As the year winds down with this upcoming last full week of trading, we find ourselves at the crossroads here. We are here because there's definitely two distinct possibility in front of us. One possibility is that we roll over from the recent gain and try to test the November low and who knows what happens after that. The other possibility is that we stop going down right about here and churn our way upwards, in an apparent and somewhat violent manner.
Lets talk about what happened in the past week first. The action from past week is purely centered around Fed decision and we can understand how market participants feel after the decision. They have a hangover. In our opinion, unless Fed surprised us in the optimistic way, this market would get sold off regardless because as we had come off such a good 2 week rally from the November low. In terms of Fed's decision, in our opinion, they are doing the right thing even though it may not be "instant market friendly" kind of decision. The bottom line with the Fed is that we have the Fed on our side still. They aren't being ignorant contrary to many people's thought and they are simply being patient to help out the financial crisis. This of course isn't being bought by everyone because many wanted that "magical potion" from Fed that can solve all of the problems once and for all. Believe it or not, many if not most of the problems associated within the financial sector still need to be addressed and resolved by the companies involved themselves. In other words, market needs to do the most to bail themselves out. This is only healthy in the long run.
Too many people are too negative toward this market and too many shorts have piled onto the recent upward momentum in our opinion. Basically, we believe that when you want to trade this market down, you definitely want to do it with good timing. First of all, you want to go negative really hard at the beginning of the crisis and in a seasonally slow environment. Right now, there's definitely no saying that we are at the end of the crisis but we are definitely far from the beginning of it. People are fully aware what the problem is and measures are being put in place to correct the problem. It does take time. However, you don't want to go really short when things are being fixed, slowly but surely.
So against all odds, we think the second possibility is that this market churns upwards has much better probability. In order for this market to dive and take out the November low, you'd need some really disastrous news or the proof that we'd go into a real recession to do that. Somehow we just don't think any of those two things is in the cards at this moment. At least, not during the Christmas shopping season, we might add.
Earnings Earnings and Earnings! What more confident catalyst you need other than earnings? We have them coming up and the way this market has been setup, anything better than the lowest expectation can cause a good rally upside. Of course, that also depends from company to company and sector to sector. Last week we had LEH reporting and we have to say markets reaction has been very positive, despite the drop of all major indices. In the coming week, we have GS reporting and this is considered best financial house there is. Again, the way it sets up is that the shorts wanted to push it below $203, which is the recent low and knock it down for good. If this stock is at $240, we say the odds of getting sold off is pretty high regardless the earning number. In our opinion, the trade definitely calls for the upside when the number is released. The next important report in the coming week is RIMM. In our opinion, the recent 20% drop from the $122 area took away any bearish surprise. It feels that shorts have pressed a bit too early going into this report on the heels of a couple of firms analysis of RIMM. It is "unlikely" that RIMM would report a slowdown in its business and we can almost ensure a massive squeeze if it doesn't play out the way bearish camp wanted. There are quite few other reports in the coming week which include NKE FDX MS BSC BBY ACN JOYG GIS... quite a few different and important sectors. This should provide us a good picture whether our economy is heading into a recession or not. Again, we believe in our thesis that market rarely goes into a crash into an earning season. Basically, we'd be much more nervous being short than long at this point.
Now some plays....
Solars, is it us or does it feel that most if not all solar stocks are being setup conspicuously on Friday? Just look at some the chart setup from some of the popular names and we swear they are all setting up for a good run-up in the coming week. By the way, they are being setup(in a very positive way) on a day that all indices dropped well over 1%. This is simply amazing which tells us that people want to own these things at year end. Basically we still have a bit over a week to window dress these names and it isn't a myth that the best stocks get owned at the end of the year to show them on your book.
STP/FSLR/JASO/LDK, these are what we considered the favourite solar names to trade last week. With the exception of LDK EPS Dec.19th, which we are still waiting for the audit report to cast away the cloud, a start today as (independent Audit out according to LDK concluded allegations incorrect), the other three are being setup superbly going into next week. YGE, IBD #92 is also enjoying a nice trend change.
SOLF/CSIQ, these secondary solar plays are also setting up nicely, especially with SOLF. The 9 ema has just caught up with SOLF and the next move might be big and will likely get this thing out of the recent trend. With the entire solar sector heating up, we feel the move is very likely to be up than down. ESLR had 2 nice days after Thursday premkt upgrade and follow up news.
Asian stocks, as seen in charts this weekend they took the week off after a 2 week recovery, following overnight numbers from HANG/SHANG they will most likely continue to be out of favor to start the week.
LRN, 300k volume and a higher finish on day 2 of trading. If this thing had any volume Friday, it might be already looking at the high $20's.
MELI, this is the play you only can wish we'd all bought more of before Cramers mention. On the other hand, this is no longer a strange name to traders and with its tighter float and story, anything is possible. Basically, this one is better now with Cramers exposure than before which is largely an unknown stock to many. The trading in this one is rather volatile so we'd continue to be inclined to buy on intraday dip and sell into strength. It has worked beautifully in the past so there's no reason to change the strategy with this stock. The trend is firmly to the upside since the break at $45.
RIMM, we've been buying some late in the week looking to hold up to the earning report and then play after its EPS is digested. Again, in either case, if this company reports a good number or the market rallies, we'd be all over this beta name along with other heavy favourites like BIDU AAPL GOOG etc.
VIP, MBT..also seemingly against all odds these were green on Friday, closing around highs of day. Another Russian stock, WBD pulled off another impressive Q with what looks like their best EPS number yet. Again as we 've seen too many times lately, nobody was interested in earnngs, this time because of CPI data headline. Simply, you had pockets of strength to buy...the solars, the biotech, the russian stocks late in the week despite the volatility to the downside in the overall market.
Bottom line, this is the time where you have to be playing the most popular stocks. We have seen it that the small caps aren't exactly working so you might as well join the crowd. The more crowded it gets with a good mover, the better. We can even see it with some of the recent story stocks from the biotech sector like RIGL SVNT BMRN etc. You trade what others trade, when a stock is showing upside momentum that is. Only then, you'd have a chance to outperform others.
Monday, December 10, 2007 at 07:30PM 