The Insightful Trader

Archive for March, 2009

US Government can’t Bail out the Banks, Fund the Stimulus, and Maintain the Dollar’s Status Too

by on Mar.29, 2009, under Editorials

     The latest Geithner bank bailout proposal is yet another giveaway to the banks at taxpayer expense.     We just don’t understand why Obama — who is, after all, Geithner’s boss — continues to give the bankers whatever they want. And what they want is to save their skins, even if they manage to destroy our economy along with the strength of the US dollar. All of which means, that if you don’t already own at least some gold, you should.

    If you want to understand what is happening here, you need to understand the politics as much as the finance. The politics began shifting the banks’ way when Reagan got elected in 1980, but the shift accelerated in 1998. That’s when Democrats got tired of being outgunned in fundraising and began courting the banks, and the last check on the banks’ ability to get whatever they wanted from Congress evaporated. As Matt Taibbi reports,  the banks then started sending campaign cash to Congressional Democrats as well as Republicans, and the banks got the deregulation they paid for. Congress repealed the Glass-Steagall Act, which had kept banks with insured deposits out of investment banking and insurance. They also got the Repulbican Senator Phil Gramm’s Commodity Futures Modernization Act, which exempted credit default swaps from regulation. Finally, they got the SEC to regulate with a light hand, or as one wag put it, an invisible hand, allowing securities firms to increase their leverage ratios to 30:1.

    So the banks own the whole political process? Well, not quite, thanks to Howard Dean’s 2004 campaign, which pioneered large scale fundraising from small donors via the Internet. Barack Obama improved on Dean’s strategy. Therefore, while Obama certainly raised lots of cash from Wall Street, he had proved that he could raise plenty of money independently of Corporate America and Wall Street too. Yet Obama acts as if the Street owns him. Why would that be?

    We can only speculate. It would seem that political strategist David Axelrod, whose relationship with the Obama goes back to the latter’s days as a local Chicago pol, lost out in a turf fight with White House economic adviser Larry Summers, who is a Geithner patron and helped preside over financial deregulation under President Clinton. It would seem that Summers needs to defend ande perpetuate his past policies rather than admit any errors. Summers has also seemed to marginalize Paul Volcker, who knows better than to advocate policy like this. And then as we have noted previously, a Buffett factor could be at work… 

    However they were decided, the continued bailouts are going to cost us; we just don’t understand how we can bail insolvent banks out (as opposed to shutting them down the way the FDIC traditionally does), fund enough economic stimulus to turn the economy around, and maintain the US dollar’s international primacy (which requires continuing demand for US Treasury securities). The US might be able to win two out of three but we don’t understand how the US could possibly win the trifecta. So far one-time events such as the repatriation of US investments in foreign countries have helped keep the dollar up, as have troubles in Euroland, which make the Euro look weaker by comparison. Over the long term, though, we wonder where the funding will come from, given that other countries are experiencing a slowdown in the growth of their official reserves.

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Sitting on the Sidelines May Be Getting Dangerous

by on Mar.26, 2009, under Market Commentary

Another great day. Both the Dow and the S&P were up over 2% again today after staging a vicious late day rally yesterday. The Dow gained another 175 points and the S&P another 18 to close at 832.86 The market gapped up this am, pulled back some at 10:30 and then proceeded to steadily climb the balance of the day with the exception of a rather weak try by the bears to take over in the early afternoon, which was quickly squashed. Metals were flat for the day, the dollar rebounded some and oil closed at $54.

So is it end of the quarter window dressing, short covering, funds worried about missing the boat; we’re not sure, but we’re loving the result. There are a lot of stocks that are up over 50% in the past three weeks and I think a lot of money managers are starting to feel the heat. Even though common sense and experience, not to mention longer term technical indicators all show that we’re in the middle of a bear market rally, if you’re sitting on millions and/or billions of dollars in cash, ie T-bills, you’ve got to be getting pretty nervous here. The higher we go, the more the pressure builds. Here we are now up for the year and if you’re sitting in cash, not a good report to send to your shareholders and clients in a few days. So despite the fact that we’ve got some serious resistance coming up here shortly at the 840 level, I think we could still feel some upward pressure till the end of the month.

Today was tech day in the market. Techs were on fire. INTC was up 6%, KLAC was up 6%, CSCO was up nearly 5% and even MSFT which has been trading pretty weak lately,  was up $.95. Solar stocks had an outstanding day also, with FSLR up over 20 points at one time though only finishing up 16 for a 12%+ move today. LDK was up 32%, TSL up 40%, JASO up 42% and SOLF up 42%. AG stocks had a good day also with most the majors being up about 6%. The financials finally took a little breather and were basically flat on the day. Oils had a pretty good day with the refiners, TSO and VLO , leading the way, while the oil service sector was flat and the coal stocks were up 3-4% on average. 

The general feeling has been to not chase this rally and wait for a pullback, but what if we don’t get one, or was the early afternoon selloff yesterday it?  Though not inclined to chase any stocks here, this sector rotation we’re seeing is a positive factor. As you can see from the chart below, we’ve got resistance  overhead that may cause us a stumble and we may have to take a breather day, but this market continues to feel pretty darn strong at this point despite being over-bought on some of the short term indicators.

spx-60min-26mar09

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Taking a Breather

by on Mar.24, 2009, under Market Commentary

The market took a small breather today after it’s incredible day yesterday, which was to be expected. Surprisingly, most the day the market acted exceptionally well until some late selling about 2:45 hit us. Overall the market was down 2% on the S&P and 1.5% on the Dow, which dropped 115 points.

Tech stocks were slightly weaker than most today with MSFT, KLAC and BRCM all dropping 2.5% to 4%. AG stocks were mixed with relatively small moves, as were the solar plays. Energy stocks, including the services, were mostly down on the day by a couple of percent. Precious metals started the day off weak and stayed that way all day with gold down about $25 on the day thought the gold stocks actually held up pretty well. The financials, the hot group the past week or so held up and in fact were doing well, until the final 2 hours when they came under some serious selling pressure. JPM seemed to be one of the the biggest losers dropping 2.46 while the BKX dropped 7.5%.

The dollar rallied some  starting it’s climb early this morning and was strong throughout the day, pushing the Euro back down to the 134.50 range. Big gainers today included SKF for obvious reasons and BIDU continued it’s upward move on some upgrades, though it too succumbed to some profit taking late. CME was the big loser today, dropping 27 points to basically give up everything it gained yesterday.

We’re in a pullback here. From the way the market acted most the day, not sure its going to be a big one. It seemed that every time we started to retreat today, more buyers came in. There were not a lot of good short opportunities today until the very end. Market just feels like it wants to go up, but as you can see from the chart below, we could easily pull back to the trendline, which isn’t that far away. I think most professionals seem to not be so intent on shorting here, as just waiting to buy until we get a pullback.

spx-60min-23mar09

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Buffett: We Will Muddle Through Even If We Change Next to Nothing

by on Mar.22, 2009, under Editorials

  So even Berkshire Hathaway (BRK) Chairman Warren Buffett didn’t believe that housing prices would fall from their peak. As housing crisis blogger Calculated Risk asks, “Hoocoodanode?”

    That’s the term CR coined when he got sick of hearing that housing prices would keep going up no matter what. Or when people said that liar loans would pay off because housing prices just couldn’t fall. Or that if you aggregated lots of liar loans into mortgage backed securities, you could legitimately rate them AAA. Or that if housing prices fell, it might happen in a very few selected markets, but not across the country. Or that our financial problem was “contained” in the relatively small sector of subprime lending, and hoocoodanode that panic was in the making?

     We say all this, not to pick on Buffett, who has forgotten more about investing than we expect ever to learn, but to illustrate how deep denial still runs among those who run this country. And THAT’s scary. While Buffett certainly knew stock prices were overvalued in 2007, and kept extra cash on hand at BRK just in case,  he underestimated the financial crisis when it broke.

     What throws us  is that Buffett — and probably most of his peers — apparently live in a country that no longer exists. In Buffett’s America, Republicans might actually pull back from undermining Obama if Democrats don’t  “point fingers” of blame or use the crisis to enact legislation that Republicans don’t like. Not only that, Buffett’s America remains a land of opportunity where smart people come from all over the world to build new businesses and first class innovations that make us better competitors than all  the rest. That’s why he seems to think that if we just bail out sick banks the economy will rebound and all will be well.  (Okay, Buffett did say that banks need to get back to basics rather than marketing risky derivative securities, so I am being little harsh. But not by much.)  This thinking is so outdated and contains so many fallacies it’s hard to know where to begin, but a writer can start, can’t he?

    First, today’s Republican Party will not support a Democratic commander-in-chief short of a World War II style military attack on America. Led by Newt Gingrich, the Republicans regained control of Congress in 1994 simply by blocking health care reform. Gingrich knew as well as anyone that many Americans had no health coverage, and that medical costs were getting out of control. He also knew that US corporations had higher costs than foreign counterparts because US companies often pay for at least some of their employees’ health coverage, but in all other advanced economies, the government pays for health coverage. Rather than work with Democrats to enact or improve on the Clinton plan, Gingrich made sure that a Democratic administration would not get credit for solving an important problem. The Republicans learned in 1994 that opposition for opposition’s sake can win elections even when it hurts the country, and they won’t change now. That’s why Rush Limbaugh, the Republican Party’s most prominent spokesman, said that he wants Obama to fail.

    Second, we wonder what legislation Obama is considering that would gratuitously provoke Republicans, according to Buffett. CNBC didn’t ask during the March 9 interview, so we are going to guess that he refers to the Employee Free Choice Act (EFCA), and to health care reform. We believe that both of these would actually help the US recover from the economic crisis. EFCA would make it easier for workers to form unions, and as we stated some weeks ago in “The Big One Time Gain,” allowing American workers to earn more money might help them buy more American products. As Buffett knows, the 1935 Wagner Act, which established basic rights to collective bargaining as well as the National Labor Relations Board, was an important part of the New Deal and helped build the widespread prosperity that postwar America enjoyed. And as stated above, we believe health care reform would enhance US business competitiveness. Even Wal-Mart, which has long been known for tough employee relations practices, now supports health care reform. 

    Thirdly, Buffett’s ban on finger pointing effectively means, no investigative commission on Capitol Hill to find out what went wrong with our economy or how we need to fix it. That’s not only bad policy, it ignores history that Buffett knows well. In the 1930s, the Pecora Ccmmission uncovered dishonest Wall Street practices and its investigation led to the establishment of the SEC.  We have to wonder how Buffett could have had his career without the SEC, which forces companies to disclose audited financial statements and other data about their businesses, in annual and quarterly reports. Buffett spends most of his days reading SEC filings and that makes him the renowned stockpicker he is.  Does Buffett really think that we don’t need to know why we find ourselves in the crisis we are in now? The mind boggles.

    Fourth, America just isn’t the talent magnet it used to be. We let foreign graduate students come to our world class universities, and make it hard for them to get permanent resident status so they can stay here legally. That’s just dumb. Many of them would do brilliant work for US companies, or found their own innovative companies here. Instead they go back to where they came from and benefit their home countries. American business supports this stupidity too. US tech firms are strong advocates of the H1-B visa program, which allows a US company to hire foreign technical workers temporarily. In other words, they bring foreign scientists and engineers here, give them first rate experience, and send them home. What kind of policy is that?   

      No recitation of this problem would be complete without mentioning just how badly, post 9/11, the US treats suspected illegal immigrants. Even Fox News reports on how we deny suspected illegals due process and herd them into detention centers with inadequate health care.  No one denies that immigration laws should be enforced, but it is un-American to abuse suspected illegals before proving them guilty. And why abuse even the guilty? Simple deportation home, along with humane treatment, would suffice for those who should not be here. And how stupid to send abuse victims back to countries all over the world so that they can tell others how badly we treated them and stain our reputation. What is wrong with us?

    We could go on, but let’s just mention point five, the proposed bailout of Detroit’s Big Three. Buffett mentions the usual claptrap about having both business and labor make some concessions but what would scrapping excess manufacturing capacity to match demand really accomplish? In addition we must make sure that Detroit uses the innovative thinking that is already out there so that it can produce energy efficient vehicles and leapfrog  foreign competition. Otherwise Detroit will just die a slower death by making fewer bad cars.

    We have long been frustrated by Detroit’s failure to listen to physicist and McArthur laureate Amory Lovins, who in the 1990s figured out how to make cars several times more fuel efficient than they are now. Just as stupidly, GM recently spurned innovative Israeli solar electric car technology. We don’t know that the latter would work, but doing the same old thing has put GM in danger of bankruptcy. Why not try something different?

    So, we agree with Buffett that America’s best days could — could — be ahead of it, if we confront our problems honestly and rediscover the Yankee ingenuity that made us prosperous. But wishing will not make it so. Neither will blind nostalgia.

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Dollar Plunges – Gold Screams Higher on Fed Move

by on Mar.19, 2009, under Market Commentary

The dollar made one of its largest one day drops ever as gold, on the verge of breaking near term support earlier in the day, rebounded over $35 on the Fed’s surprise move yesterday. The Fed’s move to throw another $750 billion into the mortgage market, as well as to announce they were definitely going to be purchasing treasuries, after jaw-boning about it for months had some serious implications in the markets.

The Fed, in effect, is saying that they’re not worried about inflation at this point, if ever, and that lower rates are here to stay for awhile. The dollar propmptly dropped nearly 500 points against the Euro almost ieurusd-30min-18mar09mmediately (see chart).

 

 Gold meanwhile ,which was down nearly 4% prior to the announcement was almost 3% HIGHER after and silver, which had been down 5%, ended up approxiately 1% higher. So some absolutely huge moves in the currency and precious metals market. Pity the traders that took late lunches yesterday because the reaction was swift and deadly if you were on the wrong side of some of those markets. Seems there is some concern amongst the Fed that perhaps things weren’t recovering or looking good enough for the end of the year. Perhaps we should have done a better job of interpeting Bernacke’s comments on his TV interview when he said he saw the economy recovering by year end. He forgot to mention that he was planning on bringing a loaded gun to the meeting that the rest of us didn’t know about.

The stock market response was rather muted compared to the other markets. After being down initially in the am after a spectacular day prior, they gradually climbed the rest of the day heading into the release. Once the release was made, we had 3 violent moves, first up, then down as profit taking ensued, and then back up to close +90 on the Dow. Once again the financials were huge winners and why not. The Fed is giving them a license to print money, and that may be the main tactic here, to let them earn their way out of trouble, much like what happened in the South American debacle in the 80’s. Many of the financials, including the XLF were up in excess of 10% after the announcement. Hell, even AIG was up 40% and C closed up .69 which is a lot on a $3 stock and FRE and FNM were two of the biggest gainers percentage wise, both up about 80% on the day. GS, which had been langusihing all day, spiked up nearly $6 to close at its highest level since October. Of course the big losers on the day were SKF and FAZ which both got hit for about 20% of their value.

In other market news, the techs were again strong with IBM’s announcement of interest in acquiring JAVA, which was up in excess of 50% as a result. The SMH had another good day as did BRCM, INTC and KLAC. Oil and drilling stocks continue strong as oil is close to taking out resistance at the $50 level. FSLR had a glowing day, up nearly 10 points for awhile before succumbing to some late profit taking and PBR, one of my favorites, continues to climb, up nearly 100% now since its low in late November.

Now the fun part begins. As I stated a wek or so ago, the 800 level on the S&P is our first real resistance level, and its notable that we hit an intraday high yesterday at 803 before closing at 794. The short term bulls definitely have the bit in their teeth, I thought Cramer was going to have the big one he was so enthusiastic about the Fed’s moves. So it’s going to be real interesting to see what happens the next few days. This low 800 level is pretty formidable resistance and I expect we may get a slight pullback to gather some re-inforcements before we can storm over it. But in a rapidly becoming government controlled market, who knows, we may gap right over, but I think not. I’m still bullish for the short term, but as I’ve said several times, it’s not going to be a smooth ride.

spx-daily-18mar09

 PS: An updated currency chart from early this am and gold chart:

euro-updated-19mar

gold-19mar09

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Market Sputters

by on Mar.16, 2009, under Market Commentary

The market made a choppy but steady climb today until about 1:30 when it peaked at the 775 range on the S&P, while the DOW was up 150+ points at that point. It was too much too fast, and serious profit taking set in for the last couple of hours of the day. Techs were a drain on the market all day with AAPL and the Q’s selling off from the start aided by a downgrade on SNDK,  as well as weakness in INTC and MSFT, before attempting a noon recovery which just got them back to end before the late afternoon slam.

The Ag stocks had a good day led by MON +3.62 and energy stocks did as well, up soundly across the board as oil was up slightly.  Opposite of Friday, the solar stocks wanted to sell all day with FSLR getting whacked for about 6 points in the after-market as I write this. The morning move up was once again led by the financials until the pm selloff, when they rolled over hard, led by the remaining brokers, GS and MS. Percentage wise C and FNM were both up about 30%, but are still penny stocks. There were some great afternoon short trades if you were nimble. Precious metals were slightly lower on the day. The net result was the SPX down a couple of points and the DOW down 7.

After hours AA cut its dividend to $.03 from $.17 and announced a large stock offering, which  dropped it about a point so that could cause us some additional weakness in the morning hours. Permabear N. Rubini called the recent move up a ‘dead cat bounce’. As I stated in the weekend report, we were getting over-bought in the short term despite being extremely oversold on the weekly and monthly charts. I took my own advice and sold most my longs in the move up this morning and in fact put on a small short position with some Q puts.

We need to see the S&P not break too far below the 740 level, but as shown, we have some horizontal support at the 730 level with even more  at the 710 area with our original up trend line. As you can see on the chart, the steep move up was unsustainable for much longer, just too steep. As we approach these support areas I’ll be watching the market closely to see if we can initiate some long positions again.

spx-15min-15mar09

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Did Buffett Spark the Rally?

by on Mar.15, 2009, under Editorials

      We think Berkshire Hathaway (BRK) chairman Warren Buffett may have lit the match that set the market on fire during his CNBC interview this past Monday, March 9 when he called for a suspension of mark to market accounting at banks. He also said that regulators should not hurt bank shareholders by asking banks to raise capital at today’s (or Monday’s) low prices. He thereby gave cover to the idea that we should let banks “earn their way out” of trouble, presumably under the cover of government guarantees. In other words, we shouldn’t worry how much money taxpayers spend on bailing banks out, and taxpayers shouldn’t care about getting anything out of banks in exchange for TARP funds, Treasury guarantees, or extraordinary Fed loan programs. As long as the Fed can keep short term rates low the banks will have a low cost of funds (such as the 1.44% average cost of funds enjoyed by Wells Fargo in 4Q2008), earn big operating profits, and cover the cost of any writedowns, his argument goes.

    Citigroup (C) head honcho Vikram Pandit understood Buffet’s meaning immediately. On Tuesday he issued a memo  touting C’s quarter to date performance. Of course, C’s profit numbers for the first two months of a quarter conveniently omit any writedowns C may need to take at quarter end, but no matter. The memo leaked promptly, natch,  provoking  traders to buy the oversold conditions noted so clearly in this site’s Daily Commentary two weeks ago. Apparently, traders figured that if banks won’t have to tell the truth about their assets, the writedowns will stop, and they will report wonderful earnings. And on an accounting basis, they might well be right. Therefore, it was  time to buy bank shares — and everything else.

    The party continued on Thursday with hearings on accounting standards at a subcommittee of the House of Representatives  (h/t, Naked Capitalism). Although SEC chair Mary Schapiro said she has “no plans” to suspend mark to market accounting, it would seem that  Banking Committe chair Barney Frank and Rep. Paul Kanjorski (D-Pa.) will get the accounting standards loosened eventually.

    We emphasize Buffett’s role because until last week he was a powerful advocate of realistic accounting standards. Indeed, in one of his annual letters to BRK shareholders some years ago Buffett went so far as to say that he reports his own mistakes scrupulously because “If you lie in public pretty soon you start lying to yourself,” or something close to that effect. Suspending mark to market — depending on what rule the Financial Accounting Standards Board eventually writes– could allow banks to lie to shareholders and everyone else about the value of the assets they own.

    In earlier comments, neither Frank nor Kanjorski seemed to be advocating major changes in banks’ accounting standards. Did Buffett’s change of heart  influence them? BUffet’s change certainly made it easier for Congress to cave in to the banking industry lobbyists who really want this one. Maybe one day the MSM will ask.

    We don’t know why Buffett changed his opinion, but we can hazard a guess. Berkshire has large holdings in several banks, such as Wells Fargo(WFC), and recently bought preferred shares in Goldman Sachs (GS), and  General Electric (GE), which has a large financial division. Before the open on March 9 when Buffett spoke to CNBC, the Dow stood at 6,627,  there was plenty of fear in the market, and indignation was rising about how the AIG bailout was effectively funnneling government money to counter parties of AIG, including GS. Buffett must have been sorely tempted to do something to protect BRK’s financial shareholdings. Suspending mark to market would certainly give him some breathing room.

    Much as we hate to disagree with Buffett, we fear that ending mark to market could hurt the United States badly over the long term. Certainly some banks will be able to earn their way out of their problems — we explained how in the bull case we gave for Bank of America (BAC) two weeks ago. On the other hand, we think that the weak banks will continue to bleed the Treasury and the Fed until they are shut down, and the longer we delay the worse it will get. We expect house prices will continue to fall and that will pressure the real values of banks’ housing related securities, no matter how they choose to account for them; we also expect banks to take additional losses in areas such as credit card portfolios and commercial real estate loans. Under these conditions reduced transparency will breed only more distrust, as lenders and counter parties begin to fear that the government will eventually run out of patience — or money — to keep propping up the sick banks. As far as we can see, Buffett’s plan works only if the economy turns around far more quickly than we expect.

     Furthermore, by keeping weak banks open under existing management we are encouraging the very people who got us into this mess, to take more and more risks with public money in order to earn the profits they so desperately need. Heads they win, and they get to keep the profits. Tails the taxpayers lose. In additon, as long as the government props up weak banks, prudent banks will find it harder to compete. Japan propped up its “zombie” banks for years and that was a big reason for its “lost decade.” Better to decide all at once which banks are insolvent, have the FDIC close them down, and return them to private ownership as soon as possible after cleaning up the bad assets. Too bad it’s not going to happen that way.

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Simple Trendlines – One of Your Best Trading Tools

by on Mar.15, 2009, under Education

Traders of all types, whether they be intraday day traders, swing traders or even long term traders all have their favorite indicators. This is true even if they’re fundamentally inclined, much as I often am. I have friends who have charts with so many indicators in different time frames on them that you can barely see the candles. Indicator lines going everywhere in all directions.

Today’s computers with incredible computing power, not even imagined just 15 years ago and the readily available high speed internet,  let most anyone have a wealth of charts and indicators on their screens. As one of the old school, I can easily remember when all we had was a ticker and quotron machine that took up half your desk and no one was even dreaming about what’s available today. As a budding trader somewhat technically inclined, it was a big day when the new chart booklets came every month so you could draw new lines in them. And forget anything shorter time spanned than a daily chart

In those days if the stock price was above the 200MA you were bullish and if below you were bearish on the stock in general. If you were so technically inclined, and willing to work a lot of hours doing it, then you brought out your straight edge and pencil and quickly learned to draw lines on your new charts. Little 6 inch rulers worked best because the longer ones were tough to use because of the page binding in the books.

As more an more things became available, traders of all sorts quickly migrated to new technology and more and more exotic tools. The one thing that all traders like almost as much as a winning trade, are new toys, especially if perceived to give them an edge. In 2007 there was worry that there would be a serious shortage of mathematicians because all the good ones were either getting hired or starting hedge funds, each competing with more exotic and esoteric trading strategies. As is pretty obvious these days, where were they and their supecomputers in calling the top and getting everyone short, or at least out of their longs.  Whereas anyone with a straight edge, electronic or otherwise, would have lightened up, if not at 1500 then most definitely by 1400 using a simple trendline.

I’ve tried a wealth of various indicators over the years, and as each of us, have my favorites, which by the way I have reduced to just a few over the years. However, my single most favored and unquestionably most reliable is a simple trendline. Invariably if I trade against them, it comes back to bite me more often than not. The great thing about trendlines is that they work equally well in all time frames, whether it be a 1minute chart or a 20 year monthly.

Trendlines are not necessarily going to get you in at the absolute bottom or out at the very top, though an intial break of one can often come very close, in many instances, but they will surely get you in or out in time to capture the majority of the move. I’m not going to give you a course in the basics of how to draw here, you can get that anywhere, but I do encourage you, no matter what time frame you invest or trade for, to add to your arsenal. It might be the simplest and most effective tool you’ve ever used.

spx-10year-weekly-13mar09

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American Express(AXP) Good for Quick Pop

by on Mar.15, 2009, under Trade of the Day

Towards the end of last week the S&P was pushing towards a major support area in the 650-665 area as reiterated in my daily commentary. As most of you know, everything has been hurt the past nine months, but especially the financials. The last few days of last week we saw some increase in the volume in certain financial stocks as it seemed as everyone was throwing in the towel on them. Watching for a pickup in volume and what I like to call a waterfall or free fall in the price of a stock can often be an alert that at least a short term bottom is near.

Of course one of the problems is that often you’re not quite sure from where. Below are the charts from both the BKX and AXP for the past few months. Notice the volume bars on AXP from mid February. No huge spikes, but definitely an increase for a couple of weeks. As you can see in the first AXP chart, it had fallen from the 40 in just the past 6 months. Often times major whole numbers such as 20, 10, etc will act somewhat as support points. Of course, it’s not unusual for the stocks to undercut those prices slightly, to pick off all the stops people have placed just below, a lesson that all new traders soon learn.

The heavier than usual selling of the financials, including AXP, along with the $10/ share psychological level aligned with a major support area in the market converged to give what I like to call a reasonable expectation of a successful trade. However, as I suggested to some friends I trade with, the safer play was to buy AXP under $10 and to write some July 10 calls against at least part of our position for $2.50. That way, in case we were wrong, we had downside protection to $7.50 on AXP  or maybe higher, depending on what % you wrote against, and if it went up and we got called away we still made 25% on your money in 4 months as long as the stock was still above $10 and we’d see what happened on the stock we didn’t write against. So far it has worked perfectly. The stock has rebounded  30% in a week so we’re up that much on the stock we didn’t write against and feel pretty good about even the rest that we did write against. It’s always easy after the fact to look back and say, I wish I hadn’t written the calls against any of it, but I like to remind everyone of the Rule of 72. A 25% return in 4 months is not bad in any market and a 30% gain in a week is fantastic. I’ll gladly take either these days.

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A Needed Day

by on Mar.15, 2009, under Market Commentary

We had a needed day Friday. Some expected selling  thru the morning,  and then a nice steady build throughout the rest of the day. A lot more of a mixed market today however as tech was mixed though the semis did ok, MSFT was still a drag. Financials were mixed with the brokers acting well but most everything else pretty mixed, a few up and a few down. Oils and coal stocks pulled back slightly overall, while precious metal stocks were all slightly up.

You would have thought the weakness in the other energy stocks would have transferred to the solar stocks as usual, but instead most had a decent day led by FSLR which finished the day up about 3points to cap a spectacular, nearly 25point move, this week. The Ag stocks were slightly down on the day. So a very mixed bag today but not bad for a Friday the 13th.

I’m still optimistic for the next few months as were way oversold on a historic basis and of course all the pundits who last week were calling for new bottoms much lower are all bullish now. However, realize that I look for this to be a choppy ride with some backing and filling along the way. We’re still in a major, perhaps long term down trend and until proven otherwise, this is a bear market rally. As promised, here is a one year daily chart with the fib lines drawn in going all the way back to the high in Oct 2007. 

I realize its hard to see this big of a time frame on such a small chart so here are the key levels. Our first major resistance is going to come here shortly, at the 800 level as we have both horizontal and a down trend line in that area. The first fib resistance comes in around the 880ish area, and then after that the 38% fib comes in around 1015. At some point before then we’re going to run into the critical 200ma before we hit there. So for the relative near term, getting back over the 800 level will be enough, though I have a sneaky suspicion it may take us a couple of tries if it can even do it but let’s hope. Even a few good months would perhaps help the psyche of the country.

 Hard to believe its been 18 months already since the market started rolling over. Of course the problem is that 80% of the selloff has come in the past 9 months. The continued worldwide slowdown doesn’t portend well for companies earnings this year and their is much debate over what the real P/E of the S&P is and will be this year, not to mention where real bottoms are made. All I can tell you is watch the charts, unlike companies or CEOs they don’t lie.

spx-daily-13mar09

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