Archive for March, 2009

A week does not make a trend.  This week was the Bear Market rally that we were expecting.  I admit that I was about two weeks early on the call.  There are some fundamental events that could turn this rally into more of a sustainable move. 1) Continuing clarity on the government stimulus plan. 2) Strong earnings, or at least no huge misses in the upcoming confession season. 3)  Shorts need to continue covering. 4)  Sideline players need to re-enter the fray with the massive amounts of cash that has been sitting dormant. 

The trading this week feels more like short covering rather than new money coming back into the market as evidenced by the relatively low volume.  Regardless, we have some positive momentum that “could” turn into something more substantial.  Technically, the charts are indicating that there should be a stall at current levels with a Doji/Spinning Top candlestick on decreasing volume.  I am not convinced that we are ready to give up on this run just yet.  Friday’s session needs confirmation of slowing down.  Even then, it may be just some flat trading before resuming its’ upward path.  Let’s see what Monday brings.  Stay nimble.  If you have taken advantage of this move, don’t give up your gains.  Best, Robin

A LACK OF CLARITY AND UNCERTAINTY IS MOVING THIS MARKET TO LEVELS NOT SEEN SINCE 1996.  WE ARE ALL WAITING FOR THE BOTTOM.  AT TIMES LIKE THESE, IT MAKES YOU WONDER IF THERE IS A BOTTOM.  WE ARE OVERDUE FOR A BEAR MARKET RALLY AS I HAVE BEEN MENTIONING IN THIS BLOG FOR THE PAST THREE WEEKS.  IT WILL COME AND I BELIEVE IT WILL BE SOON.  THERE WILL BE A CATALYST, MOST LIKELY A POLICY STATEMENT OF SOME SORT OUT OF WASHINGTON REGARDING THE STIMULUS PLAN, MARK TO MARKET ACCOUNTING, THE BANKS OR HOUSING. 

WE HAVE BEEN LOOKING FOR A CLASSIC CAPITULATION DAY, LIKE A HAMMER TYPE CANDLESTICK PATTERN ON MASSIVE VOLUME.  HOWEVER, IT IS NOT REQUIRED TO HAVE A CAPITULATION DAY.  THOSE OF US THAT TRADE AND COMMENT ON THE MARKETS ARE BECOMING WEARY OF THIS METHODICAL DEVALUATION OF THIS MARKET.  IT IS NOT SO MUCH LARGE SELLING PRESSURE BUT A LACK OF BUYING.  THIS LACK OF BUYING IS DUE TO LACK OF CONFIDENCE IN THE MARKET AND UNCERTAINTY AS TO THE GOVERNMENT’S DIRECTION.

THE BEAR MARKET RALLY WILL MOST LIKELY BE SHORT AND FURIOUS.  IF YOU MISS THE BEGINNING OF IT YOU MAY BE TOO LATE TO PARTICIPATE.  SO THE DILEMMA IS, DO YOU POSITION YOURSELF EARLY TO TAKE ADVANTAGE OF THE MOVE OR DO YOU WAIT.  THAT IS AN INDIVIDUAL DECISION.  IF YOU ARE EARLY YOU MAY GET CAUGHT IN FURTHER DOWNDRAFT AND LOSE AS MUCH AS YOU MAY GAIN IN THE BOUNCE.

A MORE CONSERVATIVE STRATEGY MAY BE TO ENTER A STOCK (S) OR A BROAD MARKET ETF THAT YOU ARE RELATIVELY SURE IS GOING TO BE HIGHER TWO TO THREE YEARS FROM NOW AND HEDGE WITH OPTIONS ON PULLBACKS AS IT BEGINS TO REVERT TO THE MEAN.  IT NOW APPEARS THAT WE HAVE MUCH MORE ROOM TO THE UPSIDE THAN WE HAVE TO FALL.  THE UPSIDE POTENTIAL IS VERY HIGH IF YOU ARE LOOKING FOR STOCK APPRECIATION GIVEN A LONGER TIME FRAME. 

The week kicked off with terrible numbers from AIG as they lost almost $62 billion in the fourth quarter.  TARP filled the void by committing another $30 billion to keep the insurance company afloat.  The market broke crucial levels as the DOW sank 300 points.

Tuesday’s comments by Ben Bernanke were somewhat sobering as the realization that the economy will continue to experience major pressure.  Geithner mentioned that the cost to stabilize the economy may be more than expected as the DOW continued to sell of another 37 points.

Wednesday saw some respite to this brutal market.  There was plenty of news to favor both the bears  and the bulls.  China is apparently beginning to recover economically and a rise in oil futures due to the crude inventory report helped the bulls.  However, GE’s problems and a bad ADP report as well as a less than rosy Fed Beige Book report weighed in for the bears.  When the dust settled, the DOW was up 150 points.

Thursday was an ugly day as the DOW shed 282 points.  Poor expectations regarding GM and C along with less than stellar economic reports contributed to the horrendous day.

The week ended on an up note on what appeared to be a short covering rally in the last ½ hour. The DOW ended in positive territory finishing 32 points higher.  The non-farm payroll number was as expected, losing another 651,000 jobs with 8.1% unemployment.  Prior month revisions on jobs were adjusted for December and January to reflect an additional 161,000 job losses.

Week over week, the DOW was off 436, the SPX down by 52 and the COMPQ worse by 203.

Learn to trade and profit!  Click here!

 

-I expect a brief and furios bear market rally.  I don’t feel that it will last very long.  We may ultimately go down to test the 5500 ( I apologize for the typo on the chart) level from 1996.  My target on the bounce is 7500.

Once again, I feel there is a bear market rally just waiting to happen.  My target is initially 750-775 on the bounce.  The index may very will retrace after the bounce and test prior lows for support.

Looking for 1370 on a bounce and then retest of the 1295 support level and possibly lower to 1008 from July 1996.

TOOLS OF THE TRADE

THE COLLAR

The collar trade is a defined risk/ defined reward trade that is very forgiving yet can be adjusted in order to optimize bearish and bullish trends.  The trade is comprised of three legs 1) long stock 2) long put and a 3) short call.  There are numerous ways to configure the trade; however, the standard application of the trade entails purchasing the stock and buying a long put 3-6 months out either ATM or slightly OTM and selling a short call slightly OTM in the same month as the put.  It is very unusual, but possible to occasionally find a collar where the short call in the same month can actually provide enough credit to pay for the long put as well as the difference between the strike price of the put and the stock.  If this happens, you have a risk free trade. 

Most of the time, in this particular trade set up, the short call will partially finance the cost of the long put resulting in a limited risk/ limited reward trade.  As previously mentioned, it is possible through adjustments to optimize bullish and bearish moves in the collar trade.  The trade is appealing because you can maintain a hedged position yet it has the flexibility to take advantage of stocks that move out of the trading range.  If the stock stagnates, the trader can just sell calls against the position and bring in monthly income.

Study the risk graph and you should gain understanding of the potential of this unique trade.  Best, Robin

ECONOMIC REPORTS

MONDAY 3/9

None

TUESDAY 3/10

Wholesale Inventories

WEDNESDAY 3/11

Treasury Budget

THURSDAY 3/12

Initial Claims, Retail Sales, Retail Sales ex-Auto, Business Inventories

FRIDAY 3/13

Export Prices ex-ag,  Import Prices ex-oil,  Trade Balance, Michigan Sentiment-Prel

 

 

EARNINGS OF NOTE

MONDAY 3/9

MRT, ORBT

TUESDAY 3/10

AVII, DKS, HOV, JCG, JASO, KR

WEDNESDAY 3/11

AEO, HOTT, LDK, MTEX, MW, MBT, NAV, OMNI, SPLS, BKE, MTN

THURSDAY 3/12

ARO, ABTL, ARNA, JSDA

FRIDAY 3/13

PNY