Wednesday, July 23, 2008

State of the Market - 7/23/08

Volatility came back into the market after a few days without it, as an early push higher based on lower oil quickly reversed, and stocks fell from there. Stocks started lower today for the first ten minutes of trading, but rose for the next hour after that, putting in nice gains, until around 10:35, when the oil inventories rose. Oil did rise following the news, and caused stocks to sell off for the rest of the morning into the lunch hour, losing almost all of their earlier gains. From 12:30 on, they traded in somewhat of a range, but as oil started falling early in the afternoon, stocks started rising. They hit an afternoon high around 2:30, and then just kind of faded into the close, with the market finishing with modest gains but off their highs. The trading seemed to slow considerably after the first few hours of trading and things got quite boring for the most part. Volume was higher, however.

Technically, the two leading indices (Nasdaq and Russell 2K) put in some poor-looking reverses today after being much higher this morning, but I think we have to wait to see if it means anything. I think the Nasdaq needs to hold the 2300 level over the next few days - as long as it does, today's action is no big deal. The Dow and S&P finished in the middle of their ranges and are OK technically - I think that 1270 area needs to hold for the S&P. All of what I just said may be meaningless because oil continues to dominate things, and there are some big reports tonight (AMZN, BIDU, QCOM) that will drive things tomorrow. Those two factors continue to make things difficult to predict from day to day. It looks like the Market Monitor ratio will remain bullish for a second straight day, and that is good. If it reverses, I would be a little more worried.

It was a busy morning for me with my trades. I covered all of my shorts a little after the oil inventories were released - just had a hunch when oil didn't sell off more that the commodities were due for a bounce. I covered at HP first @ $58.97 for a 6.6% gain, then covered CPX @ $32.48 for a 2.75% gain. Finally, I covered CLF @ $99.77 for a breakeven gain - I made my commissions there, that was about it. None of those were big gains but I got what I could get. I did not get great entries and that was the real problem. I was looking for a big move lower in these stocks, and it turns out I just picked the wrong ones - there were many oils and coals that did sell off severely the past two days. That is another reason I covered - I thought that many were so beatdown they were due to bounce up. In hindsight, I probably got out early once again, but we'll see. I think oil is getting to a point where it may bounce soon and run in some shorts - I don't want to be around when that happens.

I also sold out of my PLCE position for a 2.5% gain when it reversed after running very nicely early in the session. It looked early like it was breaking out in a perfect manner, and I was excited that I may have a longer-term position on my hands. However, seeing it reverse like it did changed my mind quickly - I did not like that action at all and moved up my stop to yesterday's highs, which were hit. I was up as much as 7% in this, but again, until it reversed, there was no need to take the early gain. PLCE wasn't the only stock acting poorly - when I was going through my early scans, I did not like a lot of what I saw either. To see CIR and WGOV reverse hard after looking so good yesterday was not good.

When I saw the market reverse, I decided to take a few small new shorts as a hedge to my ISRG position and as a way to catch a quick downmove in sectors outside of commodities. I shorted CBI (a stock I posted the other day) @ $33.77, UA (which was right at a long-term downtrend line) @ $30.64, and MELI (which was forming a bearish flag) @ $33.90. I tried to short LULU first but Scottrade said they couldn't find any shares to borrow. I kept my stops pretty tight on these and moved them up intraday in the case of UA after it broke down. Ends up it bounced just enough for my stop to be hit later and that gave me a quick 1.4% loss. I added to CBI later at $32.81 and stubbornly went back in UA @ $30.53 when it failed to close above its 50 day moving average.

I got some wins today and had a good day with the ISRG trade, but I still don't feel I'm in a groove right now. I am overmanaging positions and that is hurting my bottom line. I have said for the past week or so that commodities are looking very bearish, and I've made trades to go along with that, but I haven't stuck with them as long as I should. Subpar entries play into that a bit. The CLF trade will hurt but it is what I deserve for not following my original plan. I keep anticipating bounces instead of reacting to what I see, and that usually gets you in trouble. As it is, I wouldn't be shorting commodities here as I think they are due to bounce at any time. USO should have some support between $98-99. Any bounces though can be shorted in my opinion.

I said last night that the market was showing us a yellow light but was almost turning to green. Today's action proves it is still difficult out there. Nice looking charts reversed hard on the long side, and shorts continue to bounce up and down intraday, which make them hard to play. We continue to be in a news-driven environment with two distinct markets - commodity plays and everything else. I would still lean bearish on the commodities and bullish on everything else, but you must be careful as well. Chasing stocks like PLCE or CIR can give you a quick loss when they reverse, and chasing shorts to the downside can do the same when they get a quick pop. That's why I will likely continue to cut my losses very quickly and take profits when I have them, even if it causes me to leave some gains on the table. Hopefully, we'll be in a less volatile market environment sometime soon. Until then, be careful.

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Gio said...

Hi mac... I thought oil would bounce today, but nope. Sold out all energy positions except APWR. Shorting Ag here. I exited my SQM short a day early, but I got out DRYS in time. I'm still bearish on shippers.

I think USO gets below that 100 spot next week, so I aint going long energy here.

At least I now agree with u that all rallies in energy should be shorted in the medium term.

Mac said...

I'll put something up tonight about this, but right now a big part of me is expecting a relief bounce in commodities (if the USO gets to around $98.50) and a pullback in most everything else. I'll show why tonight, but I could of course be totally wrong. I see a lot of these oils really stretched to the downside, so we'll see.

Longer-term, yeah I think they are all done.

This market isn't making things easy, is it?