Friday, May 16, 2008

State of the Market - 5/16/08

A tough start on Wall Street today, as a flat open soon brought on selling due to more record high oil prices and a lower than expected consumer sentiment survey. The market headed pretty much straight down in the morning hours until around 11:30, when a sharp bounce started. This bounce took the indices right up into resistance levels on their intraday charts and, although they pulled back after touching them for the first time, they did barge their way through these levels around 12:15. After pulling back a little, stocks continued their march higher into the closing hour and ended up closing flat. If you look at only the closing numbers, you may not be very impressed, but today’s action was very bullish as once again stock finished off their lows early in the session. Volume was higher but that is skewed due to options expiration so it is hard to take anything from that.

Technically, the Nasdaq went back below its 200 day moving average this morning but was able to fight its way back up to close above it for the second straight day. It is too early to tell if resistance has become support here, though – it is only one day. The S&P 500 and Dow closed literally right at its 200 day moving average, and the Russell 2000 remains a few points below its 200 day. Both the Dow and Russell bounced off of their 9 day moving averages as well. We are quite overbought as everyone knows, but I’m sure there are a lot of shorts piling on right here, so a breakout could really send us higher if it happens. I’ll be back this weekend with more of my thoughts on this market from a technical perspective.

The momentum I have seen in individual small caps over the past week continued this morning, as several gapped higher and several more moved higher this morning after having huge two and three days runs(PDO, MXC to name two). JRJC was one that gapped higher on news of increased guidance for the next quarter. This is a chart I pointed out last night that was setting up but there was no chance to enter where I was thinking. I did take a small position pre-market around $24.50 and added at the open at $25.15. Unfortunately, I set my stop too tight intraday (what else is new?) and was stopped out at $24.98. As it turns out, it did head higher but then .

SUTR was stopped out at $8.06 for a 1.25% loss. Not a big deal – it didn’t really push higher after the gap up and that’s what you want to see in an earnings play – not a gap and fade job. Again, I kept my stop loss very tight because I don’t want to give back too much of what I have here. I also accidentally took double the position I wanted – I modified my order last night and for some reason Scottrade took it as a completely separate order.I wanted – so I certainly didn’t want to mess around with the stock too much.

I was also stopped out of RCH after taking another after-hours position last night. I made a gain of 5.2%, which isn’t bad. It certainly would have been easier just holding from my original position on Monday, and perhaps I made a mistake in doing so. The way I look at it, each time I’ve reentered this stock, I’ve done so in a smaller amount, so basically I have been taking a little profits along the way.

I did enter CPSL at the end of the day at $5.97 and plan on playing it the same way I have played the others – with tight stops and look to take profits when I have them. They had earnings this morning and put up a 61% increase in sales and an EPS of $0.10 vs. an estimate of $0.05, and a 230% increase Y.O.Y. I don’t know if this will head higher – I was hoping for a stronger close - but right now the speculative juices are flowing in this market and I’ll take these trades until they stop working.

Right now, playing these momentum stocks is quite tricky because you know they can reverse lower at any moment, and if you get in late, you could be hit with some pretty big losses. So because of that, and because I have had a nice run this week on some of them, I would rather be safe than sorry with my stops, even if I get out too early and miss some of the moves. If the market hadn’t already run so much over the past two months and these stocks were breaking out the way they are, I would feel much more comfortable holding them for a longer period of time – many of these moves were earnings-related so they do have a catalyst behind them. As it is, I am just taking them as short-term swing trades and get the most out of them as I can. I just don’t feel we are at a point where taking long-term commitments is smart. For various reasons, I still don’t think we are starting a huge, new bull market here. I could be making a mistake and maybe these pops are the start of a much larger move higher for these stocks. I don’t think it is, however – there are just too many of them moving, and they all seem to relate to China somehow. In the past, this frothiness in speculative stocks has indicated short to medium-term tops for the market. We’ll see how this time plays out.

Speaking of PDO and MXC, I am starting to think that the parabolic action in these stocks might be foretelling a top in the oil sector as well, at least in the short-term. Trying to predict a top in this sector has been a futile task for the past several months, but these do look like climax runs and the sector as a whole is certainly very overbought. I am also seeing the shippers go into what look like climax runs – DSX looks the most parabolic right now. Boy, getting stopped out of EXM sucks more every day. I am looking at DUG as a possible play sometime next week.

Once again, the bulls have to be pretty happy and the bears have to be pretty frustrated with the action today. There is no reason to be bearish right now based on how this market is acting. Sure, there are concerns – I have many - and it still is important to be careful. I will address some of my concerns this weekend. But if you’ve been long this week, you’ve probably made some money, and there is no reason to complain about that. Enjoy the weekend and I’ll be back with some charts and other thoughts at some point.

No comments: