The Metric System
Hey Saddam--shape up or ship out!
Good morning and welcome to the morning after. With Dubya's speech in our rearview mirror, we power up our systems with one less unknown and many more questions. Will the stimulus package be enough to stem the bleeding of the burst bubble? Have we gained any clarity on the geopolitical crosscurrents? Do Hershey Miniatures really count as carbs? Rather than try to digest all of these questions at once, I thought it might be helpful to walk through our trading metrics as we try to ascertain the State of the Minx. Let's take a look.
While the statisticians are quick to point out the percentage of stocks reporting better than expected earnings, we must remember that analyst expectations were lowered to levels that were relatively attainable. Further, it's not what is that matters--it's what will be...and for the most part, corporate America has no clue in that regard. The companies that guided down this past earnings season have been dutifully hammered and the one's that offer a glimmer of hope qualify their statements with "if the economy stabilizes..." It's important to remember that stocks, as a forward looking vehicle, will trade on expectations of a recovery but, as it stands, gaming that turn is guesswork at best.
In the absence of clarity, traders tend to place more of an emphasis on technical analysis and we're seeing that now. While I don't know if people follow it because it works or if it works because people follow it, I continue to use this metric as a backdrop with which to trade.
In the S&P, the violation of S&P 870 broke all kinds of support and that level now becomes upside resistance. On the downside, S&P 850 is the only magnet that stands between our current levels and the October lows (S&P 775). In the banks (BKX), the first test of the November lows (BKX 735) held but it's worth noting that a trade to BKX 725 would violate a triple bottom in point & figure work. Watch those levels if the financials begin to trade off. On the upside, BKX 750 is trendline resistance (former support) and, if we manage to poke through, BKX 800 remains the mamaluke inflection point.
In four-letter land, NDX 980ish is trendline support (from the November low) and, through there, NDX 950 (September/October resistance) is the next magnet. If that zone doesn't hold, there is no discernable level until we see the October lows around 800. On the upside, NDX 1040-1050 is mild resistance and while 1100 (January high) is the next stop after that. For the all-important semis, SOX 280 remains the head and shoulder neckline (a breach will confirm the bearish pattern) while SOX 290ish is trendline resistance (former support).
While I've got your attention, I must point out that my trusty stochastics are edging closer to buy signals. While they're horrid timers, they tend to be tremendous directional indicators if given time to play out. We haven't triggered the signals yet, but certain sectors (XBD (brokers), DJIA, XOI (oil)) are pixels away from doing so. This is, by far, the most bullish thing on my board.
Edge: Boofy, the confused cross-dressing bull/bear (breakdowns and stochastics offset)
What a difference a few weeks make, eh? In the middle of January, the VIX was trading in the mid-twenties and complacency was king as traders lined up for the inevitable breakout. Under the "sell hope, buy despair" thesis, whacking hope was (once again) the money trade and, before long, the weak hands dumped their holdings. Today, with the fear factor at much higher levels, the zillion dollar question is: are we scared enough? There is surely a contingent that continues to buy dips and I'm not certain if this level of despair warrants the fade trade (the other way). It will be interesting to see what the I.I numbers are (bull/bear) when they're released on Wednesday.
While the focus of the world is the Middle East, the question we must ask ourselves is whether a sufficient risk premium is priced into the market. Uncertainty is almost always negative for stocks and, until a resolution is reached (one way or another) with Iraq, there will be risk to the structural underpinnings of the market. Also, and I cannot stress this enough, please keep an eye on Latin America. It's a tinder box and don't kid yourself--if Latin America "goes", our financial sector will take a big hit and drag the broader tape with it.
I've attempted to walk through the major issues affecting the price action but understand that at any given time, different metrics will assume different weightings in our trading mix. If there was one set formula for ascertaining the future direction of the stock market, everybody would subscribe to that method and our job would be called "winning," not trading. This is an art, not a science, and the puzzle is continually moving and changing shape. Understand that it's hard, my friends, and always allow for a margin of error when committing capital. With a little luck and a lot of discipline, we'll find our way to better times and better tapes.
Good luck today.
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