Yee-haw!
We love the smell of pullback in the morning. It smells like – victory! After extensively reviewing our bearish positions in this week's wrap up and after calling for cashing out our bull plays last week and after taking a whole bunch of short positions – I would have been in a very bad mood this morning had we gone up 150-points instead of down so forgive me for being pleased with myself.
Although we called the stick-save at Friday's close, even when I predicted it at 12:40 I said that: "getting back to there would be fake, fake, fake and failing there would be very bearish going into the weekend." In my closing Alert to Members at 4:04 I said: "12:42 targets were: Dow 9,350, S&P 1,005, Nas 1,990, NYSE 6,540 and RUT 570. We got 9,321, 1,004, 1,985, 6,537 and 564 so let’s hear it for the 5% rule and Mr. Stick, who’s program is playing our tune. This was, of course fake, fake, fake, so we still expect our sell-off next week." See, this stuff isn't too hard to follow – targets set at 12:42, targets failed at the close, stay short into the weekend…
Speaking of targets, our first downside targets, which we went over in last Wednesday morning's post, should be tested this morning at Dow 9,100, S&P 980, Nasdaq 1,950, NYSE 6,400 and Russell 550. As that post was an extensive discussion of levels and ranges we expect and is still fresh, I won't get back into into it here other than to say how mean you are for not using THIS LINK to get a free trial of the PSW REPORT (just 2 weeks left on summer offer) and then using THIS LINK to refer 2 friends and lock in your own discounts. We're starting a new $100,000 Virtual Portfolio this weekend and only members will get those trade live and I'll also be continuing the $5,000 virtual portfolio and it's a great time to start following now that we are back to cash there.
While we are nowhere near as bullish as Cramer (seen here in Thursday making fun of us for being too cautious), we are also not perma-bears. A nice sell-off here is not only long overdue but it's also healthy and, if we hold 80% of the move up since March, we're going to be thrilled to go long with a brand new Buy List. Our last set of buys, which were publicly reviewed in the July 11th Weekly Wrap-Up are so ridiculously in the money that we haven't even factored them in for covers as we expect all 11 buy/writes to be called away and our 7 straight buys are all covered or cashed from last week's call. 18 for 18 is pretty good for picks in a week when the media was calling for doom and gloom (the dreaded "head and shoulders" scare).
As I keep saying, I'm not flip-flopping, I'm rangey. At PSW we believe there are real values to stocks and that, over time, values will win out. What I said on July 11th is true today as well: "So I said Cramer was an idiot to be herding his sheeple into stocks when the Dow was at 9,000 and now I am saying Cramer is an idiot for stampeding the herd out of stocks at 8,000? Am I that fickle? Not really, I just believe we are in a fairly tight trading range." Now, Mr. Cramer, we are at the top of our range and it is prudent to take profits off the table rather than punch the buy button and make mooing sounds as you mindlessly follow whatever trend formed between lunch and 2:30.
Of course, to find the most ridiculously overbought stocks, we had to look down – all the way through the center of the Earth and out the other side to China, where last week we asked "Is China's Growth an Accounting Miracle?" and just this weekend, we featured Vitaliy Katsenelson, who said: "China GDP – Are You Kidding Me?" At PSW, we like to check the numbers behind the headlines. That's why a long FXP play (ultra-short China) has become the mainstay protection in our current $100,000 Virtual Portfolio – as we had expected China to lead the market correction in this cycle.
This morning we were not disappointed as the Chinese market took a hell of a dive, with the Hang Seng falling 756 points (3.6% and saved by the bell) and the Shanghai got whacked for 5.8%, it's biggest drop since Nov 18th, when the index was over 40% lower than it is now. Keep in mind that no single stock in China can lose more than 10% before it goes "limit down" so losing over 5% in a day indicates there were many, many stocks that were halted before they found a proper level. The Nikkei had a rough ride too, falling 3.1% this morning (328 points), erasing all of August's gains in a single session as the Dollar fell below 95 Yen again and the Yen hit month highs against the Pound and Euro as well as money scrambled back to the relative safety of Japan's currency.
“Everyone’s clinging to growth in the stronger economies such as China,” said Tim Schroeders, who helps manage $1.1 billion at Pengana Capital Ltd. in Melbourne. “If there’s a perceived hiccup along the way, it pretty soon flows through to much weaker share prices. We may have priced in a bit to much too soon.” Speaking of hiccups: Reports last week showed that Chinese exports dropped in July, lending fell, and investment growth slowed, while Australia’s statistics bureau said wage growth stalled last quarter as the worst global slump since the Great Depression drove up unemployment. Foreign direct investment in China fell for a 10th straight month in July as companies stalled expansion plans amid the global financial crisis, the Commerce Ministry said today. Isn't it interesting how many fund managers will get on TV saying China, China, China yet less and less of them are putting their money where their mouths are?
Boosted by the government's four trillion yuan ($585 billion) stimulus package, China, the world's largest steel consumer, recorded its highest iron-ore imports and steel production in July. However, economic data for the month showed signs of a slowdown in infrastructure spending and real-estate development, two areas that between them account for more than 50% of China's annual steel consumption. That could indicate that the demand for iron ore and steel in the second half may plateau or even decline. Commercial real estate and construction has also collapsed in Russia (the "R" in BRIC) and a recent visit by a Wall Street Journal reporter found most cranes idled. Stray dogs basked in the summer sun near gaping construction pits, and bored migrant workers stared from the windows of prefabricated temporary housing blocks. Alexander Pivovarov, an unemployed foreman asking around the site for work, said he'd been turned down everywhere. "Everything's at a standstill," he said. "Where has all the money gone?"
Europe is down around the 2.5% rule this morning (8am) but bounced off that line. UK home prices fell 2.2% in early August from the prior month, reversing the single month trend back up. Swedish retailer H&M reported a 3% drop in July sales as Euro–zone spending fell so fast that the EU had a 2-year high trade surplus – not actually a good thing under these circumstances. “We don’t believe that the underlying macro-economic fundamentals of the G3 economies, that’s Japan, the United States and the European Union, are sufficient for us to feel that from now we are going to have the beginning of a secular bull-equity market,” said Andrew Freris, senior investment strategist for Asia at BNP Paribas Wealth Management.
We discussed CNB's shutdown this weekend and this is a big win for BBT, who will make a nice buy if they take a hit this week, hopefully around $26. We're short on X (looking good per those construction articles) and OIH but we also know enough to take the money and run in this market (it is hurricane season). Oil hit a 2-week low in Europe this morning, back at $66 and September gasoline also fell 4% to $1.93 per gallon, the lowest since July 29th, when OIH bottomed out at our $100 target. “Commodities and the stock market have been building on good economic news,” said Bill O’Grady, the chief market strategist for Confluence Investment Management in St. Louis. “It’s clear that the markets can’t deal with any bad news.”
We will be keeping an eye on our trading range and I'll have a Big Chart Review for Members tomorrow so we can establish our watch levels for this segment. In our July 27th review, we set our sights on the 33% (off the top) lines for the top of this run and we made it over Dow 9,394, topping out at 9,437 on an Aug 7th spike. The S&P never had a chance of making 1,056, nor did the NYSE have a real shot at 6,959 (topped at 6,634) but the SOX did briefly beat our 308 target by 1 point while the Nasdaq fell just 2 shy of 2,017 and the Russell was briefly 3 points over our target of 574. These will continue to be our range tops, most likely until we get a major Transport rally back to 2,086 (now 1,870) and that's why we watch the Baltic Dry Index so closely (still holding our 2,750 line) as things need to go on ships before they go on trucks – fundamentals aren't that hard – it's just that they aren't quick and easy…
Keep in mind that, in this sell-off, we're not as concerned with what fails as what holds up. Hopefully we will be able to separate weak stocks from strong as we watch performance this week and it's the strong we are looking to invest in as we begin our new virtual portfolio next weekend. If we do hold our 3% lines, then the bullish uptrend of the 15% run from July 10th will not have been broken. We have a lot of Real Estate data this week with Building Permits and Housing Starts tomorrow along with PPI and Existing Home Sales Friday. The NY Empire Manufacturing Index was much better than expect at 12, out of last mont's -0.5 and miles ahead of analyst's guess at 5. PPI should be as depressing as CPI was so no going bullish until we get past that data and no going bullish at all if we fail our 3% levels as we look for 5% to hold after that.
