Monday, April 21, 2008

State of the Market - 4/21/08

A poor earnings report by financial bellwether Bank of America caused a lower open on Wall Street today, not surprising after the big gains the market put in last week. Around 10:30, the morning lows were put in, and the market started to rally a bit off those lows. After the lunchtime hour, sellers came back in and pushed stocks back toward their lows for the day. Buyers, though, came back in around 2:30, and the indexes finished near their highs for the day. Financials led the selling early, while techs did better than most, as the Nasdaq posted a smaller gain while the S&P and Dow posted small losses. Volume was much lower than Friday but with the options expiration, it is hard to compare the two days. All in all, today was a pretty nice day considering the selling in the morning was not heavy and the indices finished near their highs.

Technically, the Nasdaq and S&P are still right near resistance, but I think today’s action is the exact type of action I would like to see for two or three more days. Volume was lower, I didn’t see many blowups, and the selling was pretty well contained. Resting here before moving through this resistance is constructive and will allow a bigger move to happen if we do indeed get above those resistance levels. I would become much more bullish in the longer-term if tomorrow and Wednesday could play out the same way as today.

As for my trading, today was another weird day. First, I was stopped out of BKE this morning for a 1.5% loss as it broke below the pivot point of last week’s “breakout”. Not a big deal - this breakout has been garbage so far and is one reason I am still hesitant to jump on this market full blast. The chart looked very nice, the stock has good IBD fundamentals, and the market has been rallying – so why couldn’t BKE blast off? I did like the way it closed at its highs so I would consider reentering, but I did expect more from this stock and that’s why I sold. Of course, GU, which I was stopped out of Friday, rose when the market was down in the morning, but fell during the afternoon when the market rallied a bit. Something still doesn’t seem quite right there and although I will keep it on the watchlist, I don’t think it is acting well. The only position I have left right now is WSCI, which had a super day. It couldn’t do anything on Friday with the market up 2%, but today it moves big-time. I have no clue why, but I am not complaining. I hope it can rest here for a few days and stair-step its way higher. WSCI is the only position I have right now and I don’t have plans to add any more unless we keep pulling back a few more days on quiet volume.

I am paying close attention to these agriculture stocks and some of the energy stocks right now, not to buy, but just to watch. The sectors have held up the market this year as the clear leaders, and they just continue upward, almost in what is starting to look like a parabolic fashion on some charts. One that stands out is POT. I have noticed that it recently pierced the long-term uptrend line to the upside, and according to William O’Neil, this is typically a sell signal. I also noticed that it releases its earnings on Thursday. Is this a perfect, “sell the news” situation? I don’t know, but I am watching it closely and if it continues in this manner, I may be tempted to short a few shares after earnings, depending on the reaction, which is most likely a very, very bad idea.

POTCharts from Telechart 2007, Courtesy of Worden Brothers, Inc.

I am really torn as to how to look at these commodity stocks. The fundamentals are truly excellent right and the future looks bright – if you’re not sure, check out the agreement that POT and a few others signed with China where China agreed to triple the price currently paid for fertilizer. And I don’t think anyone can argue the U.S. government and the Federal Reserve are all of a sudden going to change their policy toward inflation and actually start fighting it. Their “strong dollar” policy is a joke and there is nothing to suggest that that will change either. On the other hand, there is no doubt there is a ton of speculative money in these stocks, and they do say fundamentals always look best at the top. I found it interesting that Cramer is now saying to buy these stocks up at this price, and he always seems to work well as a contrary indicator. What do you think? Is this “bubble” likely to be popped soon, or will it continue growing and growing and more investors chase these stocks, not wanting to miss out on the action? Is this just a fundamentally-driven move that isn’t going to end anytime soon?

Personally, I tend to think this is approaching bubble-levels and the recent moves are being feuled by short-covering, a pathetically weak dollar, and momentum traders trying to tag along with the hot sectors. If the world economy is slowing, which by most accounts it is, commodities have to slow as well, right? I still believe the possibility exists that, unless they rest soon, some of these stocks will enter into climax-type runs in the near future, and those almost always end in pain. If these stocks do crash hard, will the market be able to hold up for long? I can’t see that happening, but maybe it will surprise us. I think these commodities will be the tell for the overall market and is what I am watching for. Feel free to leave your own thoughts on this topic in the comments section.

Overall, a good day for bulls in my opinion, and I hope we can get a few more exactly like it. In my intraday scans, I still don’t see many stocks exciting me, but the market remains bullish so I will continue to be on the lookout. If I see some nice looking charts setting up, I will post them later. Still lots of earnings report to come this week, so it should be interesting. Best of luck.

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