Friday, July 31, 2009

Market Resiliency Frustrates Bears

I admit to being a bit surprised by the continued resiliency of the market this month. I would have thought that the market was going to make a short-term top this month, and experience something of a pause that refreshed prior to Q4.

But as we know, the market can do anything at anytime, and usually moves in the direction that frustrates the largest faction of investors. So as the call for a market pullback became somewhat of the consensus view, it isn't too surprising that we didn't get one.

I think that as the market broke out into new high ground, those who had recently added to their short positions used the new highs as a level to place stop losses, such that when those levels were exceeded to the upside, it spurred an additional wave of buying.

This market is more and more reminding me of 2003, when the market continually stair-stepped higher, and never really pulled back enough to give those who were underinvested a "good" opportunity to put ample money to work. That market just continued to step higher, and force those who wanted to participate to pay up for stocks.

Moreover, the bears back then continually called for a "retest" of the March lows, but such a retest never came, and the market really powered ahead on Q4 of that year to make for the biggest yearly gain in the SPX since I think 1998.

Could the same thing happen this year? We would need to see quite a run for the SPX to achieve +25% gains for the year, but the market sure is starting to resemble that type of price action.

Monday, July 27, 2009

Gone Fishin'

I am on vacation this week in Bethany Beach. I will try to post if anything worthwhile happens in the market, but I'm hoping for a quiet week so I get some R&R in. Have a good week--

Thursday, July 23, 2009

Performance Anxiety Starting To Set In

Color me surprised by the strength of today's breakout. The S&P has broken convincingly above the 950 level, and it testing 975 currently. There was a bevy of better than expected earnings reports today, but they have been coming in that way for more than a week now.

There was also some good news on the inventory of unsold homes data, as well as a nice drop in the continuing jobless claims figure. But I think the real driver of today's action is more about bearish funds covering their short positions as the market breaks out, and underinvested fund managers putting more money to work as performance anxiety sets in.

If you have never managed money professionally, let me tell you that performance anxiety is REAL, and it is very powerful. I have experienced it countless times, and there are plenty of folks that have been sitting on giant cash balances due to the uncertainty associated with this nascent recovery.

Stocks that are higher on good earnings report include MMM, BMY, EBAY, ISRG, and more. SNDK and QCOM gave conservative guidance, and those stocks are lower today. And UPS gave a disappointing forecast, but its stocks is higher - go figure.

Asian markets were higher overnight; the dollar is lower, helping oil and gold prices; the 10-year yield is higher to 3.67%; and the VIX is higher also to 23.80; Materials stocks (XLB) are leading the action, while consumer staples (XLP) are relative laggards.

Trading comment: I have take some partial profits on stocks that are up big today, like CELG and ISRG. I also took some partial profits on WMS even though it is breaking out to a new high today. The market is now heavily overbought, and I wouldn't be surprised to see it run out of gas soon. That said, I would look to put money back to work on any 3-5% pullback, or once the market has worked off its overbought condition. I still think too many folks are not positioned correctly for a continuing stair-step higher.


Wednesday, July 22, 2009

Earnings Summary: Apple (AAPL) Knocks The Cover Off The Ball

Once again, Apple (AAPL) trounced the estimates. Earnings per share were much better than expected, coming in at $1.35, which represents 13% year over year growth. Revenue also topped expectations, rising 12% from the year-ago period, and gross margins were well above company guidance, rising all the way to 36.3%.

It was a really great quarter for the company, which characterized it as the best non-holiday quarter ever for the company. Macs sold more than expected (2.6 million units), iPhones exceeded the high end of estimates (5.2 million units), and only iPods were in line at 10.2 million units, which was widely expected, as there were no new product introductions or refreshes in this product line.

Management said Macs had their best June quarter ever, led by laptops, which grew 13% vs. the year-ago period. iPods experienced a year-over-year decline of 7%, and the company said that it is normal to expect more declines in this segment over time. That said, it is still a very good business for the company, and it should last for many years. iPhone sales do cannibalize iPod sales some, as the iPhone can be used to play MP3s also, as well as the iTouch.

iPhones had a phenomenal quarter with the introduction of the new 3GS phone, the upgrade to the new operating system and the price cuts in the old iPhone to $99. The company said it was capacity constrained and has not bee able to satisfy all the demand it is seeing for the iPhones, but Apple said it is working on remedying the situation. Ditto for the lead times that customers are currently experiencing for the new Macbooks.

Margins were really strong, surprising everyone, as the company did a great job keeping down component costs and also was able to keep a lid on costs associated with the ramp of new products.

Here are a few key metrics:
  • Operating margins topped 20%.
  • International revenue accounted for 44% of the total.
  • Cash and investments now total $31.1 billion.
  • Over 65,000 apps are now available, and customers have downloaded over 1.5 billion apps so far.
  • Six new retail stores were opened in the quarter.
  • 50% of Macs sold were to first-time buyers.

In terms of guidance, the company gave its usual ultra-conservative guidance, but I have to say that next-quarter EPS guidance did come in above the whisper numbers I was hearing. The CFO said EPS is expected to fall in the range of $1.18 to $1.23 (vs. $1.30 consensus), and revenue it expected to be $8.7 billion to $8.9 billion (vs. $9.07 billion consensus). Gross margins are expected to decline to 34%, and the tax rate should come in around 30%.

There was no mention of Steve Jobs whatsoever. The only thing management said it was looking forward to was the release of the new Snow Leopard software.

The stock had a brief reaction after hours to the conservative guidance and very briefly traded below $150. Congrats if you were able to nab any shares down there, because it soon rebounded and was back over $158. I think the stock is fine here, as the company continues to execute very well, and Mac sales should pick up into the back-to-school season and as the economy recovers. For those reasons, in addition to the pickup in growth rates, I believe the premium multiple is justified.

That said, I don't think you need to chase the stock here. The shares have had a big run, and I wouldn't be surprised to see some consolidation in the near future. I think if you're patient, you can probably get a better entry prices than we will see tomorrow. I'm holding on to my shares and would only look to add to my positions on another dip below $150.

long AAPL

Strong Apple Earnings Boost Nasdaq For An 11th Straight Day

Apple (AAPL) really knocked the cover off the ball last night, topping estimates by a wide margin. Moreover, the traditionally conservative guidance they usually give was a bit less conservative this time, imo. I covered the conference call for and will post my comments shortly.

Starbucks (SBUX) also posted strong results, and these two stocks are helping to propel the Nasdaq higher for an 11th straight session.

Among financials, Morgan Stanley (MS) reported a bigger loss than expected, while Wells Fargo (WFC) reported a much larger gain. Regardless, both stocks are lower this morning, weighing on the financial index in general. Consumer discretionary stocks (XLY) are leading the action so far.

Tonight we will hear from some more biggies on the Nasdaq, including eBay, Qualcomm, and Intuitive Surgical (ISRG).

Asian markets were mostly higher overnight; the dollar is mixed today; gold prices are slightly higher, while oil prices are slightly lower; the 10-year yield is bouncing slightly from yesterday's big drop, rising to 3.51%; and the VIX is a bit lower to 23.84.

Trading comment: Is the low VIX and 11-day Nasdaq run setting us up for a quick whack?? I think it might be, and I have added to my NDX eft hedge (QID) as a result. I just don't want to chase things here after a big rally, and I want to protect some of the recent gains in our portfolios. I have also taken profits in my SNDA trade, even as I still like that one longer-term.

long QID

Tuesday, July 21, 2009

Catepillar Makes Positive Comments On Global Recovery

The S&P 500 closed at a new high for the year yesterday, although it did not surpass its intraday high of 956. This is a tough juncture. Performance anxiety could force underinvested managers to chase prices higher, fueling more of a short-covering squeeze. But there is also a long history of the market making tops in July, so I want to be careful about being dragged into the market.

There were some more solid earnings reports last night. Texas Instruments (TXN) and Catepillar (CAT) both topped consensus estimates. TXN also issued upside guidance for next quarter. CAT said they are seeing signs of stabilization, and that credit markets have improved significantly. Also, they see the price increases for many key commodities as a positive indicator for investment (in their industry).

California took a step towards mending its budget crisis last night when the Governor struck a deal that would include spending cuts of around $15 billion, include new borrowing, but no new taxes. The cuts are not likely to go over well with many folks that live here in Cali, but they are sorely needed and should have been initiated many years ago, imo.

Asian markets rose overnight, for the 6th straight session; the 10-year yield is sharply lower today, down to 3.48%; and the VIX is higher to 24.92.

Trading comments: No trades so far today. Yesterday I took partial profits on IBM and IEZ. The market is once again overbought, but with the 200-day average flattening out soon on the S&P, I think it should offer stronger support the next time we come down and test it. For now, I think we are at the higher end of the summer range I have been talking about.

long IBM, IEZ

Monday, July 20, 2009

Earnings Summary: Google (GOOG)

Google (GOOG) reported a solid quarter, beating both top- and bottom-line estimates. EPS came in 26 cents ahead of consensus at $5.36, which represented 16% growth vs. the year-ago period. Revenue was only slightly above estimates, posting 3% year-over-year growth.

Normally, a big bottom-line beat like this would have the stock trading higher in the after-hours, but shares of GOOG are lower right now. One thing that made the quarter less "clean" was a low tax rate. The tax rate for the quarter was only 20%. Last quarter it was 25%. Management said the tax rate fluctuates depending on foreign mix of profits, but the company didn't address the issue any further.

The CEO said that business appears to have stabilized, but that it is too early to call the recession over. The company is focused on operating efficiencies and cost management; these efforts showed this quarter as operating expenses fell to 28% and head count decreased by 378.

He spent time talking about Google's new operating system for 2010 and said that the company needs to think big. He also said that even though business is soft, Google is continuing to invest in innovation, and he said he feels that the prudent strategy is for Google to emerge from the downturn stronger than its competitors.

The company also commented that their three big drivers outside of search (display, apps, and mobile) were gaining traction. The CEO said YouTube is now on a trajectory that Google is pleased with," with increasing monetization of videos. Mobile search is also continuing to gain traction, and the company expects there will be 18 to 20 mobile phones on the market using the Android system by year-end.

For Apps, 75 new schools signed up to use their platform, as well as an increasing number of corporations. The company did not go so far as to say when it expects this group to begin making up a significant portion of revenue.

Key metrics for the quarter included:
  • Paid-click growth slowed to 15%.
  • CPCs fell 13% year over year but grew 5% quarter over quarter.
  • AdSense revenue grew 2%.
  • International revenue totaled 53% (U.S. rose 2%, U.K. fell 8%).
  • Foreign-exchange hedging added $124 million.
  • Free cash flow totaled $1.47 billion (up 38% year over year).
  • Operating margins rose to 39.2%.
  • Cash on the balance sheet now exceeds $19.3 billion.

I get the sense that Google is executing as well as we can expect given the weak macro environment. I believe it is making the most out of the lower ad budget revenue, and that when the purse strings on these ad budgets begin to loosen again, the company will be in good shape to take advantage of it. Recent comScore data put their market share at 65%, and I don't see Bing putting a dent in that. (Note: I don't think I even heard Bing come up once on the conference call)

I am comfortable with my long position in the stock. Most of the analysts have become pretty conservative with their price targets, but I still think it's reasonable that we could see the stock hit $600 sometime next year.

long GOOG

Monday Morning Musings

Good Monday morning. Hope everyone had a good weekend and is well rested. I got some surfing in this weekend, which always seems to rejuvinate me. Also, I am going on vacation at the end of this week-- Bethany Beach, here I come!

Some are saying that the bailout of CIT is boosting the market this morning. While I'm sure that is helping, I think the big gains in Asia have more to do with it. Hong Kong soared +3.7% last night, and many emerging markets are making new highs. That positive sentiment seems to have carried over to our markets this morning, despite our current overbought condition after a huge week last week.

Materials and industrials are leading the way so far, while defensive groups like consumer staples and healthcare are lagging. Healthcare is lower due to concerns about the prospect for new regulations that could still come out of the Obama Administration.

Financials are doing well this morning, after Moody's said that the global banking system has finally gotten back on its feet. But longer term, they said, "Despite general signs that the world's economy is stabilizing, and a profitable quarter for some banks, most are facing significant hurdles on their path to economic recovery". I think this statement is mostly true. The big banks should pull out of this first, but profitability in the banking system as a whole will not return to former levels of profitibility for a very long time.

In its commentary this morning, Goldman Sachs (GS) raised its year-end target for the S&P 500 to 1060 from 940. That's a nice bump up, and implies there is still another +12% upside left in store for the market in the second half of the year.

Asian markets rallied overnight; the dollar is lower this morning, helping to boost commodities; the 10-year yield is lower to 3.65%; and the VIX is up +2% to a still low 24.90.

Trading comment: I have taken some additional profits this morning, just to lock some in and raise a little cash. I sold my $WYNN, and trimmed $IBM and $IEZ.

I have hard time getting bullish on the market breaking out to new highs in July. I can't remember ever seeing that, while I can cite several examples of the market making a short-term top in July. I am not turning bearish, just want to acknowledge history and seasonality, and not get sucked into a potential headfake breakout.

long IBM, IEZ

Friday, July 17, 2009

Chart of the Day: Copper Still Looking Strong

The market is mixed right now, with the S&P down slightly while the Nasdaq is up slightly. The Nasdaq has posted 7 straight positive days, so I would expect a rest to be in order.

Of the 4 big earnings reports out last night and this morning, 3 of the stocks are lower today. Google (GOOG) posted solid results, although EPS was aided by a lower tax rate. The stock is -3% lower today. GE and BAC also posted better than expected results, but their stocks are lower today also. Only IBM, which really posted a strong number and also raised guidance, is higher today (breaking out to new highs).

There are a lot of naysayers about the sustainability of the nascent economic recovery, a topic I wrote about in my most recent monthly newsletter to clients. Below is a chart of copper, which is often viewed as a good indicator of the economy. Many thought that copper had rolled over recently, and was poised to head lower. But the big bounce this week puts the industrial metal in good shape to breakout to new highs in the near-future.

Another indicator than many global economic commentators follow is the Baltic Dry Index, which is viewed as a gauge for shipping activity and thus a barometer for global economic activity. This one was also dropping fast recently, but this week you can see it has turned higher. I want to also keep an eye on this indicator to see if it can continue to climb the wall of worry out there.

Here in the U.S., both housing starts and building permits came in better than expected this morning. This is another positive datapoint, as stabilization in the housing sector would benefit both real estate assets on the books of banks, as well as boosting consumer sentiment for homeowners worried that the value of their homes is still falling.
Trading comment: The market has had a huge week, and today is options expiration. We often see an expiration hangover early in the week following, so I am hedging my portfolios with the inverse NDX etf (QID). I have also taken some short-term profits on SNDA, NFLX, and STAR.
long GOOG, IBM, STAR, and QID

Thursday, July 16, 2009

Earnings Summary: Goldman Sachs

My write-up of Goldmans's (GS) conference call has been posted here on Seeking Alpha--

Stocks Pause After Biggest 3-day Run Since March

This post is a little late as I have not been able to tear myself away from the Hank Paulson testimony on CNBC. I don't want to get off on a rant, but I find it amusing that these Congressman try to play Monday-morning quarterback and criticize each and every move Paulson and Bernanke made in trying to save the financial system as we know it.

In a calm environment, maybe more a more thoughtful approach could have been taken, but if you were watching the financial meltdown minute by minute during that period, as I was, you know that time was of the essence. I don't think these Congressman who don't follow the markets closely will ever truly get that.

Now back to the markets: The stock market has been on quite a tear over the last 3 days, with its biggest rally since mid-March. Some have suggested that maybe there was a big short-squeeze going on, as this is options expiration week.

I think that is part of it, but also let's not overlook that there was also a big asset allocation out of bonds and into stocks. To wit, the yield on the 10-year note surged from 3.30% to 3.60% in 3 days. That is quite a bond selloff (where prices drop, and yields rise), and that money could have fueled additional stock purchases.

Given the big rally, it is likely that stocks will pause now. This morning, we got good news in the form of much better than expected earnings from banking giant JPMorgan Chase (JPM), and also better than expected numbers in the weekly jobless claims. Both of these datapoints should have bolstered stock prices, but the market is having difficulty making further headway on top of the last 3 days gains.

Asian markets rose overnight; the 10-year yield is lower to 3.52%; and the VIX is down slightly near the 25.50 level.

Trading comment: Volume rose yesterday on the NYSE, making for the 2nd accumulation day this week. Moreover, market breadth was terrific as both of these accumulation days were 90% up days (where more than 90% of the volume is upside volume). The S&P is in good shape now, as it is sitting nicely above its 50-day average. And the 200-day should soon begin to flatten out, which will provide more support on the next test.

I wouldn't get too aggressive right here, but I do get the sense that many investors remain underinvested in this market. The stair-step higher pattern, with the market bending but not breaking, is starting to look more like 2003. If the market consolidates here for a little, I would expect it to make a run at new highs for the year in short order. The NDX is already attempting this. Could be shaping up to be the summer of frustration for the bears.

Wednesday, July 15, 2009

Strong Earnings Reports Help Boost Stocks

I apologize for not updating my blog yesterday. I was out of the office at a conference and did not get a chance. Fortunately, it was a pretty quiet day. The biggest news was Goldman Sach's (GS) earnings report, which I covered for I will post my comments from the conference call later.

This morning, the stock market is getting a big lift from the likes of Intel (INTC), whose better than expected earnings report is helping to boost sentiment among investors. The semi index (SOX) is up +4.5% on the news, which included strong gross margins for the company, and also and upside revenue forecast for next quarter, which is nice to see in this environment of uncertainty.

I wrote recently that I felt the market was oversold, had found support near SPX 870-875, and that sentiment had become too bearish. Those were the ingredients for the market to rally in the short-term, which it has done. On the chart below, you can see that the S&P 500 has rallied above its 50-day average. That puts the market in a pretty strong position, if it can hold above these levels.

There has also been a big bounce in the 10-year yield (below), which got down almost to the 3.25% level before bottoming. At 3.25%, the bond market was saying that the worries had again tilted to the side of economic weakness, as investors questioned the recovery. But this bounce over the last few days has brought yields back to 3.55%, and I think is an indication that investors are more upbeat about the recovery again.

I don't think that anyone should be too worried about inflation yet. I am still amazed that this seems to be all people can focus on. Maybe they just aren't paying attention to the data that is coming in. To wit, today the CPI for June showed that on a year/year basis, it fell -1.4%. That's not a sign of inflation.

In Europe, the CPI for 16 eurozone countries fell on an annual basis for the first time on record (according to the WSJ). Last, capacity utilization this morning came in at 68%. That means there is an incredible amount of slack in the economy, and I wouldn't start to worry about inflation until utilization at least got back above 80%.

The last chart below shows the long decline in the volatility index (VIX), which I have been writing about. Today, it actually broke below the 25 level, indicating investors are not predicting a sharp rise in volatility and market selloffs in the near future. This flies in the face of those who are predicting an imminent collapse in the market, although I suppose things could turn on a dime, but it would take a major change in the news coming out right now.

Trading comment: I am taking some partial profits on a few trades I made earlier in the week (NFLX, WYNN). I have not abandoned my summer rangebound thesis, and will probably look to add back to the hedges I recently sold if we continue to move higher. But this prescription for trading more actively has certainly helped my accounts this year.


Monday, July 13, 2009

Monday Morning Musings

Good Monday morning. Hope everyone had a good weekend. There aren't any real market moving releases this morning, in terms of economic data or corporate earnings. In such a vacuum, a big analyst upgrade or downgrade can move the market.

Step in spotlight-loving bank analyst Meredith Whitney, who surprisingly upgraded Goldman Sachs (GS) this morning, and also made constructive comments on the bank sector as a whole. She thinks the bank stocks could see a relief rally in the near-term, before another dip after that.

GS is up +4% on the upgrade, topping $147. The bank index (XLF) is also the leading sector on this news, +3.2% right now. She said Goldman likely had a strong trading quarter, as well as benefitting from high volumes of debt underwriting. This is also one of her themes on why she is bullish going forward, as Goldman should be able to capitialize on all of the debt issuance she sees in the pipeline.

Commodity markets remain weak this morning, as the dollar trades higher and oil and gold trade lower. Oil is down again, trading near $58 today. This is weighing on the energy sector (XLE), which is the weakest sector today, down more than 1%.

Asian markets were weak overnight, although Europe is strong this morning; the 10-year yield is up slightly to 3.30%; and the VIX is plunging -6.4% right now all the way down to 27.15. The VIX was unable to stay above its 50-day last week, and now looks poised to test that 25 level again.

Trading comment: The S&P 500 finished its 4th consecutive week lower last week, and the markets are once again in oversold territory. I think that sets us up nicely for a relief rally in the near-term, although earnings seasons heats up this week, and one poor earnings report from a big company could change short-term sentiment in a hurry.

Speaking of sentiment, bearish sentiment has grown quite a bit in many of the indicators I follow. Some of them are back to levels that they hit near the market lows in March. This is another indicator that the market could rally in the near-term, as bearish sentiment seems to have risen too far, too fast, and as it unwinds it bit it could help push the market higher.

Friday, July 10, 2009

The Man Who Crashed The World

That's the title of a great new article in Vanity Fair that delves into the collapse of AIG, and the man who many feel is responsible for taking down the insurance giant.

The article starts:

Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.

By Michael Lewis August 2009

You can read the rest of the story here, at

Consumer Sentiment Dips Again

The market is trading lower this morning after the Michigan Consumer Sentiment index dropped to 64.6 in July, versus consensus for 70.0. This datapoint seemed to move the market more than the U.S. trade data that came out, and showed the trade deficit fell in May as exports picked up.

In corporate news, GM is exiting bankruptcy after just 40 days, with a new corporate structure and improved balance sheet. Financials stocks are lower after the WSJ reported that firms looking to buy back the warrants held by the govt. are complaining the Treasury is demanding too high a price. Also, there is chatter that CIT may not be able to get FDIC backing on its bond issuance.

Markets were mostly lower in Asian overnight. Reports out of China showed that exports fell for the 8th straight month as the global recession cuts into demand. I don't see how China doesn't experience a slowdown from its recent, torrid pace of growth.

The dollar is higher today, weighing on oil and commodities; energy stocks are under selling pressure, while tech is holding up the best; the 10-year yield is lower again, down to 3.28% (have you locked in a good refi rate?); and the VIX is hovering right at that key 30 level we've been watching.

Trading comment: The market has not had the kind of bounce I thought it would from the SPX 870-875 level. As such, I want to look to use any strength to add some more etf hedges to the portfolios. But I do not want to get too bearish, as I think investor sentiment has already moved heavily to the bearish side of the equation, and that in and of itself should keep future selloffs contained. I still expect a rangebound, choppy market for most of the summer. I just want to have longs and shorts on to trade around and try to scalp incremental profits.

Thursday, July 09, 2009

Kass Weighs In

Recently, I have been saying that I felt the markets would be choppy and rangebound for most of the summer. Today, my colleague Doug Kass weighed in on RealMoney Silver with similar comments.

Doug said, "Consistent with my expectations of a sideways correction, the world's stock markets appear to be poised to go to sleep for the balance of the summer. Over the course of the next two months, I expected the S&P 500 to trade in a relatively narrow range of between 850 & 925."

Stocks Bounce As Oil Falls Below The $60 Level

The S&P and Nasdaq are modestly higher on Alcoa (AA) results that topped estimates and initial jobless claims that fell to the lowest level since January. That said, continuing claims hit a new high, and that couple with generally weak same-stores sales results looks to be keeping a lid on any buying enthusiasm.

Retailers are reporting June sales that are generally weak. The Gap (GPS) fell 21 cents to 15.05. Abercrombie and Fitch (ANF) is down 47 cents to 23.53. Costco (COST) said comparable sales dropped 6%, which is in line with expectations and the shares were down 12 cents to 45.92.

In merger news, Data Domain agreed to be acquired by EMC for $2.1 billion. Data Domain lost 48 cents to 33.43. EMC is up 8 cents to 12.60. Also, Broadcom (BRCM) is walking away from its offer to buy Emulex (ELX), which is hurting the latter's shares pretty big.

The dollar is weaker today, which is helping gold prices rise. But oil is lower, breaking below the $60 level. Despite the drop in crude oil prices, energy stocks are still the leading sector so far (+1.2%), while healthcare stocks are the weakest (-1.5%). Financials are the second strongest group so far (homebuilders are bouncing also).

Asian markets were mixed overnight, although there was some surprising news that auto sales in China surged +36% in June. Seems odd.

The 10-year yield is up to 3.38% after a BIG plunge lower yesterday following the auction of 10-year notes. Demand at the auction was very strong, flying in the face of the conventional wisdom that demand for US Treasuries was sure to weaken. Seems the appetite for safe returns is higher than most people think.

The VIX spiked over the key 30 level yesterday, a level that I have been keying in on to gauge the potential for volatility (and selloffs) to increase. Today, the VIX is trading -3.6% lower, right at that key 30 level. Keep an eye on this one.

Trading comment: Yesterday morning I covered more of our short positions/etf hedges, and added some trading long positions in AMZN and GS. I haven't added any new long etf positions, as my near-term outlook is for the market to enjoy and oversold bounce, but then to experience more downside probing before finding a better support level.

long AMZN, GS

Wednesday, July 08, 2009

The Head & Shoulders Top

The chart above was posted on today in reference to the technical "head and shoulders" top formation that so many traders are talking about.

I see it pretty clearly, and it could come to fruition in the near-term, but first I think we will see an oversold bounce from the SPX 870-875 level which was tested today. If the SPX is unable to get above its 50-day average and hold there, then we could see another leg down in the SPX 845-850 area.

But I think these technicians are missing a bigger pattern, and that is the larger head and shoulders bottom that is developing on the charts. Tomorrow I will try to post what I think is a potential H&S bottom formation in the making, and this pattern has longer-term bullish implications.

Have a good night--

IMF Says Global Economy Improving

The market was higher in the first hour of trading, but is currently back in negative territory. This comes despite some positive comments out of the IMF, as well as a couple of solid earnings reports to kick off this quarter's earnings season.

The IMF upgraded its outlook for the global economy, and said it expects it to expand +2.5% in 2010. Some of the skepticism among investors might stem from comments out of the G8 meeting, where participants said they believe the global economy still faces risks and could need more help.

Earnings season officially kicks off today, and the first two reports from Pepsi Bottling (PBG) and Family Dollar (FDO) were better-than-expected. Healthcare stocks are bucking the weakness so far, being boosted by positive drug news out of Amgen (AMGN), which is boosting its stock.

The exchange stocks (CME/ICE) are under considerable pressure, as the CFTC is weighing options for implementing position limits in the futures markets to deal with speculation. This is likely weighing on the overall financial sector as well, as big trading outfits like Goldman Sachs(GS) would also be impacted.

On a related note, oil is trading lower for a 6th straight day, leading to further losses in the energy sector. Although materials stocks are not down as much.

Asian markets were lower overnight, despite news of improved consumer sentiment in Japan; the dollar is mixed right now vs. the Yen and Euro; the 10-year yield is falling further, now down to 3.40%; and the VIX is +3.5% higher to 31.93, breaking above its 50-day and signaling a pickup in volatility.

Trading comment: Yesterday's session was ugly, but volume ran lower than the previous day on the NYSE, thus avoiding a distribution day. This cannot be said for the Nasdaq, which suffered its 2nd straight day of distribution. There is a lot of chatter about the head and shoulders top patter in the market, and right now I feel that this is becoming a self-fulfilling prophecy.

But as the S&P hits the 875 level that has been a key level to watch, I still expect a bounce in the near-term. This is why I took some partial profits on my shorts/hedges, and am looking to add to my long positions into this weakness. I expect the summer months to be choppy, and will try to take advantage of the trading ranges as they develop.

long GS

Tuesday, July 07, 2009

Newsflow Slows Ahead of Earnings Season

There is somewhat of a lack of newsflow this morning, and it is likely to stay that way until earnings season kicks off later this week when Alcoa (AA) reports.

Healthcare is the only sector positive today. The Washington Post reports that hospitals have agreed to contribute $155 billion over 10 years towards covering the cost of healthcare for those who are uninsured. Energy stocks are the weakest on another drop in oil prices, now down below the $63 level.

In other news, President Obama mentioned that a second stimulus package could be a possibility. I think that is a mistake, as there has not bee enough time to allow the first two stimulus packages to work. We already have a big combo of both monetary and fiscal stimulus in the pipeline, and we know these initiatives always work with a lag. Plus, the govt. can't afford another stimulus plan. Maybe they should focus on making this first one more effective as the dole out projects.

Asian markets were lower overnight; the dollar is lower today, helping support gold prices; and the 10-year yield is lower to 3.49%. The VIX could not get above 30 yesterday, and is currently trading around 29.60. I am watching the 30 level as an indicator that above that level we can expect a pickup in volatility, and below that level we can continue to expect "normal" trading.

Trading comment: Yesterday I mentioned that I was taking partial profits on some of our etf hedges as well as short positions. This morning, I have taken more profits in additional short positions (AMZN, CRM). The S&P has been down for 3 straight weeks, and I think a bounce is likely. I will probably look to buy some SSO for a trade to play a potential bounce.

short CRM

Monday, July 06, 2009

Monday Morning Musings

Good Monday morning. My regularly scheduled Sunday evening wind down was interrupted last night by a trip to the emergency room with my 5-yr old daughter. But after a couple of hours, and 5 stitches to her chin, everybody was back home safe and sound. Just a little more tired this morning when my alarm went off at 5am. Getting up that early is for the birds.

The market is lower this morning, as selling pressure from Thursday seems to have continued into today's session. Although Friday saw a steep selloff, volume was extremely light, which shows a lack of conviction in the selling, even as trading was light ahead of the holiday weekend. Interestingly, the put/call ratio jumped back above 1.0 on Thursday, which means folks are jumping on the bearish bandwagon quickly again.

There was a good economic report today, which showed the June ISM Services Index rose to 47.0 (vs. 46.0 consensus) from 44.0 in May. While the manufacturing index gets more attention, the services component of our economy is much larger.

The dollar is higher today, after the German Financial Minister said the U.S. dollar will keep its role as the leading reserve currency. The strong dollar is pressuring commodities, with oil back down below $65, and gold trading lower as well.

Asian markets were lower overnight, led by India where reports that their deficit could grow worried investors; the 10-year yield is higher to 3.52%; and the VIX is spiking another +8% higher back above the 30 level. It will be interesting to see if the VIX breaks above this long downtrend that has been in place since March.

Trading comment: The S&P has now been down for 3 weeks in a row. I covered more of my shorts this morning, and took partial profits in some of our etf hedges (DUG, SDS). I said for a while that I wanted to get more hedged as we got into the July/August timeframe, and that hasn't changed. But with the SPX testing its 200-day, and slightly oversold, I would not be surprised to see a bounce this week.

That said, the action looks to me like the SPX will probably test the 875 level that we were watching closely back in May. That level might provide a better buying opportunity. Big picture, I think the market will likely be choppy at best this summer.

long DUG, SDS

Thursday, July 02, 2009

Jobs Data Disappoints 'Green Shoot'ers

The chart above shows the recent trend in the jobs data. This morning, the govt. report showed that the economy lost 467,000 jobs. (vs. -365,000 consensus) and the unemployment rate rose to 9.5% (vs. 9.6% consensus).

This came as a big disappointment to investors, who were hoping that the above trend of lessening job losses would continue, or at least not get worse. These jobs figures tend to be volatile from month to month, so one month's figure shouldn't be read into too much, but its still a disappointment. Consumer spending is the biggest component of GDP, and consumer spending is highly correlated to employment for obvious reasons.

The news is similar in Europe, where the unemployment rate also hit 9.5%, a 10-year high. This prompted the ECB to leave its benchmark rate unchanged at 1.00%. ECB President Trichet said that economic activity this year is likely to remain weak, but declines should lessen, with a full recovery expected by mid-2010.

Asian markets were lower overnight; the dollar is higher today, which is pressuring oil, gold, and commodities; the energy sector is the biggest laggard this morning (-2.9%); the 10-year yield is lower at 3.50%; and the VIX is up +7.5% to 28.20.

Trading comment: As the market rolled over yesterday afternoon, I started to add to some of our etf hedges in portfolios. I started with positions on the S&P (SDS), and also hedged some energy exposure with the DUG. In aggressive accounts, I also shorted some AMZN and ADBE. Today those are all working out well, but I will continue to monitor and adjust our overall net long exposure based on how the market responds to today's selloff over the next few sessions.

long DUG, SDS; short AMZN, ADBE

Wednesday, July 01, 2009

Mutual Fund Monthly

The market was flat for the month of June, with the SPX starting and ending at the exact same level, despite ample intra-month volatility. For the year (as of 6/30), the SPX is up +1.75%. But growth has outperformed value in a big way so far this year. To wit, the growth-laden Nasdaq 100 is up +22% for the year. That is quite a bit of outperformance.

Growth has outperformed value in just about every category. The biggest discrepancy is large-cap growth, which is up +16% ytd, vs. large-cap value, which is down -5.8% over the same time period.

Here are some of the top and bottom performing (ytd) mutual funds that are part of our universe at my firm:

Top 5
  1. +55.8%: TRowe Emerg. Europe (TREMX)
  2. +41.8%: Janus Overseas (JAOSX)
  3. +38.1%: Ivy Global Nat. Resource (IGNAX)
  4. +31.2%: Legg Mason Opportunity (LMOPX)
  5. +28.8%: Driehaus Emerg. Mkt (DREGX)

Bottom 5

  1. -6.4%: CGM Focus (CGMFX)
  2. -4.5%: Stratton Small Value (STSCX)
  3. -4.0%: Rydex Mgd. Futures (RYMFX)
  4. -3.9%: Brandywine Blue (BLUEX)
  5. -2.0%: Nakoma Absolute Return (NARFX)

Among sector ETFs, steel (SLX) +43.4%, metals (XME) +34.2%, and brokers (IAI) +29% are leading the way so far this year; while regional banks (KRE) -36.4%, real estate (IYR) -9.7%, and transports (IYT) -6.7% are lagging.

As for international ETFs, Russia (RSX) +59.8%, Brazil (EWZ) +52.5%, and Hong Kong (EWH) +34.2% are on fire, while Germany (EWG) -3.7% and Japan (EWJ) -1.0% are the big laggards.

Investors Shrug Off Weaker Jobs Data and Push Stocks Higher

The market is higher in early trading, despite a weaker than expected ADP payrolls report. The ADP report showed private payrolls were cut by 473,000 in June vs. expectations for -395k. This report isn't the official jobs report. That one comes from the govt. and will be released tomorrow. So maybe for today investors are focusing on the positive reports that have come out.

The ISM Manufacturing Index for June came in at 44.8 (in-line), up from last month's level of 42.8. (Anything under 50 still represent contraction in the industry) Pending home sales in May increased +0.1%, but that comes on the heels of April's +7.1% surge.

General Mills (GIS) reported solid earnings, gave upbeat guidance, and also hiked its dividend. That news is helping push the consumer staples (XLP) stocks higher by +2.0%.

A bounce in commodity prices is also helping energy and materials stocks bounce, led by gold miners shares. The dollar is weaker today vs. the Euro, but up slightly vs. the Yen.

Asian stocks were mixed overnight, despite positive news out of China (+1.7%) that its manufacturing sector index rose to 53.2, marking its 4th consecutive month of expansion; the 10-year yield is higher to 3.58%; and the VIX is right at 25 (-5.1%) for the first time since Lehman's bankruptcy last September. A return to normalcy?

Trading comment: Today could be new mutual fund money coming into the market and being put to work, so I don't want to read into it too much. Let's see how the market closes, and how volume comes in. I am still leaning towards adding to some hedges, but I have also noted a rise in bearish sentiment lately, so I will have to weigh that into the equation as well.

Check back later for my mutual fund monthly update--