future stock to watch

Restaurant stocks have behaved much like the retailers over the past 12 months. That is to say they were great shorts until recently. If the 2008 trading year is going to be the opposite of 2007 (which has been the case so far), PFCB may be able to rally for months.

The volume in PFCB has exploded as the stock has turned around. In addition to PFCB, other restaurant stocks in the same sector have turned around – BWLD, PZZA, PNRA. This group may falter some if the major indices fall back after tomorrow’s jobs report, but PFCB is finally showing real strength.

today’s tape

Early on it appeared the market would begin sinking back to the lows of two weeks ago. The news of MBI writing down an additional $3.5 billion in losses pushed the futures down for an lower cash market open, but the major indices found a way to rally – once again led by the banks, brokerage firms and retailers. The retailers have completely turned around and have been the best sector over the past 10 trading days, handily out pacing the S&P 500.

The banks have performed much better than the brokerage firms since the FED began slashing interests 10 days ago. Here’s the 10 day chart of WFC versus GS.

I’d rather own WFC or WB over any investment bank at this point. Stocks like MER, LEH, GS and MS still haven’t broken out of their current trading ranges.

I have to admit it – you can no longer short the homebuilders. The XHB is screaming higher right now. But this trade has worked for almost a full year. And stocks like SPF, HOV and BZH are still down 70 to 90% in the past 12 months.

The groups I have just mentioned – the worst performers of 2007 – are now acting as market leaders. And the top sectors from last year cannot regain their momentum as the major indices have rallied. The oil service stocks continue to languish; large cap technology names have been destroyed as soon as they release their earnings (AMZN was sparred by today’s huge rally – GOOG is currently trading down 8% in after hours). The miners have sprung back to life; but PCU, RIO and BHP have done nothing more than rally back to the underside of their 30 day moving averages.

The market is in a completely different place than it was just a few weeks ago. The combination of a slowing world economy and a FED that will do anything to bail out the financials is taking money out of the global growth sectors and into the banks and retail. There is no other way to explain why COF and SHLD are up and NOV and ATI are down.

Now…

The major indices are still in a long term down trend.

But the internals of this market has changed. And I would begin to readjust my trading to short names like RTI, AA, RIO, PCU, AMD, MU and MDR. Except for a few names – FRE or MS – I don’t think you can short the financials any more.

Tomorrow’s job report may shape the early morning futures. But as I mentioned on January 26: We are… seeing another pattern develop in the price movement of the major indices. That is, a reversal of the morning futures as the market pivots and begins retreat from their early highs (as we saw Friday) or rebound from an early sell off (Wednesday). Keep this in mind.

The overall market is still weak, but you you need to pay attention to the sector rotation.

today’s tape

The FED gave the market what it wanted, slashing the key interest rate by another 50 basis points; but the DOW gave up all of its gains and dropped a total of 250 points after the downgrade FGIC, a bond insurer.

The failure of the bond insurers like MBI, ABK and others is terrifying the market right now. If these companies go under the financial world will be tossed upside down and the market will crash to new lows. And it makes the FED a bit inconsequential – a very scary proposition to most investors.

The next big event that may move this market is the Friday’s jobs report. I’ll leave it here today as I have an evening commitment.  I’ll be back with an extensive report tomorrow.

future stock to watch

After leading the 2007 bull market higher, technology stocks are now hated by investors. GRMN, AAPL, EMC, VMW, GOOG and INTC are just a few examples. YHOO my future stock to watch from this weekend is down another 10% in after hours trading. I don’t think many tech stocks can be owned, and many financial names should actually be considered ahead technology. Here’s the one month chart of the XLK versus the XLF.

No one has hated the fianncials more than I over the past 6 months. But you don’t make money being stubborn, not allowing your market posture to evolve. If the market heads lower after the FED decision, technology stocks may continue to be tossed aside. That’s why I’m looking at SIGM as a possible short.

SIGM lost 50% in about five weeks as the NASDAQ crashed. And it has gone through the typical bear market rally that may soon be over. The stock has stalled recently, trading sideways the past three days as the October support (about $47) may now become resistance. I wouldn’t be surprised to see SIGM decline to the $35 level if the major indices fall back to their 52 week lows.

today’s tape

The major indices added to yesterday’s gains with a modest rally ahead of the tomorrow’s FOMC meeting.  Don’t be fooled – we have seen this many times before: the major indices reach a short term bottom trying to regain sizable losses before the FED announces their latest decision.

Case in point: the S&P 500 finally reached a bottom in late November as the financials started to pull the rest of the market higher before the early December meeting.  After the FED announced its decision, the S&P 500 dropped 20 points (down to the lows of last week).

The major indices have barely recovered, and the anticipation of additional rate cuts should not shift your market posture away from bearish.  And if the market sells of tomorrow afternoon, it will be the financials and retail stocks that sink the most.

It’s important to study the price movements of companies releasing earnings in the current market.  As I have been mentioning, former high flying tech stocks continue to get crushed.  It happened to AAPL, INTC and now VMW.  After rising 150% from its IPO over the sumer, VMW is now a few dollars away from it’s all time low.  DOW gaped higher at the open after reporting a better than expected report, but – as was the case with MSFT – investors are using strength to sell.

On the other side of the trading spectrum, BA and AXP finished the day higher.  But both of these names had room to climb without interrupting their current down trends.  AXP was also aided by the possibility of another FED life line.

The price of crude oil is rising again and is currently trading right at $92. It is much better to own the USO (crude oil ETF) than most oil stocks right now.  However, the refineries are worth taking a look at.  TSO, VLO, HOC and WNR have steadily underperformed all other oil stocks over three months.  But we may be witnessing an inflection point in the energy sectors.  Here’s the three month comparison of the OIH (oil service sector ETF) XOM (integrated oil) and TSO (a refiner).

Now take a look at the 10 day comparison.

An upgrade of FTO and a positive reaction to VLO’s earnings were the catalysts that sent the refiners up 5 to 15% on heavy trading volume.  Keep an eye on this group.

After two weeks of dropping oil prices and consolidation speculation, the airlines have lost their momentum and may be on the verge of falling again.  Yes, JBLU gained 20% after releasing its earnings report, but this group is still miserable – and most names finished the session lower.  LCC, AMR, ALK and LUV are worth shorting.

The market will probably swing back and forth until the FED’s decision.  After that, we’ll have a better idea of whether or not this bear market will continue.

today’s tape

The markets continue to swing away from their opening levels – today gapping lower and then catching a bid as the day went on. The new home sales report was abysmal once again, but the homebuilders gained nearly 5% on hopes of additional rate cuts. Anticipation of lower rates also helped the banks and brokerage houses. The XLF finished the day right at the $28 support level from October. The 30 day moving average may also act as resistance.

The large cap tech names underperformed with YHOO and GOOG leading the way lower. Yesterday, I warned of YHOO heading back into the teens after it announces its earnings report after tomorrow’s closing bell. The NDX names, in general, have had a rough two weeks because of INTC, APPL and, to a lesser extent, MSFT. After trading as the best index for the past 12 months, the NDX is now under performing against the smaller caps in the Russell 2000.

Here are charts of the NDX against the RUT across 12 and 1 month, respectively.

Notice the recent pivot in performance. Now, this may simply be a result of the Russell 2000 collapsing first – and thus it has started to recover first. But the recent action in the established technology names is discouraging.

The price of Gold continues to reach new highs, and the gold stocks remain the safest ones to own. True, the agriculture stocks have rallied back to recover much of their sudden losses, but this group may continue to jump around – and in some cases I expect price moves of 30% or more in very short time periods.

MCD, a stock hat had already lost over 15% in less than 2 months, dropped another 6% today after releasing its earnings. Stocks are being hammered even when they have sold off ahead of the reports.

I don’t think you should make too much of today’s rally. Volume was virtually nonexistent compared the last 3 weeks of trading. There is little conviction when this market is bid higher. Until we hear from the FED later this week, the movements of the market won’t mean much.

future stock to watch

Last week, we saw what happens when large tech companies announce their earnings report. If there is any hint of a slow down in the company’s future business prospects the stock gets crushed (AAPL). Or, any initial positive reaction is used to take profits (MSFT). Next week, YHOO reports; and this is not a stock to own given the current bear market (actually, even if the market was screaming higher you shouldn’t own YHOO).

Like so many stocks last week, YHOO rebounded from its lows before slipping back after nearing prior support (take a look at CAT’s retreat from the $67.50 November support). YHOO failed to break out above the $22.50 support level from August. And given the current bear market, YHOO’s Tuesday afternoon earnings release may drop the stock back into the teens.

today’s tape

Market volatility remains high, and the intra-day moves – the difference between the session high and low – have been tremendous.   Yesterday the DOW swung 275 points from the top to the bottom.  We are also seeing another pattern develop in the price movement of the major indices.  That is, a reversal of the morning futures as the market pivots and begins retreat from their early highs (as we saw Friday) or rebound from an early sell off (Wednesday).

This dynamic is the result of conflicting market forces: namely, the FED versus the economy.  The economy is in now recession, dragging down equity prices in all sectors (except gold).  With Tuesday’s emergency 75 point basis cut of the FED Funds Rate, the FED has recently tried to bail out the stock market, and many investors follow the “don’t fight the FED” mantra (I do not).  This may cause the major indices to become trendless in the very near term.  But the market may be jolted soon enough, either after next week’s scheduled FED meeting or Friday’s January jobs report.  If the jobs report indicates a contraction in employee hiring, investors will likely be reminded of the US recession.  And the FED can’t do anything to help businesses hire more people.

Back to Friday’s price action…We returned to normalcy, which is to say retail stocks and the financials led the market lower while the agriculture finished higher.  The financials and retail sector were the big winners from the FED’s rate cut, but these groups have been the weakest from the past 6-8 months.  I sincerely doubt that these can continue to lead the market higher (as the did from Tuesday to Thursday).  And Friday’s action was a reminder of this; and the RTH and XLF appear ready to short, once again.

Individual names to consider shorting are TIF – last week it ran up to the $40 level that was support in mid August, only to sell off.  On the financial side, C, LEH, FRE and FNM may begin to fall again as we move further away from the last week’s rate cut.

The agriculture stocks regrouped towards the end of the week to regain some of the early week – and last week’s – losses.  I would be careful with this group at the moment.  The agriculture group will probably continue to swing wildly for a few more weeks.  I will remind you of the price action in the names of CF, TRA and MON during the end of July through August.  When an entire group is severely disrupted, it usually takes some time before the trend is reestablished.  And remember, the economy wasn’t in recession 6 months ago.  You should not dismiss the notion that these stocks my begin to trend lower.

The price of crude oil bounced back above the $90 level, preventing a reversal of the current up trend.

Crude oil is beginning to trade in a range, somewhat similar to the range I pointed out in the major indices back in December and in the emerging market ETF (EEM) on January 12.  The main difference in the action of the USO is the absence of lower highs and higher lows.  The USO is not being squeezed like the S&P 500 and EEM previously were.

Yet, oil stocks have collapsed.  The oil service stocks were the best performers in the energy group during 2007, but the OIH lost 23% in three weeks – thanks, in part, to SLB’s sell off from its earnings report.  The OIH did recover to the November support of $170, but it now trades below $164.

This has been the pattern of most stocks: classic bear market rallies that eventually fade.

The singular group that isn’t fading is Gold.  The commodity regained its footing and is back on pace to cross the $1,000 mark in a few months.  This continues to aid gold stocks like ABX and GOLD.

Outside of the gold sector, I would continue to short or sit on cash.

I was out of town for work this past week and was unable to update this site.  I apologize for failing to inform you.

After remaining true to their convictions for so long, the FED finally caved, holding an emergency meeting to slash the Federal Funds rate by 75 basis points, an unprecedented move just one week preceding the FED’s next scheduled meeting.  Let’s be clear about this: this move was about bailing out Wall Street, not to boost our struggling economy.  The Asian and European markets lost upwards of 10% in two days prior to the US Tuesday open.  The early morning futures indicated a 500 point loss open for the DOW, which may have doubled by the closing bell had the FED not interceded.  The economy is still recessing and the lagging affect of an interest rate cut will not prevent this.

So the major indices finally rallied, but only after the FED’s momentary heroics.  The first group to move higher was the financials.  The major banks gained over 15% in some instances; the homebuilders rallied, as investors may be thinking a bottom has now been reached (think again); the performance of the investment banks was scattered, but most finished the week with strong gains.  As capital finally flowed back to these groups, the global growth, commodity related stocks were battered.  Miners, RIO , PCU, FCX and BHP were pushed over a cliff.  Oil stocks lost as much as 20% in some cases because earnings from SLB and COP were viewed as disappointing.  Moreover, the slide in crude oil has pushed the price of a barrel back below $90.  Technology also lagged last week because of earnings from AAPL.  Former high flying stocks are now tossed to the side if there is any hint of slowing momentum in the company’s business.

It appeared we would end the week with three days of gains.  Strong MSFT’s earnings boosted the NASDAQ to come back in line with the S&P 500 and the DOW, as the major indices appear to be trading in line once again.  Don’t let the earlier gains fool you: remember, we are in a bear market – and the FED can’t change this fact.  The recent surge in equities is classic price action of a bear market rally.  I do believe we will fall again to test (if not break) the 50 basis points from the FED Funds rate?  I don’t know.  But the market has rallied in front of every scheduled FED meeting over the past 6 months, only to sell off in the days following Bernanke’s decision.

Tomorrow, I’ll be back with substantive report on the price movement from Friday’s action.

future stock(s) to watch

Today, we’ll go over both a bearish and a bullish stock to monitor. And given that we are in a bear market, let’s start with a stock that could collapse in the coming weeks. In the financial sector, we have seen multiple down trending companies cut their dividend, only to see their stock move even lower. C, MBI and WM are just three examples. And if you take a look at their graphs, there is a similar pattern to each stocks’ performance.

Each stock was pummeled in October as the credit and banking crisis picked up steam. Then, in November, C, MBI and WM traded sideways for about 8 weeks. But a new push to the downside came as each company cut their dividends.

On Friday, another financial firm reduced the size of their dividend by 30%. As a result, FNM lost over 8% on heavy volume.

Notice that FNM has also been trading sideways between the $30 to $40 range for almost 2 months. I wouldn’t be surprised at all to see FNM (and FRE, as well) crash through its 52 week lows soon – just as C, MBI and WM have.

On the upside, the gold stocks are the last bullish group to trade. Boosted by a strong move higher in the price of Gold, the ABX has resisted the to free fall that has infected the rest of the market.

ABX has lowered slightly as the broad market pulled every stock lower this week. The price of Gold also drifted from its 52 week high. But the dollar should continue to weaken as interest rates come down, and Gold is trading as the only safe haven for investor capital. ABX should continue to benefit if Gold continues its run to $1,000.