Monday Market Movement – Are We Done at 1/3?

There it is!

The Nikkei gave up another 2.5% overnight and is now down 1,000 points for the month of July, retracing 1/3 of the gains since March 10th, at 7,000.  The Hang Seng also fell 2.5% (this is why we have rules!) but finishing at 17,254 is down just 1,750 points (10%) since July 1st but also represents a very neat 1/3 retrace off 7,650-point run to 19,000 from the March low of 11,500.  I hate to say I told you so (actually, it’s kind of fun sometimes) but the 2 full paragraphs I devoted to playing the FXP (ultra-short China) in Friday’s post are all huge winners, with the July vertical spread looking like a clean double already – how’s that for weekend protection?  Don’t be greedy, if we are not heading lower today in the US, it’s a good idea to kill the short-term trade and take the profits off the table.

On a global basis, we need to be concerned with this 1/3 retrace trend as the Shanghai has not gone down much at all off it’s 54% run from March.  The Shanghai Composite only fell 1% this morning and has miles to go to match the sell-off of the other indices.  Over in Europe, the FTSE is down to 4,125, falling from 4.500 in June (8.3%) after rising from 3,500 in March (28%) so, PRESTO, a 1/3 retrace there too!  The DAX is right on the 1/3 line at 4,600 and the CAC is right on the nose after rising from 2,550 to 3,500 (37%) and falling back to 3,100 (12.7%), just about 1/3.  Are we sensing a theme here? 

The Dow rose from 6,500 on March 9th to 8,800 on June 12th (up 35%) and is now back to 8,150 (down 7.4%) with about 5% more to fall before hitting the magic 33% mark.  Call 700 the floor on the S&P with 950 as the top and we have a 35% gain there as well with 880 being a 7.4% drop.  Wow, what a coincidence!  Only there are no coincidences, just quant trading programs that decide these things long before you read the paper and decide what stocks look good and bad…  The Nasdaq was our Icarus index, flying too close to the sun with a 50% move from 1,300 to 1,850 and they are down just 100 points which works out to 15.4% down, a 30% retrace. 

We’ll be watching the 1/3 line on the Nasdaq with great interest to see if it holds.  1/3 of the 650-point gain is 217 points and we arrive at 1,633, quite a ways down from 1,750.  Had the Nasdaq gained the same 35% as the Dow and S&P, they would have gone from 1,300 to – you guessed it: 1,750!  So the Nasdaq is holding the top of the range that the other indexes ran to.  If the Nas can hold 1,750, it will be a very good signal that the drop is over here.  Not to be forgotten, the NYSE ran from 4,300 to 6,200 (44%) and pulled back to 5,600 (9.6%) but, if we throw out the spikes up and down on the NYSE,we have a pretty neat run from 4,500 to 6,000, back to 33% there and the expected drop zone would be 5,500.  The Russell ran (non-spike) from 350 to 525 (50%) and has pulled back to 480 (8.5%) also a very good sign if they can hold it. 

Last week, Jesse’s Café Américain gave us this S&P chart which shows the various resistance points the S&P is meeting on both sides.  We were bottom fishing last week into the move down to the heavy resistance at 870 which, as I pointed out last week, is just about 10% off the spike high so we liked it for a bounce at least.  I’m no chart guy, my technicals are math-based on our 5% rule, which just happens to often agree with charts, but I think if you draw a line from the November support line at 800 to the 890 line that was holding when this chart was drawn, you’ll discover a hidden uptrend that I believe will be established as long as we get some reasonable earnings results.  That line would put us on a path to establish a new uptrend that could take us about 10% higher by the end of the year IF we can break through the top of the major downtrend in September.  That is, of course, a lot of ifs to get through so don’t mistake this for a gung-ho bull premise but we are keeping an open mind! 

For now, let’s just enjoy the ride as we have little upside resistance and a very heavy negative sentiment that can lead to a lot of bears getting caught with their pants down as it will be hard for the earnings news and economic data of the coming week to be as bad as what has now been priced in during the panic of the last 30 days.  As I said in my weekend post, this is simply the pullback we predicted when we went to cash after Memorial Day – we stuck with our plan and finally put some of our sidelined cash to work after 6 weeks of waiting.  If we don’t hold these levels, it’s easy for us to flip more bearish but, hopefully, we caught a good bottom and we’ll be pleasantly surprised by the week’s news.

We have plenty of data coming out this week as you can see from the Briefing.com chart:

Not too much going on today but busy, busy starting tomorrow morning with PPI, Retail Sales, and Business Inventories in the morning, allong with earnings tonight from CSX and NVLS and tomorrow morning from GS and J&J, followed by AIR, ADTN, INTC and YUM.  Wednesday morning we hear from ABT, AMR, SCHW, CBSH, GCI, NITE, TXI, WOR and GWW.  CSX will be very telling, they should have had a good quarter moving commodities around but the outlook is going to be key as commodities are tailing off and there is no uptick in building, supplies for which is another major part of what the rails move.  David at Oxen Group is expecting good things from GS and the whisper on the street is they are heading to another beat this Q so we’ll see.  Word is out already and they are gapping up pre-market so I wouldn’t chase them.

Bears are chasing the bottom with bets against the S&P 500 Index rising to the highest levels since April as investors shorted more shares of health-care, technology and financial companies.  Short interest on the S&P 500 increased to 10.01 billion shares as of June 30, a gain of 2.4 percent from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg yesterday. That’s the most stock sold short since April 15. Wagers against health-care shares (the ones Cramer was pushing) rose 8.1 percent, the most among 10 industries, to 962.8 million.

It doesn’t take much to force short-covering at these levels of bearishness, perhaps something like Goldman Sachs upgrading the tech sector or Atlanta Fed President Dennis Lockhart saying: "I see the economy beginning to recover in the second half of this year” like he did yesterday.  Even President Obama is on the case, using yesterday’s radio address to defend the stimulus, saying: "As I made clear at the time it was passed, the Recovery Act was not designed to work in four months – it was designed to work over two years.  We also knew that it would take some time for the money to get out the door, because we are committed to spending it in a way that is effective and transparent." 

We went into the weekend with lots of bullish plays, mainly hedged entries and we still have a long way to go before we get super-confident in the market but hopefully this week we’ll get a little bit of clarity and hopefully we’ll find that we are still in our predicted consolidation channel, not failing a breakout as the head and shoulders crowd would have you believe.  We have some speculative DELL calls in our $5,000 Virtual Portfolio, hoping GS still has some market mojo left after their bullish call on Friday and we intend to play some more earnings this week but not until we see how the morning goes.  We also still have our SGR play outstanding and all updates will now bee posted on Seeking Alpha’s "Stock Talk" section and you can sign up to follow the $5KP trading HERE. 

It’s a watching and waiting kind of day, we already made or bullish bets during last week’s panic so our finger is going to be on the short trigger if our levels are failed in the morning rally.  Last Monday was a fairly straight-up 100-point day but we gave it all back Tuesday and then some on Wednesday but that was all based on rumors, not facts.  With any luck, the truth shall set us free – or at least back to 8,650!