren't going backwards in the U.S and thus the market (2.5% decline so far in 2010).   But rather, things are still progressing forward.   AAPL tablet will show wordly progress, how about you Obama on Wednesday night?  

The earning show has been quiet successful with many companies firing on all cylinders.  We can't recall when that many companies have beat the expectation and guided the following quarter higher.   This will be a very positive sign going forward.    Honestly, if it wasn't for the circus show from Washington, we feel this market would be right on pace for an economic recovery trade.  Concerns over the economic recovery sustainability due to China tightening starting are also playing a major role, this is probably way overblown in our view.  

Well, market is not getting any easier this week.    Despite a flurry of good earnings, especially from tech land,  the market today just can’t generate a firm rebound due to all the political noise.    Of course, we can always blame the financials for being the culprit that's dragging down the market.   However, we are wondering if people have become cautious in light of the recent events brushing off all possible bright spots on the horizon.  This market turbulence is going to give good entries on growth stocks.  Right now, these are biggest victims of selling pressure as they‘ve been the outperformers.   It may prove to be an effective strategy to trade some of these stocks into their earnings reports.

The trading the last couple of days may make you feel that the bounce may never become.  Every move starts with short covering,  if it’s to continue,  dip buyers and than conviction buyers come in and make the move successful.   Today, just like yesterday showed the latter does not exist now and longer term investors are using moves higher to take some profits back.   Simply, any upside is tempered at this stage as it loses steam.   Right now, as noted today 1105 is a level that needs to fall first.    Also technically, November supports around 1090 are seemingly support so far this week.   Note, there seems be a pretty big vacuum below if we breach SPX 1080 and we may not find any meaningful support until 1040 or even 1010.   So far, panic is not here, but it would probably rear it’s ugly head if this level is breached.   It's a definite possibility if more bad news hits the market.    However, if you have faith in the recovery of this Economy,  it’s hard to imagine we'd go lower than those level.  
 

..like a 'Matrix' bullet fight

Market nervously balanced just above SPX 1085 most the day waiting for the AIG hearing,  FOMC to give it a direction.  It didn’t help CDS spreads in the usual Euro spots were signalling trouble.   Add the fear of more bashing of the banks by the Obama in the evening and the market tested 1085, 3 times.  The last test came following the FOMC and at same time whispers were coming out that Obama will put down his Everlast gloves and not use the banks as a punching bag in his address.

Basically, something finally went right for investors and not just ‘ bull’ traders, but, investors everywhere.  Today was sort of like the Matrix movie as in the Bullet- dodging scene with investors on a wire (1080-1085), bending back avoiding an arsenal of fire power.  

Investors had to be cautious these last few days before committing any money back into the market. The overhang of headlines had to resolved and slowly this stated to occur by late afternoon.   This is why every uptick was nothing (no headlines were resolved), but a little short covering as we’ve talked about last few days.   The test of low 1080’s, a 3rd time was critical as volume increased, yes, volume increases always after a FOMC statement,  but there was shorts trying to press and crack this level and cause panic.   The market was vulnerable as it was on pin and needles, but it didn’t work.  The bulls got some momentum, short covering increased and now we have some ‘breathing room’  seemingly.   This looks like a pretty good reversal day holding key levels and considering Obama backed off tonight and made job creation and stimulating economy the agenda,  it’s more significant.    Still, we’d like to breach and close over 1105 before thinking all is closer to normalcy.  What we’d really like to see is the ‘China factor’  and it’s headlines begin to be shrugged off for a change.   This overhang remains, but as we said we think it’s overblown and will see this ease shortly as in a stop to trading negatively off new daily tightening headlines.

As we’ve discussed, besides the short covering as a start to any bounce, we have ‘profit takers’ as in those that will use any uptick to sell.  So, it’s important to understand we need to see volume..volume to signal fresh buyers and conviction for sustainability and a return to dealing with this market on a fundamental basis where eco’ data and earnings matter.

Just a matter of when...

It's not easy to sing a Bull song when every effort to rally the market has failed as of late.  What looked like a potential short term turning point from yesterday's late day rally turned into nothing, but another  failed short covering exercise as the CDS euro trouble noted yesterday was the focus.   Greece isn’t becoming another Atlantis,  tomorrow will probably be better news flow and the next it will be bad again.  These day to day changes will go on and on, in reality,  this is just another Dubai type isolated issue.  We posted before the SOTU address saying don’t get “too enthusiastic “ about Wednesday late rally as it was just in anticipation, followed up saying any uptick is for ‘profit takers’ and normalcy would only occur with a breach/ close of 1105.  This premise still remains tonight and will for awhile.

Perhaps,  this has something to do with the end of January selling to protect profits.   At least,  it has turned into that!.   A normal course we see end of a month a few times a year.  Still, the way it's going, there really won't be much profit left to protect.  Honestly, at this point, we don't know that many people that have any "Long" profit left.  It is probably a blessing we are finished the peak week of SP earnings,  this is resembling the end of month selling at earnings we just witnessed in October and could be a catalyst  to a bounce.    See your daily SPX chart or below on site of similar selling action in October and November reversal.  This is becoming reckless (while investor issues are slowly resolved in it‘s favor), which is familiar to HF selling.

We try to look for things that still make sense as a bull.  Right now, we just have to say the market sentiment isn't on the bulls' side.   As far as short term goes, this is how we see it.   Does that mean we should give it up and go full short or simply leave this market alone?  Not really!   The short term pressure may very well be the kind of break this market needs.  We know, it's kind of silly to talk about bullish aspect of things when market has been beaten down day after day.   Trust us,  it's not easy trying to be rational in this market environment.   What we believe, at this point, is that the market has shown us enough of an improvement over the last six months that we'll get some strong bids sooner than later.    Remember, this market isn't in a free falling mode as far as the Economy or Corporate profit is concerned.  What's really "disappointing" the folks is that the Economy recovery isn't progressing in warp speed.   This is basically very natural because we all want to see companies growth at 20% every quarter and our GDP kicking in at 5%+ annually.    However, this is pipedream and it's basically hitting people's mind that we are REALLY entering a grindy kind of a Economic recovery.   To us, this is simply fine because we really wanted to see this Economy recovery to take as long as it can.  Why?  We really don't want the Economic bull cycle to peak within another year or two and start the down hill soon enough with policy tightening hitting here.  Geez, if US shows 10% GDP like China, we’d probably see SPX666 instead of 1666.   This is why we are hoping majority of the money managers in America see things the same way as we do.

We have talked much about the unfriendly politicial environment to this market lately.  This is not something we can control and we just have to carefully gauge the ongoing development.   If a drastic change in Govt. policy takes place in the future that changes the scope of this market, then we'd definitely rework our strategy around it. It seems Obama packaged something in the budget that stinks all over again.   So far, all of the smoke and noise out there is playing right into sellers' hands to drive this market lower.  This basically brings us to our current view of the market.   There's no doubt that the probability of this market going lower is pretty high while we sit near SPX1080.    We do, at this point, have to be prepared as to where to start picking our buy point if this occurs.   Many stocks have shown that the pace of decline have slowed down, but it doesn't necessarily mean that they'd stop going down.   If SPX drop another few dozen points, if it doesn't bounce early February from these levels, we have to believe that many of the plays on our trading list, big and small, will drop a significant amount as well.   In the short term, we still believe that we are first for a good bounce in early February if we survive now at these levels.

We are curious too...

 After witnessing some steady selling for nearly two weeks long, we finally got some broad buying today off "weak" volume.    Well, it's weak volume according to many market analysts because the average declining volume during the last few days is much higher than today's volume.    However, today's volume is above average if you take into account the three months average.    In another word, volume isn't bad out there.   What most people are concerned, at this point, is whether this is nothing but a temporary bounce which may leads to further decline sooner or later.  A positive is strength was not sold as in any uptick last week and finally Oil/ Gold gave overall upward direction.   We need some follow through, today we had no bad headline news flow and a few positive catalysts in Volker rules possibly not passing, ISM and the budget details were not as feared for foreign corporate profits.

It's true, after some relentless selling during the last few days, any bounce is not trustworthy.    Since many of us have accepted the notion that this market can drop another 5% or more, today's action seems like just an inconvenient step stone to the inevitable outcome.   Or is it?     Over the past few months, we have witnessed market's move that is anything but rational.    Even though the possibility of market going much lower is pretty high, it doesn't mean that it will..     How do we play this then?   Right now, many plays on our listed plays are due for a bounce and this is the way we are calling it.    Whether this moves translates into something else few days down the road, then,  we'll give it a new assessment.   For now, we are treating today's action as simply an oversold  ‘short covering’ bounce with the hedgies stopping end of month selling as discussed late last week.     If some plays happen to establish some strong support at the recent low after a few days, then we'll likely enter a more meaningful position for a trade.      As far as this bounce goes, if trading, sticking with ETFs and some sector beta stocks for as long as majority of stocks below 9ema.  Friday, we alerted the ‘Casino’ Macau space and today LVS WYNN  were the big beta winners.

Remember, if we are treating this move as nothing but a short term bounce, we ought to stick our trading strategy as fast trade only.   If this somehow establishes a support for SPX and the market sentiment picks up, we'll likely add back some longer term position.     In any case, there's no rush to go big into some smaller plays on first sign of positive action.