Thursday, May 8, 2008

State of the Market - 5/8/08

Quite a volatile day today in the markets that didn’t really much clue to where we are headed next. After being down badly yesterday on higher volume, the market bounced back a bit at the open today, buoyed by better-than-expected jobless claims data and retail sales numbers. However, just like yesterday, this optimism quickly faded, as stocks sold off about 20 minutes into the session and were pushed back down to the lows of yesterday. These lows did hold and the market tried to rally back up into the lunch hour before stopping right at the morning highs. The Nasdaq popped into new highs briefly but could not continue higher. The market chopped its way through the afternoon, not able to bust through resistance. It finally broke higher around 1:30, but could not hold these gains and sold back off into the close. A bounce in the last half hour allowed the indices to finish with medium-sized gains. Volume appeared to be lower.

Technically, both the Dow and S&P held support today at their 20 day moving averages, and the small and mid caps held the trendlines I showed last night, but the fact that the market couldn’t finish near their highs took a bit of shine off the day. Like I said last night, until those support areas are broken, I can’t say the market is through going up. Yesterday certainly looked bad and around 10:30 today, I was expecting things to get ugly, considering the way the higher open was quickly sold off. It didn’t get worse, however, and the market deserves some respect for that. Until the bears show the ability to push this market lower past these short-term support areas, it is not smart to get overly negative and short everything in site. I probably jumped the gun yesterday a bit, even though it took just two short positions. I have to constantly remind myself that there will be time to get short if the market does top right here, and it is better in the long run to wait for some confirmation before jumping in on that side.

What a crazy day for the last long I owned, CDS? As I said yesterday, I was contemplating selling out anyway during the session today because I was up around 10% and it had its earnings release after the close. At least that is what their publicity said. Instead they released earnings pre-market – I looked at my quote screen around 8:00 and saw CDS being bid at $10.90 and was totally confused; happy, but confused. So I guess they just released early. I thought about selling right there, but I checked out the report and they beat the estimates, so I decided to see what happens – no need to sell a winning stock. Then I saw the bids drop throughout the pre-market, saw it open flat, and then go pretty much nowhere. Luckily for me, I decided to put a trailing stop on it before the open, figuring if it was going to get some momentum from this report, it should last through the day. If it doesn’t, I would want out anyway. I was stopped out at $9.54 for a gain of 5.3% - not that great, but it could have been worse. At 10:09, the stock was at $9.99. At 10:14, the stock hit a low of $8.35. That’s a 17.5% drop in under five minutes. What the heck is that? You hear stories from time to time about stock manipulation, and this certainly looks like it could fit into that category. Either way, this chart looks ugly and I will avoid it like the plague.

I was stopped out of FWLT midday for a 4.5% loss. I probably jumped the gun a bit shorting at the close yesterday. I should have know that Cramer would come in to pump this stocks after it was dissed yesterday on its earnings report, and the lemmings that follow his every word pushed it just high enough to hit my stop loss level. LEH broke down in the morning but rebounded a little bit in the afternoon. I will keep a tight stop loss on this as well unless the market shows in a more definitive way that it is headed.

I have yet to write about earnings-related trades but I saw two possibilities this morning that I considered entering – OFI and ENER. OFI released earnings last night and put up sales increases of 44% ($6.6 mil vs. $4.6 mil) and earnings increases of 263% ($0.20 vs. $0.06) year over year. An earnings release in early February caused a nice move in this stock, and if you go back to early 2007, the stock went from $3 to $7, presumably on a earnings report (although I don’t know for sure). Ideally, you would like to enter a stock like this the night of earnings, and then be in a better position for the pop the following day or in case it reverses course. This was an AMEX stock so I had no chance to get in after-hours. I did take a small position around lunch at $6.30 when it appeared to be basing intraday. I was hoping it would rally back up toward the close but it never did. We’ll see if it moves higher tomorrow, but I will keep a tight stop on it. On the other hand, ENER released earnings this morning pre-market and had an immediate 20% pop. This pop just grew as the day morning went on – buyers continued to pay up and it finished with a huge gain of 43%. I would guess some of this had to be contributed to short covering, but nonetheless, it was a very impressive move. The company posted revenue increases of 155% ($70 mil vs. $27.4 mil) and huge earnings increases ($0.17 vs. -$0.17) year over year. I didn’t take a position in this and am obviously regretting it. These type of earnings reports are usually the catalyst for a much larger move higher, and it could be the case in both of these stocks. It is hard to buy stocks like this that gap up so much, and you will sometimes face a situation where they reverse and you must cut your losses, but it can be rewarding. I remember buying RIMM in September of 2006 after hours, when it was up 20% on an earnings report. It proceeded to go up about 400% from there over the next 14 months. Of course, I sold out of it too soon but that’s another story.

You can look at today's action in two ways, depending if you're an optimist or a pessimist. On the bright side, the market held support levels and did not sell off more today when it looked like it had the opportunity to do so around 10:30. On the gloomy side, volume appears lower today, and the fact that the market couldn't put together a nicer rally after a big down day Wednesday is not a good sign, especially when it looked like it had the chance to do so if the afternoon. We'll see where we go from here. It is very possible we are in the process of topping here, but no one knows for sure yet. Watch those trendlines - as long as they hold, then the bulls still have a chance. If we break below them, then things could get bad. Resting here on lower volume would give the market a chance to take another run at its 200 day moving averages. I don't know if they will do that, however. Taking positions on either side is a bit tricky here - trade accordingly. Best of luck tomorrow.

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bhh said...

Hi, nice commentary. I also watched ENER today and have decied to run some backtests on gaps in the next few weeks when I wrap up the current ATR studies. I think these could be potentially very high risk/reward trades with a buy stop slightly higher than the gap and protective stop at the open. I will probably post the studies week after next.

Mac said...

I would be interested to see what you find out. In my experiences, the basic game plan is to get in as early as you possibly can, set a reasonable stop loss, and sit back for the ride. A stop below the low of the breakout day is probably good. If a stock is really going to take off from earnings, then it should continue higher immediately - not pull back below the gap. If you get stopped out, you get stopped out. But if you can just catch two or three of these earnings moves per year, you can really do well. I am kicking myself even more now for not entering ENER pre-market.

bhh said...

I hear you, I took a 1/2 position around 10:15 or so and was going to add to it on an expected pullback which never really happened. I knew I had no edge though and got lucky with about a 5% gain.

I guess I forgot to put in my post that I run the IBDIndex blog so the studies will be published there. Cheers.

Mac said...

Thanks for the heads up - I did not know that was your blog. I will keep an eye on it for the study.