Sunday, January 23, 2011

Bulls and Bears: Market Talk

We're wary of breakouts but at the same time we're still interested in buying support:  by saying that it means that we're assuming market will go down more but it won't experience a straight out rout.   We're still seeing some rotation, mostly into the stodgy more conservative sectors (take a look at Dow Jones versus Russell for example of this rotation from high beta to low beta).

Let's start with the bull case:

Nothing wrong with SPY technically here as it seems to be digesting the huge move and still above all major moving averages and firmly within a bull trend.   

Whether you trade it or not as a trader you can't deny the importance of GE as it has a finger in many different types of business.  Stock is booming. 

Semis have given back a bit of exuberance but still firmly in the bull territory.    

The financials also are off their highs but still looking pretty healthy technically.

The Dow looks great -- symbolic here of safety over momentum as many stocks in the index are holding strong (for example CAT CVX DD DIS GE HD IMB KFT MMM PG UTX WMT XOM).

Now let's take a look at the bear case.

FCX is one of our favorite tells for the last few years as commodities have led this market.  Unless this relationship has changed this is a huge red flag for overall market.

FCX broke through the 50SMA and looks like it's heading to retest the 100 level and to be stuck in range for a while.

China has been underperforming for months and still can't find a bid.   

The Russell shows more the true nature of what happened last week (at least on stocks that most traders like to trade) as it got spanked hard.  We think that the 50SMA is going to flatten out here and we'll be stuck in a range without making new highs intermediate term. 

Trannies are also another great tell that we always watch -- same thing here as the index barely got a bounce on the 50SMA.   Look for it to flatten out and possibly break as a new lower range is carved out for the intermediate term. 

KOL also flattening out on the 50SMA and we expect coal stocks to be dead money for a while. 

GDX hit major support and managed a small bounce. We're out of our gold bounce names now and will be watching this sector for deeper support levels (still quite a bit away).

And last but not least:  AAPL earnings really could not have been any better.  Has there ever been a company this big with this type of growth?   And what did traders do?  Sell it, and then sell it some more.

AAPL most likely will be dead money for a while even though we would be surprised if the stock turns out and completely rolls (quite possible it tests the 300 level though).  We'd be buyers of the 280-285 level which would be a 15% hair cut from here.  Asking for a bit too much?  Most likely, but that's where we see the best edge.  

Too mixed a scene for a new bear market, thus far anyway, but also too many cracks in the foundation for this to be a short-term (i.e. one week) pullback. We believe there will be a rotation into more boring, stodgy stocks (we're scanning through medical appliance stocks for longs!) while high-beta momentum tech and commodities chop around trying to find a new range. 

So how are we trading this?  A few longs, a few shorts, and some decent commodity support levels coming up.  Everything pretty short term and taking it one day at a time with no big bets either way.  We'll go through the sectors every weekend to come up with clues on near-term (the only timeframe we care about) direction.