Monday, January 28, 2008

State of the Market - 1/28/08

A good day today in the markets as stocks fought off a weak open and a late-day dip to close at their highs for the day. The Dow and S&P 500 were up about 1.5%, while the Small Caps were up over 2%. Although I have been and continue to be negative on this market, I have to admit that today’s action was impressive, given the negative reversal on Friday and the overseas action from Monday. The volume wasn’t very low, which is bearish, but at least the markets didn’t do another tank job. Opens like this morning have typically continued to get worse for the past month or so, so seeing a rally into the close is good for the bulls. We are closing back in on resistance areas so it will interesting to see what happens the next few days.

S&P 500

Nasdaq

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The headline I saw on Yahoo Finance is "Stocks Rise On Rate Cut Hopes". This market is totally controlled right now by the Fed and what they are going to do. I don't know what we'll see tomorrow because of that. Once their decision on rates is out of the way, Thursday and Friday are likely to be very crazy and will tell us a lot about market direction over the next few weeks. With the aftermath of the Fed decision plus a GDP number on Thursday, and the jobs number on Friday, traders will likely have a greater idea of what state we are currently in economically and where we are likely to go from here economically. Earnings reports will still be coming out as well, including GOOG on Thursday. If the signals point in the same direction, then trading will probably become a little easier than it has been for the last week.

All this being said, that headline really struck me today because of the word 'hope'. Hoping is not necessarily a good thing on Wall Street and I have found that out personally in my trading experiences. Futures have already priced in an 88% chance of a 50 points rate cut on Wednesday. Some traders are obviously "hoping" for more. What if we don't get it? What if we just get 50, which likely is totally priced into the market right now? What if we get less? I actually don’t mind if we do rally like this tomorrow and even Wednesday. We still have 60 or so points to go on the Nasdaq to break above Friday’s high and 15 more points for the S&P, so if we go into these big news events back near that resistance, I think we could be setting up an absolutely perfect “sell the news” reaction, regardless of what the Fed does. It almost seem too obvious to be legit. If we continue to rally both tomorrow and Wednesday into this monumental decision, I just ask myself exactly what is going to continue to push us higher?

Being short right now, I admit that I am and will be a bit nervous over the next few days, but the trend is still down and that’s very important to remember. I also see a lot of complacency out there still – bulls in the last Investors Intelligence survey were still at 41% compared to only 31% of bears. The VIX is going right back down after its breif spike last week. If you watch any TV or read any major financials websites, you have also probably heard a ton of people talking about how the bottom is in and everything is OK now. Buy the financials, load up, everything's just peachy. In my humble opinion, that’s crap. Bear markets end when no one is talking about a bottom, when no one sees any sort of light at the end of the tunnel, when everyone just gives up and truly feel the market is never going to go up again. We are nowhere near that state of mind right now, and because of that, if we do sell off on Wednesday afternoon, I think it could be another substantial move downward. If we happen to rally upward on these news events, then I plan on honoring my stops and just wait for a better opportunity to come. No big deal, and I will admit I was wrong on my read, which is a very good possibility. I have no way to tell the future and exactly what is going to happen. Bottom line though is that if we continue to rally into the Fed, I think the risk/reward play is to get short or be short, because the possible reward much outweighs the possible risk, in my opinion. This is how I plan on playing things. We'll see if it works.

I did not have to cover any shorts today so that is a good sign, although some went back up. I am sitting at about a 6% loss on my SKF, but I am very tempted to continue to hold it and maybe even add to it. This goes against my rules so it is a tough call, but as I described above, I think a golden opportunity may be approaching. I will try to post some possible shorts tonight if I find any. Looks like today was a bit early for the fertilizer stocks, but if you look at their volume, I still think they are a possibility right around here. Good luck tomorrow! Also, please feel free to comment on the charts if you like - I read about a trick in Telechart and was wondering if showing them like today's chart looks better. Thanks.


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