Tuesday, April 1, 2008

State of the Market - 4/1/08

The markets faced some more ominous headlines as traders awoke this morning(courtesy of Briefing.com):

  • UBS announced $19 billion in write-downs--bringing its total write-down to $33 billion. It also is seeking shareholder approval to raise roughly $15.1 billion in fresh capital.
  • Deutsche Bank announced a write-down of $3.9 billion.
  • Lehman Brothers is raising $4 billion in a preferred stock offering to shore up its capital position.

Common sense says these events are not good omens, but common sense does not always rule on Wall Street, as future rose throughout the morning, leading to a gap start for the indexes that did not show any weakness as the trading session progressed. For the indexes to all put in gains over 3% and do so in the systematic manner it did so today is very impressive. They also closed at the highs for the day, another good sign.

I know several bloggers(including myself) were confused that the market was moving so much higher on this type of news, but anymore, with this market, I think you just have to expect the unexpected. One of things that I am becoming conscious of in my trading habits is that I need to ignore the news at times and focus on what the market is doing instead. Sure, things look terrible and news continues to come out each and every day about how bad the economy is right now, but if the market doesn’t agree, why fight it? The market showed lots of strength today and regardless of my personal opinions, I need to respect it. I don’t have a clue how long this rally will last, but as long as the market is showing it is in a rally mode, then it is stupid to disagree. There is not much I can complain about with today's action - even as I look at the total volume, it appears to be very strong.

Technically, we are back over the 50 day moving average on all indexes and this is what I was looking for to become more bullish. There is still some overhead resistance to deal with, but things look pretty good, and the indexes have all officially put in a higher high. The Market Monitor quickly switched back to a bullish sign on my scans and that is also a good sign. The VIX has broken below its trendline of the past few months and perhaps this also signals we’re headed higher. Basically, the only things bearish now that I see are the continued lack of super-nice charts(there’s a few but not a ton) and the headlines we see in the news, which again should not take precedence over day-to-day market action. Perhaps the charts will start showing up soon. These are factors, but after today, the trend seems to be up.

One of the challenges of trading is that you are always facing new challenges each day. This morning, my Scottrade account would not allow any trading. I don’t know why. I assume it wasn’t just my account – my quotes worked fine, but it wouldn’t let any trades be executed. I don’t think I was going to make any moves anyway, but it kind of stunk to be completely frozen in my positions and not having any ability to do anything about it. I have heard other traders talk about spreading their accounts out between several different online brokers, but I don’t think that would solve the problem of already having positions on and not having the ability to sell or cover your positions when you need to. Technology is certainly a good thing and I can’t even imagine what it was like to not have the ability to make trades online, but it is tough when that technology doesn’t work.

I did cover my shorts this morning (although later than I would have liked – thanks Scottrade!) for two small gains (2.2% and 0.5%) and one loss (4.2%). I went long BKE after the open as well. It was downgraded today and fell below its 50 day moving average, but in my experiences, a strong stock that is downgraded usually just allows you to get in at a better price, because I often see them reverse higher off of the gap down. I liked BKE at this point as the 50 day moving average was right there and it also should have support at its previous breakout. Based on its max BOP, I thought it was worth taking a shot here. I waited however before entering into any other longs because I still wanted some confirmation that the rally was going to hold and that the volume was there as well. I started a position in a homebuilder at the close (I feel guilty even talking about it) and will monitor these two stocks before adding to them. I wasn’t super excited about any other stocks in my watchlist due to volume so I passed.

Based on today’s action, the ball is now firmly in the bull’s court – all the stars have aligned for them, but they must finally do something with it. This rally has been very slow since the follow-through day with very little action. After pulling back Wednesday, Thursday, and Friday of last week, we now have room to run, and that’s exactly what needs to happen in order for this to last. Follow-through over the next few days is what I am watching for. Is this bear market over? I doubt it, for a lot of reasons I have been talking about for the past few weeks, but that doesn’t mean we can’t still put in a nice rally here. I don’t know for sure that this will happen – perhaps this is all a big “April Fool’s” joke, but all signs point to higher prices and as such, you should focus on that side of the market until we get evidence otherwise. I will be back later with any charts that I find, including the indexes. Good luck.

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