today’s tape

No update today…I’ll be back Sunday with full analysis of this week’s action.

today’s tape

A quick post today…

The price of crude oil advanced over 4% Wednesday, finally stifling what seemed like an endless slide. And, guess what? The market still finished higher! Why? Because – all together now – the declines in the market are not oil driven; the major indices fall because of financial worries. This is why a mammoth one day reversal in MER (they sold assets around 25 cents on the dollar, and announced further write downs are still in the offing) sparked the DOW to a gain 250 points yesterday. MER, after trading below $23 yesterday, quickly reclaimed the $25 fifty-two week low and finished with a strong gain.

The move in oil did allow the energy stocks to spring back to life after being beaten for weeks. We are seeing the coal, steel and agriculture names trying to trend higher once more. Over the next few weeks it will be important to recognize if both the financials and commodity groups can move higher (financials finally gained on a day when the focus was on commodities). Whether or not the bear market ends depends on this dichotomy.

today’s tape

Last week I outlined the prospects for full reversal out of the current bear market.  I insisted that, for the major indices to break their current downtrend, the next leg up would have to come sooner, not later.  July 24:

Some have argued we will likely retest the lows from two weeks ago – I’m not so sure.  The rallies in January and March happened without a retest of their respective lows.  If this market is going to continue rallying higher, the major indices will have to recover again pretty soon.

Given the fact that the market has crashed twice since the July 24 post (huge down days last Friday and yesterday), today’s stellar rally was critical, confirming the above statement.  Today’s large moves in the banks, homebuilders and retailers suggest there is still more room for the bulls to roam.

Crude oil and the energy stocks continue to slide lower.  I am somewhat surprised the energy names have broken this far, this fast.  But we have been seeing the coal and steel names recover.  X, following the lead of companies in the steel sector, reported amazing numbers this morning.  Only this time, we finally saw the steel group rally on the news.  We’ve also seen BUCY and a few other commodity related companies begin to resurface.

You cannot be 100% bullish on the commodity names as we were just a few months ago.  But, as I wondered on July 24:

After this initial bounce in the commodities begins, the question then becomes, where does the market trade from here?  Can we actually return to a pre-credit crises market where quality stocks in every sector steadily moves higher?  Will we see GS, SLB, RIMM, WMT and X all trading at 52 week highs?  It’s still too early to tell, but for this to happen we can’t be in a bear market.

I believe that last sentence is the key.  We are in still in a bear market; and bear markets won’t allow stocks from every sector to trend higher.  Certain groups will always be hated, thrown away in haste – first it was the financials, now commodities.  If we see a bullish run – like we had from March to the end of May – we might see stocks from every sector trade higher.  Until then, I continue to advocate the trading strategy that works best: stay long strength and short weakness.  Find pair trades that are working.  Long WMT, short M.  Long JNJ, short MRK. Long GS short LEH.  Long INTC, short SNDK.

today’s tape

no update today…i’ll be back tomorrow.

today’s tape

The market was able to recover with modest gains from Thursday’s beating, a very positive sign as Fridays have often ended with a wave of selling with investors fearing the next financial crisis is right around the corner. But traders appear to be separating the wheat from the chaff in the financial sector.

Every financial stock has surged higher from last Tuesday’s bottom. So, it should not have come as a shock that the banks would give back some of the recent gains (The XLF immediately dropped when it rallied up to the 50 day moving average). But the two day performances of GS, WFC (the wheat), WB and MER (chaff) indicates some financials are still in trouble. Specifically, the short term put buying in MER is reminiscent of the BSC and LEH action I pointed out before they dropped about 50% in a week’s time. Thousands of August puts are are being purchased in MER all the way down to the $10 strike.

Oil and natural gas prices keep falling, but the energy stocks may reached a near term bottom. The OIH held the $190 level – resistance from last October and the end of December. I still think we are going to see a strong rally in energy stocks soon – and it has actually started to happen in one specific group. Strong earnings from ACI boosted the coal names Friday, many jumping 10%. On the agriculture front, POT recovered one day after its earnings were released.

These groups – the financials and commodities – have alternatively acted as leaders of the market for the past 12 months.  And It’s usually been easy to determine how each group would affect the market. But with volatile counter-trend moves in both the financials in the commodities, it’s becoming harder to judge their influence on the market.

Perhaps we should look to technology for leadership.  The NASDAQ has not suffered as much as the DOW and S&P 500 this year.  Unlike the DOW and S&P 500, the NASDAQ held above its lows from January and March; and the XLK has been able to hold the $22 mark like ti did the first three months of this year.  We are also seeing individual stocks rebound from initial earnings driven sell offs.  AAPL has gained about $13 since gapping below $150 on Tuesday.  GOOG is now $10 above it’s close last Friday.  MSFT has rebounded since dropping 7% after the company released earnings.  INTC is higher after a muted reaction to their quarter.  The major names that drive the NASDAQ are trading much better.

We’ve had our strongest recovery since I warned of the market collapsing on May 24.  The bears and bulls will now fight to gain control of the market.  And I have no clue who will win.

today’s tape

The story of this market is now changing from the recovery of the banks to the fall of the commodities (though, as I outlined last week, this has essentially been the same trade).  The financial sector has skyrocketed higher after last week’s reports from BAC, C, JPM and WFC.  And the new money flowing back into the names that make up the XLF appears to be coming out of oil, steel, coal and agriculture.

Those who worship at the cathedral of fundamental analysis, investing based on valuation, would be wise to “let go” of their dogmatic beliefs to see what is really happening here.  Value investors studying the earnings reports are probably confused by the subsequent price action.  One might ask: why are the commodity stocks getting crushed when oil is trading near $125? (Still a 75% move from last winter.)  Why does AKS continue to fall when it beat on the top and bottom line and was upgraded the next day?  How can CHK be trading in the mid $40’s when the CEO just bough 750,000 shares at $57?  Why didn’t BTU spike higher after tripling their income from a year ago?

The answer is simple, really; and it also explains why WB was up 125% in less than 2 weeks.  It’s because the market trades on themes.  And over the past 12 months there has been one guideline for profitable investing: short financials, be long commodity stocks.  That’s all that was required of you to turn a profit.  There were slight reversals of this trade when the government intervened (the BSC bailout, 75 point basis cuts on interest rates), but these countertrend moves always faded.  Right now, we are witnessing the latest reversal.  With the SEC’s decision to end naked shorting, the financials received their latest catalyst to spike higher again.  And when the financials rise, commodities fall.  That’s why POT was down today after crushing their estimates and raising their ‘09 guidance by 20%.

If you want to be successful investor, put down the balance sheets and stop listening to conference calls.  Find the overarching theme that is driving the long term trend of the market.

So…has this trade I have been writing about for over a year finally ended?  The recent price action indicates we are closer to the finale than ever before.  However, I still think it’s too early to tell.  Soon (maybe, really soon), we are going to see the coal, steel and oil stocks bounce.  The volatile swings lower have pushed many in these groups below their 30 day moving averages by 25% or more. These aren’t banks losing billions of dollars; a sharp rally will happen sooner rather than later.

In fact, we saw most commodity names rally off of their lows as the financials were knocked off their perch today.  Look at the action in CHK today.  It had a 10% trading range today before finishing higher 2% on the largest volume of the year.  Today’s reversal happened despite natural gas losing another 5%.

After this initial bounce in the commodities begins, the question then becomes, where does the market trade from here?  Can we actually return to a pre-credit crises market where quality stocks in every sector steadily moves higher?  Will we see GS, SLB, RIMM, WMT and X all trading at 52 week highs?  It’s still too early to tell, but for this to happen we can’t be in a bear market.  You didn’t forget this is still a bear market, did you?

Onto today’s action…the major indices reached their first true level of resistance today, which is why strong moves in QCOM and AMZN were ignored by the rest of the market.  The 1275 level on the S&P 500 (the lows of January and March) may prove difficult to breach.  Some have argued we will likely retest the lows from two weeks ago – I’m not so sure.  The rallies in January and March happened without a retest of their respective lows.  If this market is going to continue rallying higher, the major indices will have to recover again pretty soon.

today’s tape

no update today…i’ll be back tomorrow.

today’s tape

After last week’s parabolic move in the financial sector, I outlined a potential short term trading scenario over the weekend.  On Monday, it held true: despite BAC continuing the trend of WFC, JPM and C posting better than expected earnings and alleviating some distress in the banking group, we saw strong reversals in the financial names after gapping much higher at the open.  From 10 am Monday until the closing bell, banks, housing stocks and lenders all lost ground.

As I further suspected over the weekend, the commodity names were the beneficiaries of capital leaving the financials.  Monday saw giant moves in MOS, WLT, STLD and most other commodity stocks.  But the market returned to the recent “long financial short commodity” trade as oil, gold and natural gas dropped.  Natural gas has dropped an amazing 25% in one month.

The financials rallied today and commodity prices fell; the earnings of AXP and AAPL were largely ignored.  AXP’s quarter didn’t remind investors that the financials are still risky to own.  The reaction to AAPL’s report confirmed my outlook on the large cap technology names.  From July 19:

Individual technology names have had a hard time digesting earnings the past few weeks (see also, RIMM). But the NASDAQ is well above the relative levels of the DOW and S&P 500. Next up for technology – AAPL. The stock is currently trading at recent support ($165), but the highs are declining, squeezing AAPL’s trading range, which usually creates a volatile move when broken. And after seeing the reactions to RIMM and GOOG, I wouldn’t want to be long this stock heading into earnings.

But AAPL rallied $16(!) from its lows helping to push the NASDAQ with a gain of 1%.  The NASDAQ further ignored the performance of TXN and SNDK (the SOX was not so luky, however).  It will be interesting to see if the NDX tries to play catch up tomorrow.  The small caps in the Russell 2000 are actually leading the NASDAQ higher.

Last week I had become more optimistic about the prospects of the large cap drug makers.  JNJ rallied higher after reporting last Tuesday, but MRK was bloodied back to another 52 week low today, possibly preventing this group from trending higher as I previously hypothesized.

Today’s action was pretty crazy.  We had airlines jumping 50%; casinos rallied 5% in the final hour of trading; the XLF jumped over 4%  in the final 1.5 hours.  Of course, I’m only concerned about the XLF.  In the final few minutes of trading it dropped back below the $22.50 resistance that was support from January and March.  In five days, BAC has jumped 65% just as these stocks became over shorted, I think they are now over owned.  Similar to the XLF, the S&P 500 is sitting right at the January and March lows.  Once/if this level is breached, look for 1325.

Despite today’s very positive action, the long term outlook for this market remains bearish to these eyes.  Gold continues to rally amid the falling dollar.  This will continue to lift commodity prices – or at least prevent them from retracing too far from their current levels.  Housing prices are still falling, and any guess as to when the descent will stop should be ignored.  These trends have shaped the market’s posture for over a year, and there is still no evidence for a reversal.

today’s tape

no update today…i’ll be back tomorrow.

today’s tape

With the SEC announcing new restrictions against shorting FRE, FNM and other beaten down financials, the bulls were finally able to wriggle control from the bears this week. Better than expected quarters from WFC, JPM and C also generated some much needed optimism in the banking sector, which had become a coiled spring, waiting for some decent news to send these stocks higher.

But the problems among the banks have not disappeared. Housing prices are still falling, and banks are still in dire need for more capital. I still don’t think you can own any stock in this group. Many names have are now overextended on the upside, most notably JPM and WFC. The price of WFC is now 10% higher than the 30 day moving average.

The price of crude oil made more headlines this week, this time by dropping 11% in 4 days. Those who want to attribute this week’s market rally to a drop in crude oil have it wrong, as usual. As I have maintained throughout this blog, the financial crises is the only factor moving this market.

There has been one trade driving this equities for the past 14 months: short the financials, own the commodities. These groups have been negatively correlated for over a year. Extra capital has been pouring into oil, natural gas, coal, steel…because you cannot own any bank. If the financial stocks were not all trading at 5 year lows, oil would not be trading near all time highs. So as the financials rallied this week – as they did in January after the emergency 75 basis point cut in interest rates – commodities and commodity stocks declined. The commodity trade is simply a derivative.

So where do we go from here? Now that the banks have rallied 20 – 30%, we may see the commodity groups begin to rebound. This has been the trade every time the market reaches a bottom. The financials lead the initial charge higher, which is soon followed by the oil, coal, steel and agriculture. To those that believe the commodity groups have been irrevocably broken, I urge you too look at how the XLE and XME traded in January. Both ETFs were thrashed about 20% before regrouping to trade higher. We are seeing similar price action today. And as the financial names lose their upward momentum (very, very likely), it will be the oil, coal and steel stocks that see new capital.

Earnings from MSFT and GOOG pushed the NASDAQ down on Friday, but the price action wasn’t terrible considering the influence of these names. The trading range on the NASDAQ was very tight Friday, as the index did not lose much ground after the open. Individual technology names have had a hard time digesting earnings the past few weeks (see also, RIMM). But the NASDAQ is well above the relative levels of the DOW and S&P 500. Next up for technology – AAPL. The stock is currently trading at recent support ($165), but the highs are declining, squeezing AAPL’s trading range, which usually creates a volatile move when broken. And after seeing the reactions to RIMM and GOOG, I wouldn’t want to be long this stock heading into earnings.

Next week’s trading will be very interesting. If we see the commodity names rebound with conviction, reverting back to the short financial own commodities may prove profitable for another 3 to 4 month time frame.