Friday, July 18, 2008

State of the Market - 7/18/08

After things looked bleak for the stock market last night with many poor earnings reports released, Citigroup came to the "rescue" this morning and gave financials and the overall market a bit of a boost. The Dow and S&P 500 opened slightly higher, but quickly sold off and hit lows around 10:00. From there, they bounced most of the morning, with the Dow and S&P hitting highs around 11:30 firmly in positive territory. The Nasdaq lagged all day, but did bounce off its lows at the same time as the other indices. As stocks entered the lunch hour, they pulled back and did very little in terms of movement as they entered into the afternoon. The afternoon lows were hit around 1:10, and the market rose very slowly for the rest of the session, giving the Dow modest gains, the Nasdaq meaningful losses, and leaving the S&P flat.

Technically, the Nasdaq got support at its 9 day moving average today. There isn't much to say about the other indices. The VIX continues to plummet, but is right at what could be seen as a trendline. The best thing the market could do right now is rest for a few days, allowing it to digest the big gains of Wednesday and Thursday and possible continue higher. I'll watch to see if the short-term moving averages act as support for the indices now that they are over them after spending so much time underneath them.

This morning, I covered my CLF short pre-market at $100.80 for a 2.1% loss as it gapped up. It got as high as $103.82, so I would have been stopped out regardless. Have I mentioned before that I hate these commodity stocks? This is a prime example of why they are difficult to short right now, at least for me, even though the patterns are there. Just when they look like they are about to breakdown in earnest, they bounce right back up to a point where stops are hit.

My other positions acted poorly as well. Both SOHU and RIMM were up today while the Nasdaq was down 30 points. I was stopped out of both - RIMM at $114.49 for a 2.5% loss and SOHU at $75.67 for a 1.9% loss. What's up with that? These shorts did not act nearly as well as I expected considering the Nasdaq's action - I don't know why. The frustrating part is that both of these moved up on weaker volume. With RIMM, it almost seemed they ran it up to clear some stops out and then it fell back down. Perhaps some of this was option related. I stubbornly went back into RIMM short at $113.02 as it couldn't finish higher than its 200 day moving average. That may be the wrong decision. I will also look to possibly reshort SOHU as it fell back down after climbing over the $75.50 area.

I almost took a position in SKF around $143 but passed, figuring that this market was too hard to read early on. There is no doubt that the financials are very oversold right now, and I would be interested in looking for shorts here. The timing is going to be difficult, however. Who knows for sure when the short-covering and euphoria will end and reality will re-emerge? With the government doing everything it can to prop these companies up, you may be fighting a losing battle trying to short these. However, the volume continues to die off each of the past three days on a lot of these financials like FNM and LEH and is much lower than the volume on the selloff, which is definitely bearish. There really weren't many opportunities that I saw anywhere today.

This turned out to be quite the boring day, which surprised me with all the earnings reports and options expirations. It just goes to show once again that the market is very good at doing whatever the least number of people are expecting. On a slow, boring day, the best play is often to do absolutely nothing. Perhaps next week will give us a better trading environment with a little less volatility. I was up a little for the week, but it was a tough one for me as a lot of trades that looked good didn't work out. It will get easier at some point. Right now, my game plan remains the same - be on the lookout for an IBD follow-through day, but also be willing to take shorts on weak rallies if they present themselves. The market could go either way next week, and staying open-minded and being prepared for whatever outcome occurs is going to be important. Enjoy the weekend.


Gio said...

Hey Mac, I feel yah on the RIMM. I mean, AAPL down 6, and RIMM takes off in the final hour? Hmmm.

... you're right, this market just got very hard to trade.

I noticed your stops are super tight, like less than 2%. That's too low for me to exit, I think you're worried about a bear rally in the Nasdaq? No?


Mac said...

Yes, I do use very tight stops and I could probably make them looser. But for the most part, I've found if I enter properly, the stock should work right away. If it doesn't, why stick around to see if eventually will? I can always get back in if I want to, like I did with RIMM today? Also, I usually only have four or five positions and because of that, I would rather not let losses get too big. If I had a lot of small positions, that might work better. I do get stopped out a little too early from time to time, but by keeping my losses very small, my gains can really push the portfolio higher.

As always, trading is a process so I always look for ways to improve.

Gio said...

Oh I c. I agree, if a trade doesn't work right away, cut that! And the larger your holdings, the tighter the stops. For me, I have a 'workable range' that varies for every stock and I have a ton of other variables running through my head too, kind of CANSLiM-ish. Hehe. Have a good weekend!