Finding Morning Mavericks
- Look for green on the screen after a big down opening. Stocks that don’t respond to early selling pressure may stay resilient for the entire session.
- Pull up an index component list, and look for the leaders in a down market and laggards in an up market. This method works especially well on the Dow Industrials, because of massive daily rotation by index players.
- Sort a list of forty sectors and exchange traded funds after the first hour and see which are bucking the tide in that session.
- Make a list of tier one broker upgrades on a down day or downgrades on an up day. These issues often attract a ton of contrary capital.
- Find out which sectors were unusually strong or weak in the Asian and European sessions. Then focus your attention on similar groups trading against the morning tide.
Yo-Yos
Reprinted with permission from The Master Swing Trader Toolkit Alan S. Farley McGraw-Hill 2010 All Rights Reserved.
There are three types of traders in this world: winners, losers and yo-yos. It doesn’t take much effort to comprehend the virtues of winning or the liabilities of losing, but what exactly constitutes a yo-yo trader? Quite simply, these folks know how to make and lose a ton of money, sometimes all in the same day. Sadly, yo-yos comprise such a large segment of the trading population they may represent the silent majority of the financial markets.
This common affliction is simple enough to understand. Many traders develop enough skills to put on profitable positions with relative ease but they also play all the stinkers, paying the price with substantial losses. In this bipolar purgatory, there’s enough positive reinforcement to keep them in the game for years, but not enough profit to make a real dent on their bottom lines.
Yo-yo traders emit two very different profiles. The first type grinds through mediocre results on a daily basis, hoping that lightning will eventually strike. The second type shows profitable results over long periods, only to crash and burn in an orgy of bad trades over equally long periods. All traders display both incarnations of yo-yo performance, from time to time, during the course of their careers. The trick is to recognize its onset as early as possible and to engage in prophylactic practices that will reduce the inevitable damage.
Two major flaws lead to yo-yo trading performance. First, the afflicted individuals lack effective risk control techniques. This causes them to act inappropriately, or not at all, when positions move against them. Unfortunately, operant conditioning kicks in at the worst possible time because they’ve gotten bailed out often enough to believe the market will come back in their favor, if they just wait it out. Of course, the math fails to add up and bad karma takes over, with rising losses and dwindling profits.
The second flaw reveals a far steeper challenge to long-term survival. Their equity growth actually tracks the market and looks like an index chart. In other words, these yo-yo traders make money when the broad market is rising and then lose it when its rolls over, and starts to sell off. This is a tough proposition because the secret to long-term success is holding onto your winnings through all kinds of markets. This major defect exposes a bull market mentality that reaps destruction during pullbacks, corrections, and every downdraft in a typical week. Unfortunately, it’s also how most traders play the markets because it follows an unconscious mindset that gives legitimacy solely to uptrends, while it assumes that all other environments are aberrations or freaks of nature.
This mental mistake reveals the primary reason so much money was lost after the March 2000 and July 2007 tops.
Machines
The market-making system itself failed on Thursday. That’s a major subset of the algorithms. In any case, this selloff was NOT kosher. Even in 2007 and 2008, the “orderliness” was light years ahead of what we just witnessed. The Nasdaq-NYSE 60% threshold for busted trades is a joke. They are total cowards for not facing up to the massive system failure. The usual bust level is 10%, which has been in place for years. I’m sure the whitewash will continue and this will fade away.
No sour grapes here. I had a normal day and even made a quick 16 points on Apple. I’m sure other traders “killed it” but even more folks lost a fortune due to panic selling at ridiculous prices and to logically placed “deep” stop orders that were designed to keep them safe, in case of a new “9/11″. Wiped out a years worth of profits, or worse.
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The dollar is mostly higher against the major foreign currencies today. The market awaits the ECB meeting. With the pressures continuing in the beleaguered Meds, the ECB is looked upon to act. The most likely course is 1) reassuring words and 2) renewing some liquidity facility as the funding tensions are evident in the money markets. Sovereign bond purchases and/or forcing Greece out of the club seem like non-starters, contrary to market chatter.If the ECB’s press conference, beginning around 8:30 EST, is successful, the euro can stabilize. If not, the risk is another day of sending the euro lower and encouraging the risk-off trades (selling equities, EM, commodities, buying dollars, yen and Treasuries). The Swiss National Bank, which has held the euro-franc cross steady this week through what is believed to be large-scale intervention, appears to have stepped away from the market today, and the franc rose dramatically, like a beach ball that has been held under water. A 0.9% rise in the April CPI, a much larger-than-expected monthly increase, may have encouraged the SNB to change its tactics. It should not be surprsing to see it simply regroup and intervene later –even if not today — at stronger franc/weaker euro levels. Position: none cited
Eurozone contagion fears have caused the 10-year Treasury to rally from 3.99% in early April to 3.54% as of yesterday’s close. That took out the January closing low in yield of 3.58% and leaves a gap between here and 3.20%. Technically, it looks like a breakout with some nice upside price potential.
While I can’t rule out exploring that gap, I’m loath to play Treasuries from the long side. U.S. economic fundamentals are improving and thus it is clear that there are more intermediate-term upside pressures on yields than downside. I might change my mind if we get through 3.50% and hold there for a few days. But for now, I’d rather bet on this being a false breakout and that we’ll return to the 3.60%-3.90% range. Position: Long 10s
Is the FDA perhaps reacting to Dendreon’s (DNDN) pricing of Provenge at $93,000, which is significantly more than was expected (more than twice what many expected)? If this is the case, InterMune’s (ITMN) CEO should be clear about pricing now.And InterMune could ask the FDA for a compassionate-use program. The EPA Expanded Use Program covers people who do not qualify for the clinical trials. The EPA generally approves such programs where there is no other treatment and the drug has shown some effectiveness. From the company’s viewpoint, this has some risks (the patient dies), but it also introduces the drug to a wider audience and may help jump-start commercial sales. From a PR viewpoint, it would make the company out to be the good guy. Position: nm
Initial weekly jobless claims for the week ended May 1 came in at 444,000, down 7,000 from a revised 451,000 the previous week and up vs. expectations of 435,000.The four-week moving average of initial claims fell 4,750 to 458,500. Continuing claims for the week ended April 24 came in at 4.594 million, down from an upwardly revised reading of 4.653 million the week prior and compared to expectations of 4.600 million. Click here to read the full report. Position: n/a
Non-farm business-sector labor productivity increased at a 3.6% annual rate during the first quarter of 2010, the U.S. Bureau of Labor Statistics said today, with output rising 4.4% and hours worked rising 0.8% (all quarterly percentage changes are seasonally adjusted annual rates). From the first quarter of 2009 to the first quarter of 2010, output increased 3.1%, while hours fell 3.0%, yielding an increase in productivity of 6.3%. This gain in productivity from the same quarter a year ago was the largest since output per hour increased 7.0% over the four-quarter period ending in the first quarter of 1962.Unit labor costs in non-farm businesses fell 1.6% in the first quarter of 2010, as the 3.6% increase in productivity outpaced a 1.9% gain in hourly compensation. Unit labor costs fell 3.7% over the last four quarters, as the 6.3% increase in productivity outpaced a 2.3% rise in hourly compensation. Click here to read the full report. Position: nm
George — You’re correct in pointing out some similarities between InterMune (ITMN) and Dendreon (DNDN), but I do not think Provenge’s high price played a role in the FDA’s decision to reject pirfenidone. Typically, drug companies do not discuss pricing until after a drug is approved, and since price isn’t a factor in FDA decisions, I don’t think InterMune CEO saying anything now will alter the situation. For the sake of patients, it would be good if InterMune sets up an expanded access program (compassionate use) for pirfenidone. FDA has to OK such a program but generally agrees, which I think it would do in this case. That decision is up to InterMune. You’re right, it would be a very good PR move. On the other side, InterMune may be reluctant to grant patients access via compassionate use to pirfenidone if it interferes or slows down enrollment in whatever new phase III study is planned. Position: none
ECB President Jean-Claude Trichet has said that the central bank did not discuss the purchase of European government bonds at the meeting today, nor the possibility of establishing an orderly default procedure for European countries.Position: nm
Retail sales dropped off a cliff in April, with the majority of companies reporting worse-than-expected comps. Some of the misses, like Dillard’s (DDS) and Abercrombie & Fitch (ANF) have been downright nasty.It’s interesting these shortfalls are coming at the same time the retail ETFs are rolling off major resistance levels. Position: nm
Currencies are supposed to collapse. The issue facing the euro and Europe is normal. It will eventually be faced in Japan, and then the United States and the world will create a new globally agreed currency regime.It has happened nine times in the past 200 years. Each time, the world ticks back and forth between fiat and hard-backed currency agreements. This process is less indicative of a failure of sovereigns to manage their finances than it is a reflection of the changes each sovereign and the global markets have gone through politically, economically, technologically, socially and demographically since the last global rules were put in place. Think of it like a snake shedding the skin it has outgrown. On average, these agreements last about 35 years. The current Basel system was adopted after the collapse of Bretton Woods and the closing of the gold window in the U.S. in the early 1970s. And now it’s time for Basel to collapse, and it too will be replaced by another hard-backed system; probably similar to Bretton Woods but with a basket of commodities as the underlying support, rather than gold or gold and silver. So the world isn’t going to end, and the focus should be not on stopping it but on understanding that it is natural and probably inevitable, and on looking for opportunities. Position: None
The sloppy retail comps for April are hitting the tape this morning, in line with the disappointing estimates from my MasterCard (MA) post yesterday. I remain especially negative on apparel retailers. Profit-taking might be prudent in this momentum-driven sector.Huge revenue/earnings beat from Kraton (KRA), a specialty chemical company (and prior mention in CC) in the synthetic rubber/elastomer business. The seasonal low quarter in March generated 64 cents a share in profits and 50% revenue growth. Kraton is that perfect mix of cyclicality(paving and roofing) and stability (toothbrushes, disposable diapers, surgical gloves). If the macro holds, KRA should make $3 this year. A P/E ratio of 12 generates a $36 stock vs. last night’s $18 close. Position: long kra
ECB President Jean-Claude Trichet has declined to address the issue of an orderly default procedure for European countries, saying that “default is, for me, out of the question — it’s that simple”.He went on to say that the ECB is “inflexibly attached to price stability” and that by the end of the year, depending on final adjustments, the zone will post an average inflation rate over the 12 years of the euro of “less than or close to 2%”, which is “exactly in line” with the mandate set for the area more than a decade ago. Position: nm
Congratulations to Tricia and Bob Byrne on the birth of Robert Liam “Cinco de Mayo” Byrne last night (well, evening). I hear the boy was born with a full beard that even put Bob to shame! All kidding aside, mama and baby are doing well!Position: nm
Yesterday’s trading generally followed along with the recent pattern of sharply downtrending days followed by narrower-ranged partial rebound days. The downtrend did continue yesterday, but most of the loss was in the gap and we saw pretty decent morning climbs and a neutral close around mid-range. I would normally be looking for another leg down today, except that yesterday’s stalling came in right around the daily chart 50 MAs for SPY and QQQQ, which are pretty big support levels. If the bulls are still alive, this would be a good place for them to reenter. So I think it’s a watch and react kind of day, until we see a clear indication of whether that support is going to hold or not.Position: NM
ECB President Jean-Claude Trichet has said that Greece and Portugal are “not in the same boat” in fiscal terms, which is “very obvious when you look at the figures”. Portugal, he said, is one of the “15 other countries in the Eurozone” that needs to substantially step up its fiscal efforts to comply with the region’s stability and growth pact. All countries need to “exceed substantially” the efforts currently being made to bring budgets into line. Countries must respect “the letter and the spirit” of the stability pact, he said.Separately, Trichet said the role of the ratings agencies needs to be examined “at the global level” and that he questions “the current configuration or constellation of ratings agencies”. Position: nm
ECB President Jean-Claude Trichet said he wasn’t going to comment on the daily fluctuations on the euro, but that the currency was a “good store of value”. He said there has been no suggestion from any heads of state or government in Europe that disbanding or leaving the euro might be a good idea. He said they all believe that belonging to the euro has “brought about enormous advantages”, though, clearly, also carries responsibilities.Separately, he added that Spain is not in the same fiscal straits as Greece and that all Eurozone countries need to “take responsibility” and “do their job to ensure they are on a path that would inspire confidence”. Position: nm
Sold some May 25 calls at $4.20 on Faro Technologies (FARO) from earnings play yesterday. Averaged down on JDSU Uniphase (JDSU) at $11.75, so avg cost now $12.18Position: Long FARO, JDSU
Click here to read the testimony this morning of Treasury Secretary Tim Geithner before the Financial Crisis Inquiry Commission.Position: nm
Click here to read the St. Louis Federal Reserve President Bullard’s speech on the U.S. economy this morning.And click here to read Federal Reserve Chairman Ben Bernanke’s speech on bank structure and competition this morning. Position: nm
The major stock indices are all sitting at or near their 50-day moving averages; since the March 2009 low, we’ve seen only two occasions when they have significantly dipped below that average.The first occurred in July 2009, and the move from the previous high to the low that followed was, on average for the indices, about 8.5%. In January 2010 we had a second penetration of the average, and the peak-to-trough move was an average of 9%. The lows of these two periods mark an uptrend line that is roughly parallel with each 150-day moving average.
At our present point in time, if we were to project a 9% pullback from our previous April highs this would indicate the following retracement levels: Dow 10,244; S&P 1102; Nasdaq 2307. In the case of the Dow and the S&P and depending on how the move would play out in time, this pullback would likely take these indices down to their 200-day moving averages, where they would find support. A 9% Naz retracement would take that index back, again relative to time, to the support line. Position: Long SDS
Natural gas stores rose to 1.995 Bcf as of April 30, according to data released Thursday by the U.S. Energy Information Association. Nat gas futures for June delivery are down a penny at $3.98. You can see the whole EIA report here.Position: n/a
Staff Reporter Laurie Kulikowski examines the positive impact that volatility has on the E*Trades (ETFC), TD Ameritrades (AMTD) and Schwabs (SCHW) of the world.Position: N/A
The fast breeder or fast breeder reactor (FBR) is a fast neutron reactor designed to breed fuel by producing more fissile material than it consumes. The reactors are used in nuclear power plants to produce nuclear power and nuclear fuel.Monju, in Tsuruga, Fukui Prefecture, is a fast breeder reactor (FBR) that adds on to the research base developed by its older research FBR, the Joyo reactor. Monju is a sodium-cooled, MOX-fueled loop type reactor with 3 primary coolant loops, producing 280 MW. Monju began construction in 1985 and was completed in 1991. It first achieved criticality in 1994. It was closed in 1995 following a sodium leak and fire in a secondary cooling circuit, and was expected to restart in 2008. Restart was postponed several times and Energy Daily is reporting that it will occur now. In April 2007, the Japanese Government selected Mitsubishi Heavy Industries as the “core company in FBR development in Japan”. Shortly thereafter, MHI started a new company, Mitsubishi FBR Systems (MFBR), with the explicit purpose of developing and eventually selling FBR technology. Position: none
Never a guarantee, but that should mark the low of this leg down in the OIH. I would expect a bounce out of this area now.Position: Long OIH
A few questions this morning about ATPG Oil and Gas (ATPG). This one tends to be volatile around earnings, and it is actually a hard buy right here. I like the prospects long term but would probably wait until the mid 15’s to get in.Position: Net delta short ATPG (spreads both ways)
The very obvious key technical level for the S&P500 is 1150 which was the high back in January. If the dip buyers are going to bounce it they should look to do so around that level. I wouldn’t be surprised if we breached it and triggered sell stops set there first but the buyers are going to be sniffing for entries about there.Position: None
We could all use a little POT right now. I’m talking Potash Corp (POT) of course, so I am buying some May 100-110 call spreads around 3.05. Not a big position though.Position: Long POT
That price should have been a $4.05, and it is closer to $4.15 now, not a 3. And no jokes about who got the POT (call spread) early.Position: Long POT
With volatility being higher right now, it is a great time to look at calendar spreads, either as a protection vehicle or a long entry vehicle. Take advantage of selling some of this May premium.Position: nm
Looking for a new entry point in Apple around its 50-day moving average at $237 but wondering if it will ever get down that low? Seens like a reasonable entry point but it’ll take a lot more selling in the broad for Apple to get down to $237.If it does, look for institutional investors to come in and support the stock there. Heavy volume always gives them away. Position: none
Business Wire is reporting that GE’s (NYSE: GE) ecomagination program has reached a new milestone. Apparently GE will be working with 250,000 cows at the Liaoning Huishan Farm in Shenyang, China to develop the world’s largest biogas project based on cow manure. They expect to rid themselves of a proportional amount of waste as they produce 38,000 MWh a year. GE plans to deploy their JMS420 Jenbacher gas engine technology.Position: none
Doug Kass’s gnome hears that the Greece austerity bill has enough votes for passage.Position: N/A
The credit market is trading like the Dow is down 500 points. Bids are extremely tough. I just tried to call a trader for color and he laughed and said “Freefall. I’ve got to go.”I lightened up substantially at the open on credit. Now at a minimal position. Very falling knife feeling… Position: None
Trying to get things posted as quickly as possible, but this is a fast moving market. It didn’t take long after that ATPG post to get to those mid 15’s, so we’ve closed our short vertical spread from earnings, and are just sitting with the May call spread now.Position: Long ATPG
Readers interested in the rare metal issue may be interested in the announcement in DOE’s Website May 6, 2010Washington, D.C. – The Department of Energy has released a Request for Information (RFI) soliciting information on rare earth metals and other materials used in the energy sector. The request is specifically focused on rare earth metals (e.g., lanthanum, cerium and neodymium) and several other metals including lithium and cobalt, but respondents are welcome to identify other materials of interest. These materials are important to the development and deployment of a variety of clean energy technologies, such as wind turbines, hybrid vehicles, solar panels and energy efficient light bulbs. In a March 17 speech, Assistant Secretary of Energy for Policy & International Affairs David Sandalow announced that DOE is developing its first-ever strategic plan concerning rare earth metals and other materials in energy components, products and processes. Assistant Secretary Sandalow said, “Clean energy technologies create jobs, cut costs and reduce pollution. The information we’re requesting today will help guide the Department of Energy as it helps shape a clean energy future.” Position: n/a
Yesterday the action in AAPL formed a “hammer” reversal candle on the daily chart which closed a gap between 255 and 250; in addition, the two day money flow indicator dipped briefly negative for several days and is now positive while the 20 period indicator remained solidy positive during this time. These conditions often precede bounces and if this market does turn around later in the session, I would be looking at AAPL for a trade. If, however, the lower end of the gap is taken out the next logical level of support would be, as you said, the 50 dma.Position: no position
Shares of Pilgrims Pride are getting hit hard this morning after a weak earnings report. The company reported a loss of $.21 a share for the quarter. The earnings contained reorganization and other charges of $.16 a share. The chicken producer said that revenues decline to $1.6 billion compared to $1.7 billion last year. The company did say however that they were profitable in April and that they were restarting 3 closed chicken pants increasing capacity by about 10%. The company emerged from bankruptcy last year and has been on my watch list. Post bankruptcy equities often outperform for many years after the reorg is complete. The stock is off over 20% on the day. If the slide continues I will probably be a buyer of the stockPosition: none yet
American Water Works (AWK) provides water services to over 16 million people in the U.S. and Canada, and it pays a 3.8% forward dividend yield. A daily chart shows that the pullback in the stock price since the beginning of this year crafted the formation of a “declining wedge” pattern.
Last week, the 50-day moving average was broken to the upside, and this week, the downtrend line drawn off the January, February and April highs was penetrated. The relative strength is above its 21-period average and centerline, and the slope study is in bullish divergence, making a higher low than price and moving above the zero line. Positive money flow has accelerated since price bounced off the 200-day moving average last week, and a confirmation of the current move could mean that the lows that were made in March and April qualify as a double bottom. That confirmation would require a new swing high or a close above $22.22 and would be a long entry point with an initial trailing stop under the 50-day moving average. Position: No positions
At today’s lows, the SPDRs (SPY) retraced one-third of the rally off the February lows, for an important short-term support level. The index began to recover from the first two hours of volatile downside action, but trade should remain choppy into the close.
The one-third support level is 115.40, slightly above the multiweek highs left behind in mid January. The market faded in the last half of January, leaving behind 115.15 as a midterm top. An important bottom was reached on Feb. 5, leading to an almost straight-up move for 10 weeks. A healthy pullback has been under way for two weeks and has now reached solid support. If this level can hold under more pressure later today, the SPY will be set up well for an upside surge if tomorrow’s numbers are viewed as positive. I have sold some of my UltraShort Industrials ProShares (SIJ)/UltraShort S&P 500 ProShares (SDS) position that was initiated in late April and now have a small long position in Ultra S&P 500 ProShares (SSO). Position: Long SIJ, SDS and SSO
Scaling into these oil patch names has been brutal and as a matter of discipline I’ve taken partials stops. Focusing on the OIH, 116+ didn’t hold so now 111.35 area becomes the target unless this reverses before the close. Ugly!Position: Long OIH
Lost with all the problems in Europe, tomorrow will be the payroll reports. We expect payrolls to come out below expectations. Bloomberg’s economist survey calls for a gain of 190,000 jobs. We expect more like 125,000. In the scheme of things, that isn’t much of a miss, but it will probably cause the bond market to bull steepen. The 2-year will rally more than the 10-year.Currently I’m projecting a Fed hike in 1Q 2011, with a decent chance of a December hike. Only a payroll gain at more than 400,000 in the Household Survey would make me move up my expectation for a hike. So this goes to the playbook I detailed in last week’s Bondlife column. If a small beat of say, 250,000, causes a big Treasury sell-off, use that as an entry point. Position: None
when so many out there right now are depending/hoping on others to do enough buying near this obvious potential support level that represented the early highs this year?Though we are now just a few points away from the low 1140s we espoused the other day on CNBC as a logical first target for the break of the low 1180s, we also believe that a rather significant psychological shift may be happening, too. Whereas so many wanted a sell-off to buy at lower prices, now that they’re is one, are those same previous buy-the-dip espousers actually stepping in to buy lots of stock here? We think not. In fact, just how many now are hoping for a rally to sell into? We think lots. Europe’s main stock index took out its early February low today (while the SPX is still 10% above its Feb. low). Europe is unravelling, as is its currency. Despite only 3% of those polled were bullish the euro fx today (as per the DSI poll many institutional investors watch), if the perception continues that Europe is really in trouble, then stocks globally still have further to decline. Position: N/A
Well, I thought there was a small silver lining to the selling earlier today because there wasn’t a lot of volume behind the selling. At one point, volume was tracking about 15% to 20% lower than Wednesday.Unfortunately, that’s changed as NYSE and Nasdaq volume is now tracking higher than Wednesday; another classic day of distribution. Many leaders are getting hit hard, but the market needs this. It’s easy to blame market weakness over concerns about overseas debt, but I think it’s more about the fact that there are just too many extended stocks out there. All stocks need to consolidate gains after major price moves. It’s starting to happen now. Position: n.a.
The Greek parliament has approved the austerity measures the government agreed to and this saw the euro tick up. However, Market News International reports that the German SPD said that it will not vote for the Greek aid bill. The parliamentary head of the SPD indicated that the government refused to agree to a financial transaction tax, which the SPD had indicated was their price of support. The SPD will urge its members to abstain in tomorrow’s vote. As recently as earlier today the SPD was holding out the possibility of supporting the government. Merkel’s coalition has sufficient votes–this week–to pass the measures without the SPD. However, it had wanted what Americans call bipartisan support. Next week is a different matter. If the CDU/CSU lose the regional election (NRW May 9th), it will also lose its majority in the Bundesrat, the upper chamber of parliament.Position: None
Ken, Also, first time in a long time that I’ve noticed more new 52-week lows than highs.Position: long SDS
Favorite long: health care, especially pharma and med tech. Favorite shorts: retail and discount brokers. Big price war in discount brokers.Position: none
April same-store sales data were uniformly weak, triggering major selloffs throughout the sector today (the broad market isn’t helping).One thing isn’t clear to me. Were the sales weak on an absolute basis, or are the comps just getting tougher because they’ve moved into the post-bear-market era (April, 2009), with consumer sentiment coming back from the dead? Position: nm
I see as I skim the various Web sites and blogs with commentary about this week’s Value Investing Congress that David Nierneberg of D3 Funds was a speaker at this year’s event. Apparently, he talked about one of his holding, RadiSys Corp. (RSYS). He told the conference that the company has a strong balance sheet, with two thirds of the market cap in cash and very little debt. The embedded-computing company sells products to a wide range of industries, including telecom, defense and medical markets. I have stolen some wildly successful ideas from Mr. Nierneberg over the years, so I will do a little more digging into this idea.In a Q&A session after his presentation he said that the case for Move, the real esate web company was still intact. I like the stock as a very long term play on the eventual recovery of residential real esate markets. Position: None
There are reports from several E&P companies, including Cabot Oil & Gas (COG), of equipment shortages for hydraulic fracturing. Hydraulic fracturing equipment is used to extract natural gas from shale.Position: none
We got a pretty good report form Core-Mark Holdings (CORE) this morning. First-quarter revenues rose slightly more than 13%. It predicted full-year revenues of around $6.9 billion, according to the news release. Earnings were $84 million, compared with $118 million a year earlier, as margins edged lower in the quarter. The company distributes packaged food and cigarettes to convenience stores in the U.S. and Canada. It should be able to continue to grow revenues as the recession continues to wind down. At 7 times earnings, the stock is cheap, trading just below book value.Position: nm
So do we have ourselves a mini crash? Sell in May and go away might make sense. Expecting the Fed to trot out the “exceptionally low for an extended period” language. Better yet, the Fed buys $50 billion Greek bonds with QE!Position: none
Would the market be as panicky if CNBC moved a few blocks away, and showed regular greeks sitting in cafes sipping strong coffee or ouzo? Strife is always fun to watch, but I think the coverage is certainly fomenting some of the market reaction.I think we do have a lot more to go in this euro situation, but kinda feels like some uber-panic that can reverse (on a trading basis) once CNBC switches to other subjects. Position: None
In markets like this, this is what I do: I check to see what i can jettison in favor of VALUE — I am actually pretty light on speculative stocks, but AM RIGHT NOW buying the energy MLPs, which are getting SMOKED for no good reason. Names like Enbridge, Kinder and Transmontaigne are paying 9% distributions based on this crush job… I’d rather play defense with these than just about anything else… If there’s a safety net in a crashing market, these are as close as it gets for me… Just a suggestion.Position: TLP EEP
Contributors — any stances on where this plunge will end?Position: n/a
Wow, that came unglued pretty fast. I am not sure if the television is making it worse but we sure lost the floor in the market quickly this afternoon. The sellers appear to be piling on right now and pushing price s lower very quickly. I am not sure there will be any buyers left to push the market back up this afternoon. It seems traders have rediscovered fear after months of embracing only the greed side of the equation. I am going to sit and wait for some signs of stabilization before digging around for potential bargains created in this sell offPosition: nm
The Dow has dropped below 10,000Position: nm
I think the low is “in” but the total range is insane. I think the algorithms just burped up black swans.Position: nm
What happened? The effect of incremental changes on discount rates, exponential effect, but the Fed doesn’t get it. Practically, a European bank probably liquidated a U.S. stock portfolio to reduce risk.Position: None mentioned
Bonds are exploding to the upside as the selling panic accelerates. The iShares Barclays 20+ Year Treasury Bond (TLT) is up over 3% on extremely heavy volume and is now just shy of $97.00.
This is the biggest single-day gain for the TLT since March of last year. The volatility is amazing. Tomorrow’s unemployment, regardless of the numbers, may turn out to be a nonevent. Position: No positions
I did write earlier today that the credit market felt like the Dow was down 500 points. I didn’t think we’d hit 900 points.Some telling quotes. California 2040 Build America bonds 50bps wider today. The Muni CDX is 40bps wider. High Yield CDX 4 point lower. Investment-grade CDX 25bps wider. Hit 40bps wider briefly, now back. Cash bonds aren’t trading, so don’t ask. In individual name CDS… AIG +100bps today, Goldman +40, all the other banks +30. Insurance names 40-70bps wider. Everything is substantially wider. McDonalds is 15bps wider. AT&T is 25bps wider. These would be huge moves for a high-yield CDS contract in a normal day. McDonalds usually doesn’t move this month in 3 months. Position: Long MCD, T, GS bonds
You guys have been very patient putting up with my insistence we needed a 10-12% correction. As we have been saying, corrections in bull markets are sudden and sickening and terrifying, but over quickly. When you can identify the reasons (Greece and contagion), which we all know so well, all to the better. I do not believe this is the start of a major downtrend — this is a correction in a bull market. Not buying yet, but soon. Don’t leave the buy tickets too far away.Position: nm
Contrary to much speculation about future yen weakness, the CurrencyShares Japanese Yen Trust (FXY) is rallying today after bouncing off an historical support level. The sustainability of the move remains to be confirmed over time. I was watching for a breakdown in FXY and monitoring the strength in the dollar as a buy trigger for Toyota Motor (TM). A rising dollar and falling yen benefits Japanese exports.
The setup appeared good on the currency side, with FXY highs of early and late 2009 looking like a large double-top, a minor uptrend line penetrated and the larger support line being tested, as well as the 50-day moving average making a “lead” or “death” cross below the 200-day moving average. Money flow and the intermediate-term trend have been decidedly down over an extended period. The overlaid chart of Toyota (black candles) shows that the stock price has been sitting on a support line for about 19 months, forging a strong base from which to rally. I will be monitoring the FXY to see if this strength continues and keep you posted on the potential long Toyota trade. Position: No positions
Circle this date on your calendar, because you will be telling your children about the 1,000-point loss that did not occur.There will be a major investigation into what happened today. I turned to a roomful of people and said when we were down 500 that we would close down less than 300 at the close. Stay tuned. Position: None
So when does the congressional hearing on computerized trading begin? That was just a breathtaking move, and there is no way that the action was not accelerated, or even created by program trading. This is the sort of stuff that has kept the individual investor out of this market during the rally over the past year. They were killed in 2008 and never regained any trust, and now we have this glaring example of machine manipulation to make sure they never do come back.Position: None
I still think it makes sense to rotate into the defensive sectors if one has to keep money in the market. Certainly, the cheap stocks in defensive businesses should hold up better if the pullback continues. It will take the long only guys some time to move their funds around.Position: none
I think Rev had my phone bugged, as I was just saying to another colleague of mine that the whole computerized, algorithmic trading issue may have a little to do with this craziness… just a little.Anyone lucky enough to get that Apple (AAPL) $199 tick on the buy side?!? Position: Long AAPL, short AAPL calls
It looked like the market-making system itself failed today. That’s a major subset of the algorithms. For once, I agree with Scott, this selloff was NOT kosher. Even in 2007 and 2008, the “orderliness” was light years ahead of what we just witnessed. |
Illumina (ILMN) Looks Ready To Resume Uptrend
Illumina (ILMN) is trading over 40 this morning, after reporting strong earnings on Wednesday evening. The stock has been working its way back through a huge unfilled gap since last October, stalling at 40 in January and again in March.
A breakout above this resistance level opens the door to a vertical spike that carries price back to the October high at 44 and a resumption of the strong uptrend in place between 2003 and 2008.
Biotechs Issue Sell Signal
Gilead Sciences (GILD) got crushed after earnings on Wednesday, dropping nearly 10%, and bringing down the entire biotech sector. The iShares Nasdaq Biotech ETF (IBB), which had carved out a bullish consolidation pattern, broke two-month range support and triggered an interesting short sale signal.
The sector rollover follows poor price action in the last few weeks so, as usual, the market gave out a warning signs before the breakdown.
Tape Reading Tells
Reprinted with permission from: The Master Swing Trader Toolkit
Alan S. Farley McGraw-Hill 2010. All Rights Reserved.
Tape Reading Tells
Experienced tape readers keep a collection of key observations tucked away in their brains, so they can act quickly whenever the tape cycles into analogous price action. This hodgepodge of personal signals, setups and key tells can yield quick profits because the data comes through personal experience, instead of reading a book or attending a seminar. Mr. Market plays a constant game of misdirection, but our accumulated tape knowledge lets us see through the veil and decipher key elements of the daily grind. Let’s look at the most potent of these small portents of market direction.
Globex Futures – Look at pre-market index futures and see where they’re trading, relative to their day-session 15-minute 50-period moving averages. Expect a positive opening for stocks when index price sits on top of the average, and a negative opening when it lies below. If the SP-500 is above but the Nasdaq-100 is below, look for intraday rotation from tech and small caps, into the blue chips. Flip over this outlook when Nasdaq-100 is above and SP-500 is below. On those days in particular, watch for speculative four letter stocks to take over the leadership mantle.
Advancers/Decliners – Market breadth and up/down volume offer valuable data on hidden strength or weakness. Buy midday pullbacks when breadth shows greater than one thousand advancing to declining issues. Sell midday bounces when breadth shows less than minus one thousand advancing to declining issues. Up to down volume in both exchanges greater than four to one points to a trend day that favors the dominating side of the market. Assume there will be no intraday turnarounds when you see this type of price action. Instead, stop fighting the tape and focus intraday capital on 60-minute range breakouts or breakdowns that follow the prevailing trend.
Buy/Sell Flow – The NYSE TICK exposes the peaks and valleys of intraday swing cycles. Look for large-scale reversals after the TICK hits an extreme reading, like plus or minus 1400, for the third time in a single session. Use smaller TICK extremes to pinpoint intraday swings that will carry price they other way in a 60 to 90-minute cycle.
Stealth Breakouts – Watch for a breakout or breakdown when intraday price creeps toward a support or resistance level that it’s failed to exceed multiple times in the last three to five sessions. This slow crawl will print a series of small bars, with no pullbacks on the 15-minute chart. Look for these issues to hit the contested level and then expand quickly through the barrier. Why does this type of price action predict a big rally or selloff? It’s a common scenario in which big players have entered the market and are accumulating or dumping shares under the radar, trying not to attract attention. They push prices slowly by hitting the spread with small shares at regular intervals, while supporting their positions with decent size on the other side of the market. Momentum eventually gathers steam and the stock cuts through support or resistance, like butter.
Historic Price Levels – Stocks respond to every high or low on the chart, no matter how old or far away. Take profits and cut losses into big prints from prior years because they can easily stop a strong trend, dead in its tracks. However, be patient because price often goes vertical into these magic numbers, yielding windfall gains. Highs and lows set into place five or ten years ago become excellent pivot points for new entries as well.
Algorithm Games – Stalk liquid stocks you want to buy on the pullback. Then watch as program algorithms take price down and down and down. Sit back and wait for the selloff to cut through short-term support. That happens because the eggheads writing these programs know the charts better than many traders, and want to shake out poorly placed stops. Finally, wait for the bottom to drop out and then look for the bid to stretch 20, 30 or 40 cents below the last print, while the ask hardly moves. That predicts the selling frenzy is nearly over and positions can be taken for a rebound. You now have to hit the asking price, even though it’s much higher than the low printed by the falling bid.
Finally, here’s an observation that will add considerable power to your tape reading expertise. Look for price action to cycle through three distinct phases when it moves into a key position, just above resistance or just below support. Like so many elements of market dynamics, these interrelated impulses track the action-reaction-resolution cycle, discussed in Chapter 1.
- Euphoria driven by the breakout or breakdown.
- Fear triggered by a fade against the breakout or breakdown.
- Intensified euphoria or fear that confirms the breakout, breakdown, pattern failure.
Most traders focus their full attention on the excitement of the breakout or breakdown, jumping in when the ticker tape bursts with buying or selling activity. Of course, as I’ve argued throughout this text, this is a great way to lose money. In contrast, tape readers step back and examine the quality of this three-prong conflict, which ultimately tells them whether the embryonic move is bonafide, or a nasty trap waiting to be sprung.
Ford (F) Setting Up A 2-3 Month Decline
Ford (F) has been one of my favorite stocks since the 2009 low. I listed it as one of three top picks for 2010 last December at TheStreet.com. I own the other two (IBM @99 and AAPL@191) and have been looking for the right time and price to buy F.
Sadly, that might have to wait until the second half of this year. Ford gapped down on high volume last week, following two weeks of steady distribution. This points to the end of its yearlong vertical rally and the start of a corrective phase that could eventually reach the 50-week EMA. The moving average is now rising off 9 and could meet F near round number 10 in the next two or three months. I’ll be watching that price level for a turnaround.
Infosys Tech (INFY)
Offshore IT companies (outsourcing, Bangalore call centers, 3rd party tech admin) look great here, with leaders Cognizant Tech (CTSH) and Infosys Tech (INFY) showing interesting breakout patterns. In fact, INFY is trading just a point from its all time high at 61.25, posted in 2007. CTSH has already rallied above its 2007 high and is now trading at an all time high.
The great thing about these patterns: they don’t look overextended like the broad market after the six-week rally. This should help to support the developing uptrends. One caution though: this is triple witching options expiration week and both stocks are trading near big strike prices that could come into play before Friday’s close.
Yum!my
Yum! Brands (YUM), purveyor of the Taco Bell, Pizza Hut and KFC brands went vertical on Tuesday, spiking into the top of its 9-month rectangle pattern. The stock finally looks ready to break out and test the all-time high in the 40s.
Other sector leaders (using my proprietary scans):
* Dominos (DPZ)
* Ruby Tuesdays (RT)
* Cheesecake Factory (CAKE)
* PF Chang (PFCB)
* Chipotle (CMG)
* Darden (DRI)
Politically-Correct Short Sale
