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The Bear Stare

By

Three Peat?

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Think about how many times I have fallen.
Spirits are using me, larger voices calling.
What heaven brought you and me
Cannot be forgotten.

(Crosby, Stills, Nash & Young)


Good morning and welcome back to the sneak attack. With all the bulls looking at the north pole, the ursine dug deep in search of their soul. The two-day soiree was a sight for bear eyes as they quieted talk of their recent demise. "Nobody was short, not even my friends," said Boo to his crew as they all made amends, "There's no way to know when the crimson will end but my sense is the landscape could use a good cleanse." Will the hat trick be scored and some swagger restored or can Hoofy stake claim for some upside reward? The Hump has arrived so you better make way as the critters are here with something to say!

The last few sessions have been a rude awaking for the blind believer camp. In fact, it was likely an eye opener for many bears who have been squeezed out and forced from the sidelines. It's easy to lose sight of "why" the market should trade lower as logical reasoning has lost credibility as a function of price. We must remember that a bull and bear market perpetually exist and the final arbiter is the stronger force in play that day. That's what traditional media will point to despite the fact that reactive rationalization is usually late and seldom profitable.

While macro concerns, lopsided sentiment, (still) low volatilities, extended field position, inflation concerns and decelerating fundamentals may have played a role in the sudden slippage, there is another reason for the backwards bend. The macro dance whipped as the calendar flipped and it seemed as if nobody got the new script. One only has to look at the monolithic movements for proof positive of this dynamic. The dollar has ripped higher, metals and equities are under serious distribution and crude is tetherballing 5% a day. Can anyone say rotation?

I offered on Monday that there were a slew of agendas in motion and it's always difficult to game invisible flow. The question now becomes one of degree and whether this is an aberration or outright reversal. I received quite a few emails last night from Minyans opining that there was, in fact, fear in the stock market. I respectfully disagree as capitulation doesn't typically feature unchanged vols. It's true that a meaty option order contributed to the overhang of premium but that didn't effect NASDAQ vols which were similarly subdued. And a look at the Investor's Intelligence numbers this morning (which were computed before the weekend) finds the highest reading of bulls since January 1987.

Google (GOOG:NASD) was the most obvious culprit of false hope as the breakout got stuffed at all-time highs and never looked back. By the end of the session, the tech damage was equally spread through the semis, nets, storage and telecom. The old school couldn't hide from the slide as the once buoyant banks tested BKX 104 (on the upside) and fell through the late day trap door. Toss in the smeltage in the metals, the disappointing action in energy names (vs. +5% crude) and the steady bid to the greenback to complete mirror image of the recent scrimmage.

We recently used an analogy that Hoofy was skating on thin ice and the pond was wobbly as hot blooded bulls raced to lace up. The difference between upside momentum and outright exhaustion is a tiny crack as the financial fabric is intricate and intertwined. A few bovine beasts are now under water and the fate of the tape rests with their friends. Either they rush to save the bovine brethren or turn tail and try to bail. On thing for certain, your strategy should respect--but not be dependent upon--the actions of others. At the end of the day, you've got to watch your own back.

We power up this Hump Day pup to find that the tricky Nikkei (-70 bips) held acne support at NKY 11,400, Europe is off less than a percent, the greenback continues to grind higher (through its 50-day), metals are mixed and the stateside futes are no great shakes. Turning our attention to the charts, the NDX is sitting directly on the 50-day, the BKX is nestled between 102 (50-day) and 104 (recent break), the Russell should find some support at 624 (50-day and recent low) and Citigroup (C:NYSE) may find some sponsorship near $47.50 (before mission critical support $46.20-$46.40).

Good luck today.

R.P

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