Given the current condition of the market, it’s time for a bearish trade. There is much speculation about numerous mortgage companies going out of business. One company that is specifically related to the giant drop in AMH is RAS. RAS has exposure to debt obligations tied to AMH.
RAS lost 35% today and has dropped more than 70% in the past 6 months. The stock’s trend has all the makings of a stock headed to zero.
Right out of the gate, it appeared the bulls would be in control for a second straight session. But volatility remains high, and that means we will continue to see gains given up quickly as the markets deteriorate further. Today’s action was very worrisome for several reasons. First, we continue to see heavy selling right into the close, suggesting sellers aren’t yet finished as the bell rings. The SPX lost a full percentage point in the final 40 minutes of trading.
Also troubling was the breaking of support on the DOW, NDX and NASDAQ (I mentioned this yesterday). The selling appears to be spreading to tech and other sectors. If these indices can’t regroup early and rebound tomorrow to recapture the levels I mentioned yesterday, the next support levels to watch will be 13000 on the DOW, 1900 on the NDX and 2525 on the NASDAQ. And if these levels are broken, the bulls will be in a world of trouble.
Today’s selling seemed to be sparked by the opening of AMH this afternoon. It opened for trading a little past 2 and dropped 90% in 2 hours.
This sparked sudden drops in the financials, housing, banks and lenders. Have a look at RWT and other names in the REIT business. I have mentioned this many times already, but you cannot anything tied to lending, credit and housing right now. Other companies may be releasing terrible news in the coming weeks that slashes 50% of their stock price.
Even during today’s terrible session, there were certain stocks that moved higher today; and most trade in the sectors I have remained bullish on. MTW would have gained well more than the 2% it gained today if the overall action wasn’t so bearish. Other stocks I have mentioned multiple times, PCP, RIO, MDR, PCU, NVDA and FCX all managed to finish the session higher.
Though straddling the market being long on tech and commodity related stocks and shorting anything connected to housing, lending, and the banks has worked well for the past month, I believe we are heading into a complete market down trend. If we see more selling tomorrow, I’d be very hesitant to own anything at the moment. But if you have to own one stock, make it CROX. It hasn’t been (and likely won’t be) affected by the subprime mess and credit crunch.
The business of online retail has picked up over the past 6 months, as evident from the earnings numbers and chart of AMZN. If the strength of online retail is not limited to only AMZN, other web retail stocks may also benefit from the consumer’s new predilection to shop from their computer. For this reason, one might suggest a name like OSTK, but it’s price action is less than appealing. Instead, I have another name to consider: NILE.
Similar to AMZN, NILE surged after last quarter’s report and continued to tack on another 40%. NILE will release it’’s latest number on August 6th, and its current trend indicates you should be a buyer instead of a seller into that report.
It took some time, but halfway through today’s session we finally saw buyers enter the the market to bid the major indices up about .75%. But today’s gain is secondary to the fact that we didn’t go break down to lower levels. The NDX, NASDAQ and the DOW all bounced off strong support from last June. And they will indices need to hold the 1950, 2550 and 13250 levels, respectively, to prevent a full scale market collapse.
Before we get to the domestic markets, you should take note that the Asian markets were mostly higher overnight. This is a good sign (for the bulls). The international markets have been trading in step with the US markets more and more as the current economic globalization continues to expand. Thus, it’s nice to see the Asian markets move higher in the face of last Friday’s domestic decline.
On this side of the ocean, we had two different types of strong sectors. In one group, you had the bottom feeders buying the sectors that were thrashed last week – the banks, lenders, housing and brokerage stocks. Each sector rallied more than 1% today. These stocks aren’t going to fall everyday, but they should continue to be shorted, or at least avoide until further notice.
Other sectors outperforming the overall market were the best performers from last week. Gold stocks gained an average of 3.4%. If the commodity price can hold the $650 support and move higher, gold stocks should continue to rally higher. Other metal and mining companies also moved by 3% or more. Names I have been consistently mentioning, such as RIO, BHP, PCU and FCX all bounced back 3% or higher today.
The price of crude oil languished below the $77 level or most of the day, but oil stocks were able to rall, nonetheless. The refineries had the biggest move, but should still be avoided in favor of the drillers, service, and integrated companies. NOV, RIG, SLB, COP and CAM are ones to continue monitoring.
The NASDAQ finally underperformed the S&P 500, but remains the much stronger index, overall. The SOX was able to jump 1.7%, led higher by NVDA, INTC, TXN and the solar companies I have been mentioning (most of them are in the semiconducter sector). In fact, the solar companies were the best performing stocks of the day. Giant moves in FSLR, SPWR, TSL and JASO may suggest another long run is in order. Don’t say I didn’t warn you; FSLR, my future stock to watch from last Tuesday, is now up 11.5% since that entry. Not bad considering the recent market action.
Though machinery stocks were dumped last week, they rebounded very strongly today. The best names over the past year have been TEX, FWLT, MDR and MTW. I continue to favor this group as one of the remaining bullish sectors in the market because of their to foreign countries. The week dollar should continue to aid these companies.
Even though the markets had their worst weekly performance in in 5 years last week, it isn’t difficult to understand what is currently going on. The credit, lending and housing worries will attempt to pull the market down, while tech and the oil/metal/mining/agriculture/machinery stocks provide bullish support. So the game plan is pretty simple, continue to shot the former groups while being long on the later. And as always, only trade with the trend.
OK, so today’s stock to watch isn’t actually a stock. It’s the $NDX 100, the index for the the biggest (non-financial) stocks that trade on the NASDAQ stock exchange. Despite this week’s miserable tape, the $NDX is still on top of the 1950 support level from June.
So far, the credit and lending panic that has been terrorizing the market has not spread to the tech sector. But if we plow through the 1950 level we could see every major sector turn downward.
Halfway through the final hour of the closing bell it appeared today’s damage to the markets would be limited. Then, with about 30 minutes before the weekend, an avalanche of selling pushed the DOW lower by another 150 points. As I mentioned yesterday, volatility is here to stay for the foreseeable future – you’ve been warned.
The worst performers of the entire week were actually in the green until the very end of today’s session. The financials, banks and homebuilders were on course to finish will limited gains right up to the final few minutes of trading. It seems, most traders decided to sell all other sectors instead of the banks/brokerage/housing stocks. The optimists out there (if there are any left) might suggest this indicates a bottoming of the banks and brokerage firms and that the other sectors must now be wiped out before they finally settle, eventually allowing the major indicies regroup before they can ascend again. Only time will tell.
For the second time in three days the price of crude oil surged 3%. Commodities have a tendency to run wild if they break out of a tight trading range, and crude oil has down exactly that. I make no predictions on future prices, but the current trend suggests that $100 a barrel oil is a real possibility. An increase in crude usually boosts the energy sector, but the XLE fell over 2% for a second straight day. CVX avoided the earnings miss that plagued XOM yesterday, but it, too, fell. The three months chart of CVX shows it has held the ~$84 support (May and June’s resistance).
Similar charts for XOM and COP suggest the integrated oil stocks have held up better than most. At this point, I would consider this group one of the few to have avoided a true trend reversal. And I’d still look at names like RIG, NOV, and SLB as future bullish trades. Continue to avoid the refineries.
Until today, it appeared the major drug companies were becoming a safe haven for investment capital after positive reactions to reports from MRK and GSK. However, along with PFE, BMY and JNJ now tail spinning out of control. The $DRG is at sitting at a fresh 52 week low.
There were only two groups that managed to finish the day with strong gains – the solar power companies and the exchanges (we’ll get to them in a minute). I’ve heard some analysts and traders compare this group with the ethanol stocks that crashed last year after a sudden spike. They’ve recommended staying away from FSLR (my Tuesday stock to watch, up 3% today), SPWR, TSL, JASO and others. But these names are being bid up, outperforming the current terrible market.
When volatility and trading volume surge, the exchanges are one of the few groups that benefit. Both CME and ICE reported record trading volume yesterday; ICE also reported that it saw trading volume increase to new levels during its latest quarter. These two names have performed much much better than NDAQ and NMX. There has been talk of additional consolidation after BOT was acquired, and this may help CME and ICE continue their strong trends.
Heading into next week, your game trading plan should remain the same. Short anything related to housing, lending and credit. On the bullish side you must be very selective, if you decide to buy anything at all. Names to consider include BGC, HPQ, EMC, FWLT, PCU, AAPL, AMZN, BA and CSCO.
If you happen to come across a stock that gains over 1% when the S&P 500 drops 2.33%, you should take notice. You should pay special attention if the company recently rallied after its latest earnings report and trades in a specialized bullish sector. What stock fits this description? POT. POT remains one of the better performing stocks in the red hot agricultural sector and bounced off its $75 support level today.
The money being pulled out of the brokerage firms and banks will have to go somewhere eventually; and POT is strong candidate to receive new institutional money. Am I worried that it’s already up 170% over the past 12 months? No.
Just how far can the financials fall? I have no clue. I never predict were stocks are going to trade. However, I do attempt to prepare for every outcome and develop the appropriate contingent strategies. Let’s take a look at GS.
During February, the Shanghai market fallout that spurred a brief global sell off and eventually sent GS down to the $190 level. It son rallied off this level and was able to recover. GS reached this level again today but finished up at $195. If GS (everyone’s favorite financial stock) breaks the $190 level, it could easily fall down another 40 points to $150. If that’s the case, and GS keeps falling to trade at a 52 week low, the broader markets will likely be in very big trouble.
Earlier this week I wondered if the financials and banks would take the lead and pull down the rest of the markets. Today, this was certainly the case. The markets continue to fret over a credit crunch, banking concerns and an abysmal housing market – and the blow up of a couple Australia hedge funds didn’t help – dragging down every major sector into the red. The decline was certainly massive, but the volume was near recorded breaking on both the NYSE and the NASDAQ.
Let’s go over the good news first – the little of it that there is. The big tech names helped the NDX sustain only a loss of 1.2%. AAPL certainly helped with its report, finishing up 6.5% against a terrible tape. Many big names like GOOG, RIMM, CSCO and QCOM all fell less than 1%. Quite impressive on a day like today. Other names I have mentioned bullishly, such as NVDA and SPWR were able to finish in the green. Finally, Like AAPL, WFR – another strong semiconducter stock (with exposure to the solar market) was impervious to today’s selling and jumped over 5% on its earnings report.
Amazingly, the NDX was able to recover from its session low and creep back above its 30 day MA. And it remains solidly above the 1950 level that should now become support.
I continue to believe this index and most of tech will outperform the rest of the markets until the end of the year. But stay with the bigger caps. Avoid the smaller, speculative names that are killing the Russell 2000.
Now to the bad. The financials, banks, REITS and homebuilders continue to fall apart. I’ve sufficiently stated my position on these groups. On to more troubling matters, the recent leaders of this bull market were some of the worst performers on the day. XOM shook up the energy sector as they unexpectedly missed earnings. This pulled down CVX (who reports tomorrow) and sank the entire energy sector nearly 4%.
The mining sector lost about 5% and looks to be in trouble after the XME brook through the $60 support level. But some of the best performing names were able to hold up relatively well. RIO and CLF held above their respective levels of support ($47.50 and $75), while BHP, FCX and PCU remain above their 30 day moving averages. If you are going to be long some where other than tech at the moment, these five names are good candidates.
Gold and silver stocks lost an average of 4%, but this comes after some names have already run up as much as 20% within the past month (that means you SLW). The $XAU remains above its 30 day MA and the Gold and Silver commodities remain in good shape.
Tomorrow’s market volatility will be very high again; and it should remain high for at least two more weeks. We are going to continue to see big swings as the market alternatively focuses on strong earnings, global economic growth and the potential credit and lending crises. Also, tomorrow’s reaction to the government report on GDP growth will be very interesting. Don’t worry about the actually number, just the trading response.
Finally, for those that still refuse to short this market, I would suggest buying inverse ETFs that move up when the market drops. Have a look at the QID, SH, MZZ, and DOG. This will allow you to play the down side of the market without the (irrational and ignorant) fear of having to go short.
AMZN surged over 24% after posting numbers that crushed estimates. I heard some “experts” on TV advising people to take the gain and walk away. I must not be an expert because there is now way I would sell AMZN here. When long trending stocks have massive moves (in the same direction) accompanied with strong volume, they have a tendency to continue running. One stock that has recently traded this way is RIMM. At the end of June, it also blew past the Street’s numbers and gained over 30 points the next day, ending the session at $200. RIMM now trades $220 less than a month later.
Come to think of it, there’s an even better example to look at.
That’s right, AMZN itself exhibited this type of behavior after the numbers from their last quarter were released. Past performance is no indication of the future – but I wouldn’t be selling AMZN after today’s strength.
Positive reactions to earnings reports from AMZN and BA helped the market recover fractionally from yesterday’s sell off. Once again, it was nice to see an immediate rally following a previous loss- the large volume didn’t hurt either – but I don’t think we are out of the woods yet as far as sudden large declines are concerned.
Still, the markets have been able to recover from dramatic falls in the past 6 months; first in February after the large one day fall out in Shanghai; then in June when the 10 year yield unexpectedly cracked the 5.20 level. It took some time to recover form both events, but China’s market has since continued its run and the 10 year note now rests comfortably at 4.9%. The markets most recent problem is possible the subprime meltdown bringing down the economy.
I make no predictions on the outcome. Stay long on market strength, and short market weakness.
In addition to BA helping the aerospace sector and AMZN helping the internet stocks, a 3% spike in crude oil bootsed most energy stocks. The services and integrated names each gained about 1% after falling early in the session. But as I have been cautioning, the refineries remain weak, taking another hit today. HOC, FTO, VLO and others all dropped on strong volume.
Most metal and mining socks dropped today as Gold and other commodities finally came down some from their recent highs. This group remains one of my favorite, but if the broader markets trade flat for a week or two before picking a direction, names like RIO, PCU and FCX could come down a little more. Stocks related to uranium should be avoided, however. USU and CCJ had been stellar investments until a few weeks ago – each have broken down into down solid trends.
The machinery and infrastructure names were hit hard today. Names like FWLT, MDR, TEX, DE, MTW and others were all down substantially on strong volume. These stocks have been some of the better performers of the past year, but they have recently sold off after reports from CAT (last week) and TEX (today). This could be another sell the news scenario; and assuming they recover along with the rest of the market, I’ll continue to like all of these names.
The airlines took a hit with crude oil gaining almost $2.50. Surprisingly, some airlines have actually performed very well over the last month as crude has broken higher – some gaining over 10%.
This just shows that conventional wisdom is no resource for trading. Crude oil prices are surging and could be heading to $80 a barrel and beyond. Most professional investors and traders would tell you to stay away from this group. But when if a stock goes from $35 to $48 in seven weeks, does it matter that the stock is an airline (UAUA)? It’s still a 37% gain, isn’t it?
Like I mentioned above, we aren’t out of the woods yet. Any day, some other company might release a statement indicating the current subprime and credit mess is affecting their business. First, it was BSC saying two of its hedgefunds were worthless. Yesterday, it was CFC stating they expect significant difficulties for the next couple of years. We could hear additional negative reports within the next few months from other companies. This is why you should continue to avoid all banks, financials, REITS and homebuidlers.
