Thursday, May 29, 2008

State of the Market - 5/29/08

Despite a better-than-expected GDP number and lower oil prices, stocks couldn’t get going early on today, as the market opened flat. The first hour of trading was quite volatile, with stocks rising, falling, rising, and then falling again around 10:30, when the oil inventories were released. They showed that crude inventories fell for the week against expectations of no change. This caused a spike in crude, which caused stocks to fall. In fact, most of the volatility this morning can be traced to the action in crude, which was also up, down, up, and then down again. A news item that stated the fall in inventories was caused by temporary delays in unloading tankers probably caused much of this volatility. After things settled a bit, traders took this report as somewhat bearish for the energy sector, and oil did head lower, which caused stocks to rise higher through the lunch hour and into the early afternoon. However, around 2:20, stocks hit their high points for the day, and sold off the rest of the session, making them lose almost half of their earlier gains, even though crude finished 3.5% lower. Volume was once again higher.

Technically, the Nasdaq flirted with its 200 day moving average in the afternoon but the late day pullback pushed it back below that mark. Both the S&P and Dow still have some catching up to do with the Nasdaq, and the Dow also could not close above a key moving average (the 50 day) even though it was above it midday. One encouraging sign that I saw intraday was that small caps via the Russell 2000 were very strong and flirted with new recent highs on their chart. Unfortunately, these also sold off late and closed below these levels. The VIX broke down a bit today so perhaps there are higher prices ahead, but given the big drop in oil and better GDP numbers, I do find it disappointing that the market could not hold onto its gains and even push higher into the close. Today was a perfect opportunity to have a really big move, but the market couldn’t do it. That could be an ominous sign for the bulls.

Despite the gains today in the market, I didn’t buy any stocks. As I like to do on up days, I checked IBD’s “Stocks on the Move” this afternoon to see what fundamentally sound stocks were moving. MA had a nice day today but I wasn’t going to chase it. I saw a few (MATK, AAP, BIG, SQM) that looked OK, but besides MA, nothing excited me. I thought about a few stock from last night’s post – both AIMC and ABAX moved a little today, but the volume on both was not what I wanted to see. In hindsight, SOHU and SINA, which I posted on Tuesday, were the plays to go with yesterday, but I did not do so. None of the other stocks I posted last night did much of anything, and I just don’t see a ton of great charts out there right now. Because of this, I will simply wait with some cash in my account. If this turns out to be more than an oversold bounce, (and today’s action may be a warning sign that this bounce is about to end) then the great charts will show themselves to me and I will take them. Until then, I prefer to err on the side of caution and protect the gains I made earlier this month.

I did take two shorts near the end of the session, although I don’t know if they will work or not. I said yesterday that oil looked like it held support, but I wanted to wait until the inventory news came out to make any decisions in this sector. I am glad I did not cover CNQ or sell DUG, because the action today in most oil stocks looks quite bearish and nullifies those bullish reversal tails put in yesterday. Perhaps they will still bounce from here, but my guess is that won’t happen yet based on today. Because of that, I took a position in CRZO at $64.80 based on the oil selloff and the overall chart pattern, which is sitting right below its 50 day moving average after selling off on very heavy volume. It also looks poised to break below a four month trendline. This is not my typical “weak-rally” short, but I think if oil continues lower, this has more room to the downside. The moneystream has just totally crashed in this stock and that often is a sign of lower prices. I will use a tight stop though just in case it does hold here.

I also shorted ISRG at $291.76 based on the close in the Nasdaq today. This stock has been extremely choppy since November of last year, and now looks to be forming a head and shoulders pattern. It broke down below a four month trendline last week on heavier volume, and has rallied on weaker volume for the past four days right back up to this broken trendline, as well as its short-term moving averages. Ideally, I think this would be a better short if it rallied up to its 50 day, but I will take a shot here based on the market action, and will use a tight stop in case it decides it’s not done moving higher. It is very possible I get stopped out with a small loss.

Today’s action does nothing to change my mind that we are putting in an oversold bounce here and are probably headed lower in the near future. Look, the bulls had the perfect opportunity to knock one out of the park today with oil down so much, and they just couldn’t do much with it. I don’t know if I expected a 2% gain, but I expected stocks to hold the gains they had midday, and they couldn’t do that. Volume has increased in each of the past three sessions, so that is a positive for the bulls, but I would be extremely careful entering any longs here. If I find any interesting shorts, I will post them later, but I don’t think there will be that many. Cash is still a smart choice here unless you want to poke at the short side, maybe with some inverse ETF’s. If the market can rally higher tomorrow, then I may change my current view. But as of now, I have to remain cautious and lean to the bearish side of the market. Best of luck.

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