Friday, April 10, 2009

State of the Market - 4/10/09

First of all, I want to apologize for not posting as much recently. As you know if you read this blog regularly, my family welcomed a new son on December 28, and also moved to a new house two weeks ago. Needless to say, it has been a very hectic couple of weeks. In addition, we have figured out all too well that unlike our first son, the new addition is not the easiest baby to take care of. He is fine as long as someone is holding him, but if you put him down for a second, he starts crying. He does virtually the same thing when he sleeps - knocked out in someone's arms but as soon as he is put down, he wakes up within five minutes. I can't complain too much since my wife deals with it almost all the time (and that alone is virtually a full time job) but that puts me in charge of mostly everything else in the house, which leaves little downtime. We're hopeful this improves over time because we are both frustrated. Anyway, just wanted to explain what has been going on. If posting continues to be more sporadic that normal, hopefully you will understand why.

Onto the markets. We had quite a day on Thursday, with an earnings "surprise" from Wells Fargo that gapped stocks up at the open and they continued sharply higher for the first hour or so of trading. They consolidated for most of the rest of the day nicely before breaking slighty to new highs around 3:00 and closing near their highs for the day. Volume, although not huge due to the holiday, was also higher, which is impressive. All in all, a great day for the bulls as they broke the S&P, Nasdaq, and XLF all to new higher highs once again. The beat goes on for them I guess. Resistance I would watch for now is around 1665 for the Nasdaq (which corresponds with the high of the last bear market rally) and around 877 for the S&P.

In terms of oscillators, most are slightly overbought but not in any way severe enough to warrant caution. The pullback during the first half of the week was very constructive and allowed this move to happen. That is how healthy markets act. The only thing I would worry about is that the T2108 is at its highest closing level ever (89.27) for the four years Telechart shows. It is just above its former high from January 6 which proved to be the top of the past bear market rally. We'll have to see if that means anything - it hasn't so far.

I didn't do anything on Thursday and remain in cash - I just don't like chasing gaps to the upside and actually had to take care of some errands with local taxes and moving things and such, so I wasn't around my computer anyway. There were some decent breakouts on stocks I have posted this week (ALV, EJ, PVH, and BAC) while others are still setting up nicely. I am starting to get many more stocks with high BOP levels which shows a lot of underlying accumulation. Those include SOLR, SOL, FEED, BPO,, SOL, OCN, ATRO, RGR, FRPT, DNDN, CZZ, CTRP, DPZ, and TER. After seeing positive reactions to earnings the past few days, I also plan on watching the after-hours reports more closely over the next few weeks to see if I can catch a few earnings plays.

All that being said, I cannot totally get my skepticism of this rally out of my mind. I still have this strong feeling that this is going to all end very badly. I don't know when it will happen, but I just can't shake that feeling. Let's look at the Wells Fargo report on Thursday which spawned a huge rally in that stock. Great, they made $3 billion dollars in profit. That's terrific. However, the cynic in me starts to think about that and ponders a few questions. Didn't the government have to give billions of dollars to these banks through TARP and other bailout programs? Is this a legitimate profit, or is it just a one-time fluke due to the taxpayer-sponsored handouts to these companies? Heck, I am not a CEO and never attended any business school, but I am pretty sure if someone gave me say $5 billion I could find a way to make a tidy profit on my business as well.

I also think about the mark-to-market decision and how the banks can now claim their assets as basically anything they want to. Honest accounting is out the window. You don't think that may have an affect on profits (paper profits that is)? Heck, I can look at my new house and say, "you know what, I think this house is worth $1 million" (it's not by the way) and then go around telling my friends I am a millionaire. However, reality is a cruel thing sometimes, and just like the reality that I am indeed not a millionaire sucks, I still think the reality of the assets held by these banks has to emerge and be dealt with at some point, and when it does, it is going to suck as well. Just my opinion - maybe I am completely wrong here.

So the bottom line is I continue to be torn as to what I should do here. The trend is definitely up right now and there is no use fighting it (this rally is exactly why I use tight stops - get out early and miss a beating), but I just still have a lot of trust issues with this rally. My guess is that it continues for a few more days to weeks before failing, and then things get really, really bad. I just hope I am paying attention when it turns and can catch it on the short side. For now, I may try a few individual longs from the above watchlist, but I don't see myself going all-in here at any point. My conscience, for better or worse, won't allow me.

I don't know if I will have time to get a video in this weekend, but if I do, I'll show you those stocks mentioned above. Good luck, and have a blessed Easter holiday.


Charlie G. said...

Hey Mac, that's funny, our newborn (7 weeks old) is so low maintenance then our three-year son was. Sleeping through the night, soothing herself out of crying, etc. I think her revenge will come in her teen years.

The T2108 reading is interesting. This bear market rally and/or longer term trend reversal sure has put a squeeze on the shorts. I was holding a very small position of FAZ for about ten days and sold it this week (for a small loss) just in time for the crazy financials. FAZ and FAS look to be crossing soon!

Mac said...

Charlie - ours is the exact opposite - our first was very low maintenance looking back, although he is 2 1/2 now so I don't know if low-maintenance applies anymore. Each kid is different I guess.

Anonymous said...

Mac someone disagree with you about this is a healthy market...

Let's look at reality here folks:

1. There is a major liquidity disruption under way right now in the markets. Machine-driven ("quant") trading as a percentage of total volume has been flying higher.

2. There have been a series of overnight 'gap higher' moves in sequence followed by days that fail to follow through strongly. Bull markets don't feature this sort of distorted move. Rather, they are measured, reasonable advances with most of the buying being real and taking place during market hours.

The effect of (1) and (2) is what is known in the investing marketplace as "distribution"

Imminent collapse in the stock market was "saved" to a large degree by buying and selling between firms, but their firepower and willingness to play this role is not unlimited and exactly when their liquidity disappears is a matter of time, not supposition.

Mac said...

I said that the market is 'acting' healthy - but I would agree that in reality nothing is healthy in our whole economic world in general. That is where all my skepticism for this rally comes from and I know that skepticism won't go away easily. the market is moving higher, consolidating, and then moving higher. That's what I meant by acting right. That's the type of action you want to see if you're a bull. At some point, I still think stuff is going to hit the fan, but it may not be for a few more weeks.