Wednesday, July 16, 2008

State of the Market - 7/16/08

Another volatile day for Wall Street, although the tone was much better than the past few days. Better than expected earnings from Wells Fargo allowed traders to be optimistic this morning, but a higher-than-expected inflation number quickly changed those outlooks pre-market. Stocks were able to still open slightly higher, but pulled back quickly. They bounced higher, pulled back again, and then around 10:35, right when the oil inventory numbers came out, the market zoomed higher as oil fell dramatically for the second straight day. They hit a peak around 11:00, and traded in a range through the lunch hour. Stocks continued to climb throughout the afternoon in a systematic manner, with very few pullbacks. The gains continued right into the close, and the indices all put up big gains, closing at their highs with the Nasdaq and Small Caps leading the way with over a 3% gain.

Technically, the Nasdaq, Russell 2000, Dow and S&P 500 all got over their short-term 9 day moving average, but in the case of the Dow and S&P, just barely. The S&P is lagging here a bit. The Nasdaq and Russell are above their channels right now, but the other two are sitting right near the top of them. If we get follow-through tomorrow, then today's action may turn out to be meaningful. However, volume was running lower throughout the day and looks like it will come in lower than Tuesday, which takes a large amount of the shine off of today's big move. If a big move percentage-wise like we saw today was accompanied by big volume, I would be excited. As it is, a big part of me just thinks today was some short-covering, not the big instiutions jumping back into the fray buying stocks. Remember, we were very oversold, and bear market rallies tend to be sharp and powerful due to short covering, so be alert. Today was good for the bulls, but it is not an all-clear to buy any and all stocks. That's why you wait for a follow-through day.

When you look at a chart of the VIX(at least in Telechart), you will see the huge spike upward in the high 30's that I've been looking for in a bottom. Unfortunately, that had to be a misquote - I was watching my screen today and saw it open at 38, and then immediately fall to 27. I would assume that something got messed up somewhere, unless the PPT is now involved with rigging the volatility index as well (right now, I put nothing past those guys). The put/call ratio was barely above 1.0 all day, so there really wasn't any fear out there and the trading refects that. The point is don't be fooled by the VIX chart and think we got our big fear spike. I am hoping that gets fixed to reflect what really happened.

I was stopped out of the rest of my SOHU ($67.49) and DGP ($24.67) positions this morning after covering about half of them yesterday. I ended up with final gains of 8.9% in SOHU and 9.7% in DGP. It stinks to give up some of the gains I had yesterday morning, but that's the way this market is - it's tough. I almost added another oil short, but I am still hesitant to push too hard in this sector, so I held tight. I wouldn't be surprised to see a bounce in crude here, although I do think based on the charts that most of the stocks in this sector are topping or in the process of doing so. I just think shorting here might be chasing a bit and putting yourself at risk of a quick whipsaw. I am definitely going to continue watching these stocks though. The only short positions I have right now are ROSE and XEC, which I still have tight stops on.

I did think about going long with a few stocks this afternoon, and I tried to find some that interested me, but I just didn't find many. The stocks I was watching included ENER, PARL, VRUS, NNBR, RBCAA, and EZPW. I finally gave in at the end of the day and took small swing positions in EZPW ($16.76) and RBCAA ($27.05). These will be short-term plays and I will have tight stop loss levels on them. To be honest, I am not expecting much. I waited because part of me expected another reversal today. Most of the movers today were in the stocks that have been beaten down so much - financials, homebuilders, retailers, etc. I don't like playing around with those trying to catch bounces because I am not good at it. I would rather take a shot at strong stocks that have held up well during the sellling if we get a good lengthy bounce. Since I only took two small positions, I think what I would rather do is keep most of my cash ready to play any earnings plays that may pop up over the next few weeks. I will be watching for those like a hawk and hope to find some.

We're in a news-driven market right now and since we've been so oversold, any good news will likely get some short-covering going, as today's Wells Fargo report demonstrates. The only problem with that is that day to day, we really don't know what the news is going to be or if it will be good. Today's rally was long overdue and who knows, maybe it will lead to something more important and meaningful. Today will be day two of the rally attempt for the Nasdaq and Russell 2000, and I will watch for a follow-through day starting Friday. But this week is also options week, which is always crazy. Basically, I think today was good, but I am not getting too excited yet. I am still of the opinion that since we never got a good capitulation on this downtrend, this will likely not be more than a short-term bounce to relieve some of the oversold conditions in the current market. Maybe I will be wrong - that's certainly happened before. I will be ready either way. I'll be back later with a look at the indices and some charts to watch if there are any.


bmbull said...

I would agree that the open on the VIX had to be some sort of bad tick. There's no way that spike to 38 was real.

Mac said...

It is still showing on my Telechart charts however. I just don't want to hear on TV that this market has bottomed because the VIX spiked to 38 today. That would be total crap and I think be quite misleading.

Anonymous said...

I use TradeStation and the VIX shows a high of 28.32 and a low of 24.87 for today.

bmbull said...

That's what StockCharts is now showing as well.