Woo-eee, what a hangover the markets have!
Coming off a 500-point week, we can expect a bit of a pullback, the question is how much of one will we get? As long as we hold 12,750 on the Dow and 1,375 on the S&P, we are still in rally mode. It might be a bit much to expect the Nasdaq to hold 2,375 rather than 2,350 but that's what I'd like to see to confirm a level of tech rotation we need to sustain a real rally. Having the Russell hold 800 would also be amazing but that's a lot to ask as well. SOX 372 is a must…
As Sage points out in his article, we need to always have some opposite bets because the market (and any individual position) goes both ways. If you can accept that then we can make you a better trader with this simple concept: It is cheaper to buy puts when the market is going up and it is cheaper to buy calls when the market is going down. I know all of you sophisticated investors may be saying "Duh" at the moment but, if you commit yourself to WANTING to be 25% bearish then you should have been picking up puts or selling covers when they were on sale on Friday, right?
You need a goal in your virtual portfolio and that goal should be, for example: I want to be 75% bullish (that's about my max) favoring tech and focused on oil to break down in the next 2 months. So now we have a sector to key on with our puts (but, just like the main virtual portfolio no more than 75% and really 50% is a lot for a sector) and a well defined goal. Now the trick is, whichever way the market or the sectors go, we are looking for bargains to add to our overall positions. What am I looking for? Cheap tech to buy calls on (MRVL, SNDK, ISRG, WFR, SOLF, CY), expensive oils to buy puts on (SU, USO, XOM) as well as a few expensive techs to short (RIMM, FSLR) and cheap oils to take long (PTR, FTO, COP).
By compiling a "shopping list" and keeping tabs on prices, we can recognize a bargain when the market holds a sale. In this wild, swinging market, there are sales for both bulls and bears at various times during the week – a smart shopper must learn both to recognize a bargain and to act on it. It's as simple as buying low and selling high but it all starts with a plan that makes sure you know your lows and highs when you see them.
If the Dow can't break 13,000 this week, we are very likely heading back into a period of more consolidation where we need to do our next round of bargain hunting. We were just rewarded last week for our bullish mix that we built up over the past 3 months and we may get a little more mileage from what we have, but it's time to pull in our horns and take a fresh look at the market. If we can't break out, it may be time to make a new list…
Asia went on a shopping spree this morning with the Hang Seng and the Nikkei both jumping about 2% early on and staying up all day. Financials and auto companies led the gains in Japan and property companies rebounded on the Hang Seng. The Shanghai Composite leaped 6.8% on news of a rule change that would block large shareholders from selling on the open market (a little late with the market down 50%) but the bounce was quickly erased as regular shareholders dumped their positions, leaving just a 0.7% gain on the day.
China's top oil refiner, SNP, estimated Q1 profits will be off 50% from last year due to high oil prices and runaway costs as well as the unique (to China) issue of pricing controls. The stock dropped 7.4% on the day. China's finance ministry announced last week that they would refund the 17% tax oil companies pay on imported oil, something that sent global prices skyrocketing last week (along with Nigerian rebels, who claim they have been antagonized by Bush sending warships into the Niger Delta).
EU markets started off well but turned down on BAC's earnings, which is funny as BAC shook it off so far. Nestle and Schneider Electric had poor earnings over there and the BOE's plan to bail out the mortgage companies seemed a little disappointing to investors, who always seem to want more. The ECB, on the other hand, is very unlikely to cut rates as they can little afford to take on the additional inflation that oil will hit them with if they allow the Euro to dip closer to the dollar.
The earnings just keep on coming and this morning's big misses, aside from BAC, were AMLN (6%), LLY (4%) and MAT (1,300%). The only other misses were put up by ALDN, CNB and JEF while bears were recorded by AME, ACI, BOH, HAL, HBI, HAS, LEE, MRK, NVS, QXM, DGX, SXT and WFT with NONE of the missing companies going so far as to lower guidance. We will get about 100 reports a day this week but if we continue to get these ratios of hits to misses then we can certainly continue to stay bullish!
Later today we'll be watching BSX (we're long), EFX, ETH, FDG (we're short), HXL, LOGI, NBR, NVLS, ROH and TXN (we're long). Tomorrow morning it's AKS, T, BHI, BJS, BTU, EAT, CP, CME (we're long), COH (long), CFC, DD, ECA, FITB, HBAN, JBLU, KMB, LXK, LMT, MCD (long), NCC, OXPS, PAS, PH, RYN, SHW, SII, UAUA, UNH, WAT, WU, WYE and after the bell we see BRCM, CREE, FCFS, FBC, IBKC, NSC, ODFL, RJF, RHI, TER, TUP, XL, YHOO and YUM.
That just takes us through Tuesday! It's going to be a very exciting week but, with all this data, it may take a while for the market to digest the data so don't expect much today or tomorrow. Today we'll be happy to just hold on to most of what we gained on Friday. We are still looking for oil to ease off and for the dollar to rise off the floor, without those moves, even if we have good earnings for Q1, we won't be able to assume the consumer can hold up in Q2.
