..a sleeper

A sleeper of a day!.  Two sides to the market, the morning consisted of more great earnings from WHR/CAT  for some strength and the afternoon dip was sell the financials before GS’s hearing on Tuesday and the financial reform bill on the floor.   In between was a flattish sleeper of a day.  Unless, we get some excellent earnings in morning, the afternoon dip could continue into the morning trade.

The two sides, you can call the headwind or the tailwind team.   The earnings tailwind coming into Monday‘s trade~40% of sp500 companies reported, ~80% have exceeded Street earnings forecasts,  the average margin of upside was 20%; companies are also stopping revenue forecasts – 69% of firms are also beating St sales ests.   The tailwinds…GS/financial reform.   Which side would you rather play and be on…earnings …a stronger than expected recovery that is appearing or the tailwinds that don’t last very long at this point??.  Mid term..earnings, but in the very short term the above smells may continue to linger.

Once the bigger names (SP) finish off this March end reporting season, we will start to get more of the mid-small cap companies.  Hopefully, the earnings will follow suit and we will get surprises to trade as new growth stories emerge.  

Euro Fear...

Once again, good old Greece made the headlines today along with a Club Med  friend, Portugal!    We were kind of wondering what it would take to give this market a real reason to sell off and now we know.  The news of debt downgrade for Greece and Portugal was not unexpected, but `junk` status makes it one (Greece) of the world`s riskiest debts.   End of the ‘big’ earnings out of the way, it is a legitimate catalyst for sellers to push this market down about 30SPX points.   Also, the usual end of month profit taking played a role after a run.

We'll not get into the implications of these downgrades as anyone can pull up a financial news and read up on it.     What we are concerned is whether today's move signals an imminent correction with some more downside ahead of us.    Of course,  the fact this is happening in the middle of a really good earning season makes the thinking even trickier.    We have seen this market come back from a massive selloff from a week ago.    In fact, after today's decline, some of the sectors, including financial and commodity, are already sitting at a sizable loss from their peak not too long ago.   So, even if GS was up today,  there is still residual from that day's smell that lingers.   

For this market,  which carved through at least 4 supports of interest today,  (including the channel we had up here recently and  a close below 20ma finally),  the next support is at around 1175/1170 and it's honestly not that far away and it takes maybe only few hours of work.    Does it mean that we'd have a reasonable chance that market can hold at that level and bounce from there?    What we know, at this point, is that after today's decline, this market won't go down any further without a fight.    We bet that for every 10 point drop in SPX,  we are going see some buyers step in to bid on some stocks that had good EPS reports. 

Honestly, with or without Greece, this market is signalling one way or another that we need to consolidate around 1200.    Again, today's news is a "perfect" excuse to lock up some people's months long's hefty profit.     So what is DJIM doing assuming we may get a correction on the way?    For us, buying dips in small chunks is the way to go until the market reverses the trend.    In addition, we still have many companies that haven't reported yet and it's worth continuing to hunt the good ones, but earnings for now will take a backseat for a few days at least.   So, be careful chasing a good report as it was possible for the last 2 weeks, it may succumb to profit taking quickly for now.

Bottom line, this market won't be a snoozer in the next little while.    We are sure that we'll get plenty of action as we head into May.

...Hmmmm

A few habits of the market we’ve extensively covered are…dip buyers come in on shallow pullbacks intraday and/but, if there is a big sell off >1.5%,  they always ignore the next day to step back and instead wait for the dust to settle.   We also know shorts waste many opportunities to press fresh positions/ get aggressive the day following a big sell off because they continue to fear upside risk.  Today, we have all these characteristics, which will probably point to a fight tomorrow for the 20MA (1196) and the 1200 level.  Simply, the Bulls shouldn’t feel disappointed we failed to reverse hard and take back the 20ma.  It may come tomorrow.  It is the Bears, despite the sovereign overhang catalyst, who should feel disappointment as their troops stayed in their holes.  

Despite what may seem like heavy selling the past 48hours, it really is not panicked and resembles more of simple month-end profit taking using the Sovereign issue as the excuse.  The little bounce today can be credited to short covering and nothing else as the dip buyers stay sidelined, so really nothing to get excited about either on the Bulls side

A few things need to change for the Bulls.  Firstly, tech has been running on the sell side for a few too many days, plus most recently (noted yesterday), Earnings have taken a backseat (poor reactions to X, DD VECO  etc)  to the Soverign/Gs/Financial reform overhangs.   We need earnings to be driver for this market to go higher.  For the moment,  market has lost that ’ lovin' earnings  feelin'  due to the prominent overhang.   Also, believe or not, if the financial reform debate gets the votes it needs to move on after failing 2 times, it may actually move the market to the upside tomorrow.  Hey, we have a little imagination!.  Speaking of imagination and big money does have it…with all the downgrades of Club Med members,  some are probably betting SP may give the UK a paper cut.   Maybe Paulson is meeting with GS & SP;).. Anyways, this would be a monstrous event if it were to happen.

..can’t teach an old “bull’ ..new tricks..eh!

Talk about the habits in yesterday’s Journal coming to fruition as the SP snapped back 15pts!. Not only did we take 20MA back, but closed above 1205, which is a signal the Bull will likely test Mondays’ highs. If we can close above here tomorrow, it will make this highly probable.

If Tuesday’s sell off seemed relentless to some and yesterday's action cautious,  today's action states the  plain and obvious (underlying ‘ bullish’ sentiment is still there).     With the kind of news flow and mood swing lately, this market is definitely worthy of making a soap opera out of it.   Where’s Greece or Portugal today?   Come on, those headlines from two days ago should have at least a couple of days of staying power, no?    Well, you tell that to those who are chasing the high beta BIDU AAPL as the broad market focus also came back into earnings power as we’ve been noting here as something that needs to come back to go higher.

Of course,  this market is not just about the high flying beta techs.   The way this market (SPX wise) carried itself in a 2.2% rebound,  the action had to be broad.    The strength from financials helped quite a bit as they are the most sensitive to soverign overhangs    The earning reports from various industries keeps suggesting the improvement in the Economy covers a wide spectrum of sectors.    Now, we don't need to point out a particular paper stock or a specialty chemical stock to make this argument because believe us,  the move today is pretty wide spread.    

The only weak spot(s) today seemed to come from some commodity area such as coal and steel, but we’ve been writing about the warning signs from X early in the month.  In fact, we view the weakness as opportunity soon to start in some positions in DJIM faves’ like CLF and WLT  X at much cheaper prices than we could have imagined a few weeks ago.   Maybe, even for a quick bounce trade for tommorow starting with CLF.   Still, it’s not a hurry because we are seeing commodities like copper, aluminum hovering at important technicals levels and have earning reports to trade instead.   Clearly, considering CLF had excellent earnings and sold off big (it follows in the footsteps of X’s excellent report), the problem is China curbs we noted recently that are reflecting upon the group and money is coming home ( this means into domestic stocks..paper, builders and the materials for them). 

The other spot was a weak LED group , despite a good tech print.  VECO  has been selling off since earnings and this strengthened with AIXG’s report that had something about not so strong of an order book.  Just like commods’, money is rotating out the best momentum stocks/ groups of late.  To be completely honest, we welcome our past year's best trades selling off as it had become hard to justify chasing on valuations recently.   This will only present an excellent oppy later to get back into the winner's on a cheaper share!.

Slowly but surely, we feel some of the companies are finally getting the kind of reward it deserves for delivering few awesome reports in a row.  Examples ..VCI, IRBT, HOT  and APKT, DLB (AMC) today in mid cap names.    Finally, after a long period of denial, we think the general public is accepting the fact that things can only get better from this point on.   The only thing that somewhat worries us is that bad news doesn’t come often these days.  That's because when a negative headline does come,  it blows up in a 1.5%-2% down day.    On the other hand it’s better to get these corrections over with quickly.   Still, overall for this market's sake,  we just hope the positive sentiment won't let stocks get ahead of themselves keeping in mind as we've said earlier in the month, if a correction comes it won't be like last Q right after INTC earnings, but instead a little later ...meaning May for this Q. 

DJIM #18 2010

On a day the market just needed a few points in the green to close above 1205 and regaining a bullish posture towards testing highs, it was bombarded by negative catalysts and made a technically bearish weekly.  

All excuses were pointed towards the lingering GS smell and spill,  but as we pointed out mid afternoon it was earnings as the NASD/tech was the real culprit in our view (fell another 20pts off after >2pm note).   Let’s just say, if DJIM’s DLB APKT were SEMI’s and not QLGC WFR (MFE tech software didn‘t help sentiment ),   the disappointment in tech earnings would not have been seen.   Yes, these are not the typical Semi’s,  but with the LED semi’s (VECO CREE etc.) still being beat up,  the whole group suffers.  GS and BP are not responsible for a 50 point NASD spill and SMH  being down around 4%.   The day simply showed earnings and guidance/comments do matter to this market in a big way.   Any signs of the recovery losing momentum and the market will be punished at these levels as earnings are the cushions for the contagion fears.

Tonight,  Greece got bailed, but futures are not surprisingly quite muted from this weekend’s expectation being fulfilled.   The good thing might be is shorts, who usual expect a big gap up on any positive news from the other side of the ocean may try to press in the early going if they don’t see one and we test 1180 at some point in the morning.     Otherwise,  the market will need more than just a bailout, but some relevant M&A activity (earnings BMO is pretty quite to help) and the usual Monday MF/institutional money that buys the market on a new month and/or Monday’s for the last few months seemingly.

The magnet of 1200....

There is really not a whole lot of reasons why this market should go up this much today as there was not a whole lot of reasons the market went down that much the trading day before.  It seems whenever there is a ’bunch’ of possible catalysts (not one real catalyst) leading to a move up or down, the next day is usually a reversal of that move.  So, today’s short covering move is taken with a grain of salt as we did not close above 1205-SPX.   All of the catalysts we've seen and discussed that caused this market to gyrate around 1200 may simply be the fact that we are due for some solid consolidation around this 1200 level, even if seemingly it comes with some volatility day to day now.

Fundamentals may support higher levels down the road, but it may not mean that this market should get there right now.    Out there, we seem to have a lot of crosscurrent headlines that can impact a trader's emotion, but otherwise it's really business as usual, in our opinion.     Many tech, financials stocks led the rebound today and many commodity stocks lagged behind due to China RRR hike and Aussie mining tax.    On another day, the role can simply be reversed.    The last thing we want to do here, is trying to over analyze every mini move of every sector and interpret into something irrelevant.     After all, many of these sectors have had a strong run up since the beginning of the year and we are getting close to the period where action would eventually slow down.    Consolidation among some sectors is fine and rotation into some other sectors to play catch up is just as good.    We just have to understand what has gotten us to this point at first place, and that is the Economic recovery and today‘s global PMI‘s/ ISM were strong pointing in that direction.     The Greece bailout, the Oil spill, the GS investigation, the financial reform and many other events we are going to be facing down the road, do not really affect the reason we buy into this stock market day to day.

Bottom line, it seems that there's quit bit of position juggling out there on a daily basis.   It's also perfectly understandable some people are comfortable holding their positions and aren‘t chasing further just yet.    For us, we simply have to spot the strongest plays and keep trading until the play tires itself out.

..bleeding the Euro

It seems N.American market traders can’t dicipher news or Global traders, who mostly had the day off (UK,China) Monday are just better are evaluating headlines. Why?...well,  because today’s catalysts for the beating were all out before Monday’s trade and our markets eventual ‘big’ up day.   Of course,  we all know the steep decline can be attributed to sovereign fears, but it is the details of the bailout announced, notably  (ECB’s Greek bond collateral waiver rule change) that prompted an exodus out of the Euro and a break of important technical levels.   Also, China RRR hikes which we’ve said all along will come also mattered today, but not yesterday after being released over the weekend.  A HSBC PMI # from China didn’t help, but there are actually 2 numbers and the one on Friday which is considered the official PMI# from (The National Bureau of Statistics) was the better one.  In our view all this shows is China curbs are cooling things (the overheating) and that’s what it’s supposed to do!.  This is not necessarily a ‘slowdown’ scenario.  All this leads to the validity of this downward move.  Either it is way overdone or US traders are a step behind in understanding the moving parts of what is occuring overseas.  

Premarket there was no real evidence of what was to be a big gap down and a frantic opening 10minutes in which most of the days losses occurred.   Euro CD spreads were out some, but far away from panicked levels from the prior week.   If you look at many charts, you see there was really no chance to avoid a beating as individual stocks gapped big and the first 5-10min bars were most of the days losses on individual stocks.  Almost every important sector sustained 3-5% losses.  The only win was the SP was pretty flat from around 11am and closed over 1170.   There are different breach levels traders are looking at (1180-1175-1170) for a signal to 1150.   Who’s right, who knows?

Besides the Friday NFP # adding to the volatility, the ECB meets Thursday and if they do more rule changes it will rattle things again.

Basically, the markets are handcuffed as there is no ’official comments’ leadership  in the Eurozone to the soverign concerns.  One hand and/or country is saying something, the other is saying the opposite while the Euro bleeds.   Also, again, earnings take a backseat as all eyes on Euro (FXE).

Rough Patch

Consider the phase we are going through now and next little while as a "rough patch" or even the May correction we were talking here last month.   Today’s breakdown to 1156 taking out the last support at 1170 and not closing above  it pretty well confirms we are in a May correction.    Mayday Mayday is the distress signal from Europe that has put the market in this unstable position.   Add, the China curbs creating a possible slowdown in many eyes and we're likely due for a rocky month.   Any push higher/bounce now and we are looking at "S"upport at 1180/1185 now being "R"esistance.   Of course, the surge of USD and Euro bloodbath is just putting any sort of major reversal attempt out the window until we find a tradable short term bottom.   Even a great NFP# on Friday might be a negative event as it would likely strengthen the USD.

So here we are, the sort of pullback we've all been waiting for.    Honestly, this may be the best time to get a pullback right before the summer rolls around.    After all, we've come a long way since just three months ago and this market has a right to take a breath and price in many macro issues.     What we do not want to see, at this point, is for this market to get out of control as far as the selling goes.    Things can escalate in Europe and this may be a catalyst to give some more people a reason to reduce exposure.    At this point, we can speculate all we want, but we still have to bite our time to let it play itself out.

Technically, the next important of support is 1150 and we may have a range between 1150 and 1200 to play with for the next couple of months, until one of the level gets broken that is.    So far, we aren't in a rush to get anything because many plays just look like they aren't ready to settle down yet.  Any new buys will likely have a very short term lifeline for us (24-48 hrs at this time).  It`s a short term traders market as we are not seeing dip buyers of significance these last 2 days.

Bottom line, earning season is still going as we speak but it's quieting down considerably and is taking a backseat to all macro issues.   The market focus is definitely not on earning reports anymore, so we have to pay more attention to other headlines that can potentially impact investors' sentiment.   Still, as far as individual mid-small cap plays,  we still expect good initial reactions to reports to trade.

3D market

It’s going to take a few days to understand what anything (stock) is worth,   it is simply premature to buy this May correction of 7.5%.   It doesn’t matter if error trades, fund liquidation due to margin calls etc. or just panic was responsible for the ‘milliseconds’ plunge.   The problem was before….We noted the ‘lack of leadership’ in the Eurozone and the ECB meeting possibly rattling the markets again.   Well, it was Trichet calmness on the sovereign concerns that was the ‘match’ that led to the fire we witnessed in awe.

Anyways, stocks were for sale before the afternoon plunge and have been for days with no buyers stepping up for 3 days as we’ve discussed.   Simply,  it’s been a buyers strike and we’ll continue to stay in this camp.

DJIM #19, 2010

The breaking news tonight is that EU/IMF approved a 3 part/ one trillion bailout after Austin Powers held the Europe/ world ransom.   Is this the sort of response we've been waiting for?  Well, the market participants certainly aren't expecting anything less audacious because the fear from Greece fallout had become genuine and devastating to the investors' confidence worldwide as of Thursday.   Another Bazooka was called for, the pressure was at a crescendo!.  The ECB had really dropped the ball  last week leading to a complete about face tonight.  Amazing movie stuff!

By now, all of us have read enough and are presumably familiar with the terms HFT (high frequency trading) and ISO (intermarket sweep order). So, we are not going to bother explain what transpired on that crazy Thursday.   All we have to point out is that, once the technical level of SPX 1150 was breached/ long term Bull trendline from March 2009 and no immediate bounce thereafter, it basically opened a floodgate where everyone wanted to protect their profit by selling their holdings.  The Greece was a catalyst that warranted such a spectacular display of frantic and panicky action in those minutes.  We at DJIM, have sat there and watched it in absolute amazement of those minutes in trading.  To sum it up, now we have seen it all these past few years.!

Judging by the futures reaction tonight, market's definitely "relieved" to see the outcome from Europe.  We aren't sure if we have seen the absolute low for this correction.   Oh yes, this is still just a correction and as much as some people may hate to admit, this is extremely healthy for a long term bull market.   Right now, because due to the increased volatility, we can't help but to think that this market's capable of rebound back to the 1150 area.   However, given the fact that earning season is near the end and summer is about to begin, we highly doubt that this market is capable of challenging any higher ground beyond that.  This correction, in most likelihood, needs a big portion of this summer to digest.  This is fine with us as we are more than comfortable to start trade some plays at the current levels as oppose to the levels a couple of weeks back.   As for tomorrow, expect a round of profit taking on any big gap at some point for those wanting to get out still with some gains back after this flight to safe havens last week. 

As far as plays go, we are noticing somewhat better behaviour from the commods on Friday so that may be the area we'd step our toes into first.  This would conicide with expectations for a USD/ FXE trend change.   As far as other plays go, we basically have to go by one day at a time and one play at a time to assess if any are worth trading yet.

Bottom line, market wanted a correction and they get what they asked for quickly. The correction may have arrived in an unconventional fashion, but it's still just a bump along the current bull market.  All of a sudden, market is going to be full of opportunities again very soon.