Monday, May 21, 2012

Monday Morning Musings

The market is getting a nice bounce in early trading.  Last week, this was a bad sign as every up open in the market sold off by the end of the day and the market would close weak.  That could still happen today, but the market is heavily oversold now and feels like there is a bit more bid to stocks than last week.  And stocks have been down for 11 of the last 13 trading days.

Industrials and materials stocks are leading the early action, as those groups were the hardest hit over the last few weeks.  Defensive consumer staples and utilities are lagging.  Financials are also faring well, but JPMorgan is not participating today after it said it will suspend its stock buyback but maintain its dividend in the wake of its large trading losses revealed last week.

There isn't a lot of news to attribute the strength to.  Asian markets were mixed overnight with little action.  But Europe is up slightly today and the message out of the G8 meeting over the weekend was that global leaders want to keep the EU intact and would like to keep Greece in the eurozone.  Somehow I still feel before all is said and done that Greece will decide it is better for them to exit the euro.

Despite the G8 news, the euro is basically flat on the day, but it is up from its lows earlier this morning.  Commodities are getting a bounce with oil prices up near $92.25 and gold prices trying to get back to $1600 (currently $1595).  I sure haven't notices a drop in prices at the pump here in LA.  Has anyone else?

In corporate news, CBE will be acquired by ETN for a nice premium.  And LOW reported earnings and the stock is getting hit due to lackluster guidance. 

The 10-year yield is getting a bounce from last week's ultra low levels, currently 1.74%.  And the fear premium is coming out of the options market in the form of a 10% drop in the VIX so far.  The VIX has broken below Friday's lows (23.07) and is close to taking out Thursday's lows at 21.87.  The VIX is trading near 22.50 as of this post.

Trading comment: I was early last week looking for an oversold bounce.  But bounces do come at some point, and it looks like now we have more ingredients lined up to make it happen this week.  The fear premium is coming out of the VIX, bearish sentiment spiked last week, and the market is as oversold by several measures as it has been since the bottom last October.  I still expect continued volatility this summer, so we would be looking to use any upcoming rallies to trim/sell lagging stocks and move to a more defensive allocation for the intermediate-term.


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