LEH traded lower in the final 90 minutes of trading today; and after the bell the company announced it will offer $3 billion in convertible shares. This will only create more whispers about the LEH viability to remain alive. This is why you can’t own financial stocks. And compare the final 90 minutes of LEH versus a random miner like RIO.
LEH puts could become very profitable if the company suffers the same fate of BSC.
The first quarter of the 2008 trading year ended with modest gains. Volume remains very light and will remain so until the new earnings season begins next week. There was little action today, but a few items are worth mentioning in this space.
First, major drug companies MRK and SGP were thrashed as analsyts forecasted Vytorin, their cholesterol drug, would lag previous sales estimates. As I have warned previously, drug and biotech stocks are at the mercy of FDA rulings and other trials. But if you had simply followed the trend of these stocks there was no reason to own either heading into today’s trading session. In fact, both had acted as great shorts for months.
Commodity prices were under heavy selling pressure today. Crude oil may now be stuck in a $100 to $110 trading range for the near future. Here’s the USO chart that illustrates this trading pattern.
Notice that the USO was in a tight trading range for a few months as Crude oil had difficulty surpassing the $100 level until mid February. Despite the concerns of a global economic slow down, crude oil has remained in a solid up trend. Watch for the $77.50 level to act as support, as it was this Winter.
The agriculture stocks all fell as the DBA sank lower by 3.5%. Be careful with names like POT, MOS and other stocks in this space. The are very volatile. Also, TRA and TNH – former high fliers – have broken their robust up trends. Others may soon follow if commodity prices don’t rebound.
The prices of gold and silver also dropped, and the XAU index appears to be headed back to the $170 support level.
If precious metals can regain their up trend, AEM, GOLD, and GG should start to run higher.
The financials ended little changed, but the homebuilders continue to show strength. The XHB turned higher today, and if the broad market can stay firm at these levels, it should be able to take out the $23 price with relative ease. The next resistance level would then be $25.
Little else happened today, so I’ll end it here. It will be interesting to see if the “short financial – long commodities” remains the best trade for yet another quarter. Earnings season may determine if this will be the case.
China’s stock market has struggled leading into the summer Olympics held in Beijing. The FXI has rallied over the past 6 days, but it faces strong overhead resistance at the $140 level.
In July of last year, the $140 level was stiff resistance, and it became strong support until a few weeks ago. In fact, from mid January until mid March the FXI did trade below the $140 level – seven times – but the ETF never ended a session below this level.
But the downtrend of China’s market eventually continued, and the FXI traded all the way down to $120. The ETF has rebounded to $137, and will now face the $140 as resistance yet again, along the 30 day moving average. It may be time to short LFC, CHL, ACH, JRJC or other Chinese stocks.
The markets have already begun to roll over (yet again) as we move further away from the FED’s latest intervention. Economic data suggesting the housing market still hasn’t reached a bottom and that the economy is grinding to a halt, along with renewed concerns regarding the health of Wall Street’s investment banks, weighed heavily on the major indices as they all dropped 3% from Wednesday to Friday.
Despite last week’s surge in equity prices – and the predictable chorus of bulls singing the markets praise – this blog has maintained that the current bear market is all but over. The problems facing names like LEH, MER, C, WB, the mortgage insurers and other financial institutions will not magically disappear simply because the FED Funds Rate has been cut in half. True, the government has been able to prevent an epic collapse (bailing out Bear Sterns, lifting restrictions on FRE and FNM, and holding an emergency January meeting to cut rates 75 basis points after the international markets were drowning) but the trend in most equities is still down.
As the financials began their latest fall with the rest of the market, the mining, energy, steel and agriculture stocks were being purchased. Here is the one week chart of the XLF versus various commodity related stocks.
Commodity prices fell on Friday, and we need to pay close attention to the performance of the GLD, SLV, DBA next week. If these ETFs begin to fall again, the commodity stocks will begin another steep decline. The USO and UNG have recovered much better, and most natural gas stocks are trading near their 52 week highs. The renewed weakness in the dollar should have provide a base for most commodity prices.
The retail sector was under heavy selling pressure this week, culminating with JCP lowering its guidance on the upcoming quarter. Other retail department stores also dropped on heavy trading volume on Friday. I can’t find one retail name worth owning currently. But names like UA, RL, and COH maybe be ripe to short.
AAPL and RIMM were able to able to rebound after the large cap tech names fell after ORCL’s earnings release. Both stocks are very strong right now but each face two problems they may not be able to overcome. First, as a group, technology remains very week. MSFT, INTC, GOOG and CSCO collapsed towards the end of the week as the entire market fell. The QQQQ is trading right on its 30 day moving average, and any short term worries about the technology sector may send the ETF back to the $41 level, its 52 week low.
Secondly, the earnings of RIMM (this Wednesday) and APPL (April 23rd) may adversely affect the current up trends of each stock. Consider my consecutive posts regarding the earnings of ORCL – a stock that also began running higher preceding its earnings report – from this past Wednesday and Thursday.
March 26th: ORCL may influence the NASDAQ tomorrow as it reports earnings after the bell tonight. The stock has already gained 9% over the last month, so – no mater the results – the stock may sell off.
March 27th: The market was also under pressure because of the heavy selling in ORCL and the rest of large cap technology. ORCL dropped 7% after a huge run in March. It’s going to be very hard for stocks to advance further after such large run ups. The overall posture of the market just won’t allow for it.
Unless RIMM and AAPL can crush their earnings and maintain ambitious guidance about the upcoming quarters, these stocks may suffer the same fate as ORCL. But, as I said on the 27th even if the performance of RIMM and AAPL blows away their estimates, the current market posture may still push these names lower. If you want to hold onto RIMM or AAPL into their earnings you should pair your long position by shorting weak stocks like JNPR or BCSI.
A lighter post this afteroon…
A sluggish GDP report and rumors spreading that LEH might suffer the same fate of BSC dropped the market Thursday. Of course, Lehman was quick to say the rumors were totally unfounded – just like Bear did a couple weeks ago. MER and GS also dropped on heavy volume, and investors are buying a ton of April puts on all three stocks. 23,000 puts of the LEH April $20 strike were purchased today when the stock trades at $38.
The market was also under pressure because of the heavy selling in ORCL and the rest of large cap technology. ORCL dropped 7% after a huge run in March. It’s going to be very hard for stocks to advance further after such large run ups. The overall posture of the market just won’t allow for it. RIMM, INTC and AAPL were all clobbered today, but these are now names you should buy on the dips – not the financials.
Most commodities paused after the gains from earlier in the week, but the price of crude oil was still higher near pipelines because of an explosion in IRAQ. Possibly benefiting from oil’s rebound are the solar names. All but FSLR have been sliced 25 – 50% since the end of 2007, but many names have seen active buying recently. FSLR is the still the best performing stock in the sector, and surge in other names (CSIG, SPWR, JASO) provides support as most stocks appear to move together.
Trading volume picked up today, but we still haven’t seen anything explosive since last week (the FED and expirations options week will do that).
We continue to see the financial names sell off and the commodities and commodity related stocks reclaim the high ground. The price of oil surged over $4 and the oil service stocks were the main beneficiaries, as usual. Natural gas also gained for for a second straight day as did natural gas stocks. Meanwhile, LEH, MER, C, AIG and many others are failing to follow last week’s move higher with any real strength.
This market continues to be an easy one to trade. And the strength in the commodity names like ANR, RIO, APA and others may continue in the near future. Take a look at the three charts of each stock below.
All three stocks traded on 125% of their normal volume today; where as the SPY and QQQQ traded only 75% and 60% of their regular volume. This is quite a difference and suggests the bullish moves in the RIO, APA and ANR are very strong. Also, each stock appears ready to test their respective resistance levels once again. Now that RIO’s potential deal for Xstrata is no more, the Brazilian miner might be able to break above the $37.50 resistance. As oil continues it’s bullish trend, APA should keep soaring higher especially if equities become favored over the commodity. And a report suggesting increased coal exports and a future tightening of supply sent ANR up 7%.
As it appears the steep drop in commodity stocks is over, you can once again be long oil, coal, steel, agriculture, precious metals and miners as you short the rest of the market. Banks, investment banks, the hombeuilders, retail, airlines – they all had terrible sessions and are worthy of shorting. Here is the 3 month chart of the RTH fading from the mid $90s resistance for a third time.
Like I mentioned yesterday, I believe the large cap technology names will be the determining factor for where this market trades in the near term. AAPL and RIMM each gained another 2%. Even GOOG moved higher today. Remember these were three of the 4 tech stocks that lifted the NASDAQ in 2007 (AMZN being the fourth). If these stocks can return to their form of last year, this market may still have a chance of moving higher. ORCL may influence the NASDAQ tomorrow as it reports earnings after the bell tonight. The stock has already gained 9% over the last month, so – no mater the results – the stock may sell off.
The price of crude oil was one of many commodities to suffer large losses last week as money began flowing into the financials after the FED reduced interest rates again. But oil has steadied near the $100 level. The USO has held the $80 support and may fully rebound up to the $110 level (or beyond) if tomorrow’s inventory report is bullish.
Despite the lastest action from the FED, we haven’t exited the “long commodities, short the financials” phase of this market. And if the price of oil (and other commodities – GLD, SLV, DBA, KOL, UNG) continue to rebound, equities will likely retrace to their lows.
Tuesday’s price action indicates investors have yet to abandon the trading strategy that has worked so well since the credit crisis began last summer. Commodity prices rebounded with conviction today after last week’s severe correction. Gold, silver, wheat, corn, natural gas – they all moved higher today, and commodity related stocks may be ready for their next bullish run.
The agriculture names were given an extra boost as MON raised its full year 2008 guidance. MOS, POT, CF and the entire space was lifted and will continue to rise if commodity prices do not collapse. I would also continue to watch the natural gas names like SWN, ECA, XTO and CHK.
Downgrades of BAC, MER and COF helped pressure the banks and financial names, and a steep decline in housing prices prevented the XHB from crossing the $23 resistance I mentioned yesterday. Names like JPM, LEH and MS have surged as much as 25% since their recent lows; and as we move further away from the FED’s latest intervention these names may start to drift lower once again (like we saw after January’s rate cuts). And for those in need of a fundamental reason to avoid these sectors, this morning Goldman Sachs reported that write downs will continue to the tune of $200 billion. Again, for anyone still (still!) holding onto a financial stock, take the recent lift to exit your position.
The large cap technology names continue to support the market with consecutive advances in AAPL, RIMM and INTC. As the market continues to be pushed up and down by the bulls and bears, the technology names may be the determining factor as to whether the current bear market persists. The names contained in the NDX are unaffected by the credit crunch and the wild swings in commodity prices. Their performance is critical to the overall health of the equity market over the next two weeks.
The market continues to react as it did after the January FED Funds rate cuts. The market was battered to overextended lows before the FED’s actions sparked a tremendous rally before the major indces faded into a narrow trading. Then, at the beginning of the March, the market started to deteriorate again. The FED decides to cut rates by another 85 basis points last week, and we are off an running again.
And the market internals are similar to January’s rally. With lower rates, the major banks, homebuilders and everything financial related has exploded. Commodities and commodity related stocks have suffered, despite the broader market advances. What is different is the new strength in the major technology companies. Names like AAPL, AMZN, INTC and CSCO have joined RIMM to outperform the market. During January’s FED inspired bullish run these names still dropped to new lows. Keep an eye on this development.
What we need to watch in the coming weeks is whether the surge in the financials runs out of steam and if money begins to flow back into the commodity and other sectors. For instance, here’s the one day comparison of the XLF, XLK and XME.
It will be interesting to see if the XLF can break through the $27.50 level. Other names to watch are LEH and MS and their $50 resistance levels, and C at the $25 level.
The homebuilders are still behaving like the best financial related sector. The existing home sales data pushed many names to 6 month highs on very strong volume. But this group may slow down. The XHB fell 4% from today’s high to finish below the early and late February resistance level.
Eying the broader market, the level to watch on the DOW is 12750. This price was twice resistance during February.
The next few trading days should continue to be hectic as the market decides if it wants to follow the same “short financials, go long commodities and commodity stocks” pattern that has worked (outside of the FED intervention rallies). If this trade gets turned upside down, we may actually see the market begin to trend higher. Don’t make any predictions, let prices be your guide.
The credit crisis has reached a new, once unthinkable level. One of the largest firms on Wall Street no longer exists. Bear Sterns is no more. Technically, bankruptcy was avoided as The Federal Reserve assisted the buyout (if you can even call it that) from JP Morgan. However, for a company whose stock traded at $160 last spring and $90 just over 2 weeks ago, ending its reign as a titan of Wall Street after the final acquisition price of $2 a share, does it really make a difference?
To the shareholders of BSC, the answer is an emphatic no. And to those that held onto their BSC stock (or even added to their position on the way down) out of loyalty to the company; or because they were the recipient of billions from sovereign wealth funds; or because there were rumors of a possible buyout in January; or because the stock was just to cheap to sell – all rationalizations I have heard over the past 6 months – you only got what you deserved. Where others have seen “bargains” in the financial sector, calling false bottoms on a regular basis, I have never wavered in my bearish stance on the financials. This outlook was never the result of fundamental, valuation analysis or a prediction on the FED’s ability to successfully intervene. Stock prices were dropping – that was my signal. It is the only signal you can trust
When the CEO of BSC publicly stated that the firm was not strangled by liquidity problems, the stock price continued to drop. Traders began buying hundreds of thousands of March puts as low as the $10 strike while the company traded at $70. These puts had less than 2 weeks to trade before they expired. Still, investors held their positions in BSC as they became virtually worthless.
You can watch CNBC all day; read every article in the Wall Street Journal; listen to company conference calls; read earnings reports – but no amount of information can precisely tell you when to buy or sell. The only parameter with the ability to quantitatively define a successful trading system is the price.
I’ll be taking the rest of the week off to rest and watch college basketball all day. I’ll be back next week with updates.
