You could call Friday’s action an exclamation point to one of the wildest weeks of intraday reversals I’ve ever seen. With about 30 minutes to go of trading, the market was dead in the water with volume picking up and the indices right on the verge of taking out the lows of the day. We had already taken out support of those wedge formations I’ve been discussing which was critical to staying away from the possibility of testing the January lows. The only way we were going to avoid serious technical damage today was some kind of end of day miracle rally. I have to admit, given the trading of the past week it was in the back of my mind. But nothing like this. There he was, Charlie Gasparino of CNBC mentioning a rumor of an Ambac bailout plan that was imminent (Monday or Tuesday of next week).
.. and here we go again. It led to a 250 point reversal in 30 minutes. Suddenly, the short positions I had put on earlier in the day didn’t look like such a good idea! In 30 minutes, the market changed from one on the verge of another big break down to one in a state of uncertainty. As has been the case for much of the past 8 months or so, good technical and fundamental analysis has given way to rumor, Fed speak and news driven rallies. It remains an incredibly difficult environment to trade and one that I have to continue to recommend staying out of for now. You’ve seen how difficult it has been for me to pull profits out this year and I eat and breathe this stuff while trading for a living.
I liked what one member said in an email to me: "It feels like skill is being replaced by luck." So true. Of course there is luck involved to successful investing, but it seems much more so in recent weeks. There will come a time when new leaders emerge and the rumors, Fed speak and big news headlines subside. When the technicals matter and patterns become more predictable. When that time comes, there will be extraordinary profit potential. Take this time to watch and learn. Maybe read that investing book you’ve always wanted to read, study the tutorial here and the nearly 4 years of Stock Watch report archives to get an idea of what a great looking chart looks like. Keep your watch lists up to date (the Hot Stocks screen here at Self Investors is a great place to start!). Be patient but prepared.
On Friday, Don Worden of Telechart summed up the recent action so well in his notes:
"There is an old saying you seldom hear anymore: "The market knows." It is generally uttered in kind of a spooky, ghostly tone. But it would mean the same thing even if somebody like the late Judy Garland were belting out the ghostly lyrics. It means that the market is clairvoyant. It often behaves in a way that convinces traders it must have known all along what was going to happen.
It is something the market has repeated very often–over the years. And nobody has ever been able to explain it, although many think they know. However, if I know anything about ghosts, they are very "shut mouthed." They don’t give away many secrets. I think it’s possible that I’ve never encountered a market that lacks intuitive insight to the degree this one does. It’s clear the market spends most of the time bewildered these days. This obviously means the ghosts themselves are confused. Maybe they went on strike with the writers and are refusing to come back.
In the meantime, the rest of us mortals are forced to think for ourselves. All we can do is try not to lose money until the market or the ghosts lurking about make a mistake and inadvertently drop a clue.
That was an impressive move during the last half hour today. The problem is that was an ominous move yesterday. And a bullish move the day before that. And so it’s been. Each day the market puts on a show for us, delivering a believable clue that soon falls apart–or more often is just forgotten. "
Let’s turn to the charts. Perhaps they provide us with some clues (or not!)
Like all the indices, the Nasdaq too was left for dead heading into the last 30 minutes of trading on Friday. It broke down below the wedge formation in convincing fashion before staging that massive late day reversal. Notice how it just got back to the point of resistance/support of that bottom short term trend. Are we bearish or bullish here? It’s just damn tough to tell at this point. We do appear to be breaking down in the short term but with the bulls having an outside chance to still break out from the top of the wedge, given Friday’s high volume reversal. It’s entirely possible that Friday’s lows just marks the bottom of a wider triangle formation, but at this point I have to give the nod to the bears. It took a massive rally based on speculation of a deal getting done with Ambac and a whole helluva lot has to happen for that to work out. With all of the deteriorating economic news and rising inflation, the bulls are pinning their hopes on a bail out of bond insurers. The bulls have legs to stand on, but I’m darn certain it’s less than 4.
Notice that the S&P really took out that wedge on Friday with the massive rally just getting it back to resistance of the wedge. It just looks like this market is going to need to see a massive follow through very early in the week next week for Friday’s move to mean anything. Again, Friday’s lows could just mark the bottom of a much wider wedge formation, but regardless, we’re going to need to break out of the top of the formation to avoid a retest of the January lows.
The Dow looks better than the S&P and Nasdaq do and was able to get back inside that wedge but lets remember that the Dow isn’t the best representative of the overall market.
The bottom line is that this market remains a big uncertainty with no trend, little leadership (commodities) and a flurry of upcoming important economic events (PPI, GDP, housing numbers). Not to mention a speech from Bernanke on Thursday to contend with. This market is probably ready to explode very soon, but which way remains to be seen. It’s best to stay out until a firm sense of direction is resolved.
::: Model Portfolio :::
** This section will now appear as a separate report to be published every other Wednesday.
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::: Best/Worst Performers :::
– Top 10 Performing Industries For the Week –
1. Internet Service Providers: 10.75%
2. Steel & Iron: 8.15%
3. Wholesale – Other: 7.80%
4. Aluminum: 7.60%
5. Copper: 7.25%
6. Gold: 7.15%
7. Technical Services: 6.05%
8. Meat Products: 6.05%
9. Heavy Construction: 5.95%
10. Diversified Computer Systems: 5.75%
– Top 10 Worst Performing Industries For the Week –
1. Toy & Hobby Stores: -7.65%
2. Sporting Activities: -6.70%
3. Consumer Services: -5.75%
4. Apparel Footwear: -4.95
6. Rental & Leasing Services: -4.65%
7. Manufactured Housing: -4.50%
8. Personal Computers: -4.25%
9. Drug Delivery: -4.20%
10. Security Software & Services: -4.20%
– Top 5 Best Performing ETFs For the Week –
1. Herzfeld Caribbean Basin (CUBA) 22.35%
2. Market Vectors Steel (SLX) 7.60%
3. Asa Gold (ASA) 7.40%
4. Ishares Brazil (EWZ) 7.30%
5. Market Vectors Gold Miners (GDX) 7.15%
– Worst 5 Performing ETF’s –
1. HOLDRS Telecom (TTF) -6.20%
2. Ishares Telecom (IYZ) -5.45%
3.
4. SPDR Biotech (XBI) -4.80%
5.
This section will now appear as a separate post on Mondays (if there are some interesting IPO’s coming to market).
While 2008 should be a much slower year for IPO’s considering the deterioration of the market, there will continue to be some good companies coming to market here and there. I’ll be highlighting the best IPO’s every Monday.
::: Upcoming Economic Reports (
Monday: Existing Home Sales
Tuesday: PPI, Consumer Confidence
Wednesday: Durable Orders, New Home Sales, Crude Inventories
Thursday: GDP, Initial Claims
Friday: Personal Income/Spending, Core PCE Inflation, Chicago PMI
::: Earnings I’m Watching This Week :::
Monday:
Henry Schein (HSIC), Donaldson (DCI), Focus Media (FMCN), LDK Solar (LDK), Shanda Interactive (SNDA)
Tuesday:
China Fire & Security (CFSG), Foster Wheeler (FWLT), Home Depot (HD), Internet Gold (IGLD), Natus Medical (BABY)
Wednesday:
Amedisys (AMED), Toll Brothers (TOL), LifeCell (LIFC), Central European Distribution (CEDC), Ctrip.com (CTRP), Flowserve (FLS), Gmarket (GMKT)
Thursday:
Arena Resources (ARD), Chart Industries (GTLS), Flour (FLR), Rowan (RDC), American Intl (AIG), China Finance Online (JRJC), China Medical Tech (CMED), Comp Vale Do Rio (RIO), Deckers Outdoor (DECK), Grant Prideco (GRP), Hansen Natural (HANS), Heico (HEI), SW Energy (SWN)
::: In Case You Missed It – SelfInvestors Blog Entries of the Past Week :::
1. Goldcorp (GG) Breaking Out After Blowing Out Estimates, Vasco Data (VDSI) Crushed Again
2. Axsys (AXYS) Breaks Out to All Time Highs, Suntech (STP) Blinds Solar
3. The Coal ETF, Gold / Agriculture Topping? Time to Play Financials / Homebuilders?