Wednesday, May 7, 2008

State of the Market - 5/7/08

Good earnings reports from Disney and Cisco failed to inspire traders today, as the stock market opened slightly weaker, tried to get into positive territory a few times early on, but couldn’t really get much going to build on Tuesday’s bullish reversal. At 10:30, the oil inventory numbers were released and it showed a higher than expected stockpile of inventories, which is normally good news if you want lower oil prices. In keeping in the tradition of this weird market, however, oil actually rose higher on the news, which caused more severe selling in the overall market. Stocks peaked briefly after the oil news was released, but then did nothing but head lower throughout the session. Around 2:00, the indices just fell off a cliff and continued lower into the close. Dip buyers were nowhere to be found. Today’s losses have taken the indices back below the intraday lows of Tuesday and short-term support levels, which is bearish. Volume was also higher today, giving all the indices another distribution day. I said yesterday that as soon as distribution started showing up, then the turn could take place, and perhaps today is the start of that turn.

So is this the top? It's probably a little early to tell, but I did see an interesting headline on Yahoo Finance around lunchtime that makes me think it may be - "The Worst is Behind Us: Paulson Joins Street Luminaries, Declares Victory." I have been saying that a turn is probably close by and I expected it in a week or so - not right now - but if this headline doesn't signify something from a contrarian perspective, I really don't know what will. When I saw that, it just stuck out to me as a signal that the market rally may be over right here and now. It would be perfect irony. This strikes me as the same situation as a few years ago, when President Bush flew into the aircraft carrier and declared victory in Iraq. That declaration didn't work out too well, so when anyone on either side of the aisle in government declares "victory", forgive me if I am a bit cynical. Seeing this makes a large part of me want to short the heck out of this market right here and now, but I can't do that yet. Today was certainly good for the bears, but I have to be patient and see if more distribution comes into the market over the next few days. I started two shorts today (FWLT and LEH) in case this is the top, but am not loading up yet.

As you can guess, today was not a good day for the trades I took yesterday. I was stopped out of six of my seven positions at some point during the day. I was stopped out of WSCI with a 4.5% loss early in the session when the momentum from yesterday did not continue upward in the morning. Looking back, I never should have taken the trade because it did not finish above its 9 and 20 day moving average – without both of those happening, I can’t say there was a real change in momentum. I settled for it closing above its 20 day and you can see what happened. Somewhat of a loss of discipline in that trade – I knew what I was looking for, didn’t quite get it, but still took the trade. GFA just headed lower after reversing at support levels yesterday, and PSEM did not hold short-term support. I was stopped out of both GFA and PSEM with 3.1% and 4.5 % losses respectively. Toward the end of the session, PWRD also broke below support and I was stopped out of that as well – I didn’t calculate the loss yet, but I think it's probably around 4%. Obviously taking those positions yesterday turned out to be a mistake and it sucks to take losses so quickly. You have to cut stocks though when they don’t work – that’s just how it goes. I was also stopped out of EXM for about a gain of 6% and NUAN for a loss of about 3% - these are estimates because I haven’t calculated them yet. Certainly a busy day and not that much fun for me. My account wasn’t hurt too much – I am still basically where I was about a month ago, and up a little under 10% for the year.

It’s kind of weird, because after the session was over yesterday, I felt a little uneasy about the number of positions I took. I almost felt that I was going overboard and should have been more careful. Maybe that feeling was trying to tell me something. The only long I have left right now is CDS, which held up well today. However, CDS reports earnings after the close Thursday and I never like to hold a stock through earnings unless I have a big gain. I am up about 10% right now in CDS, so maybe I will take half profits and hold the rest. The charts still looks good and hasn’t given much of its breakout back. If we continue lower, I will likely be stopped out anyway.

I will be back later with the charts of the indices and some individual charts after I do my scans. I don’t have the guts to definitively say that today was the end of this bear market rally, but I am thinking that it is a good possibility. The rest of this week will tell us a lot, as will the volume on any other selloffs we may have. Best of luck in your trading.

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