The Succo Sit Down
Nice seeing you John!
Good morning and welcome to the spawning. Yesterday's smack tightened the slack of the short leash attached to Hoofy's brat pack. Despite his long chill and the steep upside hill, Boo managed to drill and take hold of the 'Ville. Have the bears (once neglected) now been resurrected? Or will their efforts fall short, be contained or rejected? Strap yourself in and steady that chin for a new day of fray is set to begin!
Last night, after a requisite schvitz, Professor Succo swung by for our weekly beer. It's a tradition, of sorts, as he lives in Cincinnati and commutes to the big city. Aside from being a fine trader and a better friend, John also happens to be the smartest man I've ever met. The topics of conversation typically range from quantum physics (during which I often nod my head and hope he doesn't wait for a response) to theology to the markets to the state and fate of the world. This is what we discussed:
Succo: The market closed on the low--that's not a good thing.
Toddo: Yeah, did you see the battle at the end of the session? (Pulling up comparable S&P and NDX charts.) The NDX clearly broke yesterday's low around 3:30 and the S's fought it off until the end of the session. Breadth reversed, the financials led the downside, Home Depot (HD:NYSE) closed lower on a solid report and the macro tells were just awful.
Succo: (watching the headlines cross the bottom of the television) "The dollar falls to all-time lows against the Euro as foreign inflows dropped to $4.19 billion from previous month $49.9 billion." The China import restriction didn't help the sentiment (or the dollar) today either. Man, can you imagine what we would be thinking if we were portfolio managers fully invested at a large mutual fund right now?
Boo: (interjecting) Yeah, you'd be thinking that you have to be fully invested because you're underperforming. You'd prolly also be thinking that it's not your money...and if you were a pensive cookie, you might be thinking that there's some scary stuff going on in the industry right now.
Hoofy: (respectfully) Come on guys, don't you think you're jumping the gun a little? The S&P and NDX are still in a well-defined uptrends and (clearing his throat) the NASDAQ is up 40% year-to-date. A little give back is healthy. (Pause) Isn't it?
Toddo: Technically? Yes...but that doesn't mean there's not risk. For some reason, people (and critters) tend to think more about risk when the market is down while focusing on reward after it's rallied. That's psychological phenomenon has plagued investors since the beginning of time. It'll work (for a while) in momentum driven markets but it's also the poison apple sometimes.
Snapper: Come on Toddo--stocks have proven over the course of history that they'll outperform other asset classes. How can you say that?
Toddo: I'm not arguing that fact, Snapper...I just want you and the critters to see the other side of the coin. The average stock market return from 1926-1999 was 11% and jumped to 18% from 1990-1999. Those are the indisputable facts. But there are two important points to be made. One, we're three years removed from the biggest bubble in the history of the world and two, the most widely held issues were typically up a heck of a lot more than that (into the bubble). It could take a pretty long time to digest those imbalances.
Boo: (chiming in) Yeah, your boys from Matador City have gotten pretty smug with some jingle in their jeans. Have you watched television lately? The teletubbies are spitting up all over themselves! If it wasn't so sad, it would be funny. And you're telling me that there's too much skepticism...pah-leeze. This rally was funded by one thing--liquidity. Well, I've got two words for you partna....Kool Aid!
Succo: (thinking for a moment) Yeah...but they're gonna keep fighting and do everything they can to keep it going (especially with an election next year). Bear markets, by definition, are tough for everyone and there's a chance that it'll be a long and painful process. They've got every bear--or what's left of 'em--second guessing themselves and spun around in their fur.
Boo: Come on now, Succ...they've only got so many bullets in the gun and the last one is gonna be pointed at themselves!
Sammy: Fellas, with knowledge comes responsibility...let's keep our eye on the ball here.
Toddo: I agree--that's why I'm watching the financials like a hawk. The BKX 50-day moving average is 916 but, well, the XBD (brokers) sliced through their 50-day like a hot knife through buttah. BKX 900 is more "congested" support and there should be some turtles around there (if and when). Beyond that, file BKX 850 (multiple bottom break) and BKX 800 (daddy's nemesis) away as zones of interest.
Hoofy: Dude, 121 BKX points? Whataya, eating a silly sandwich or something?
Toddo: I didn't say it was today's business, brother, I'm just tossing those levels on your trading radar. S&P 1030 (on a closing basis) and 1020 (intraday) are the mid-October low and those should be areas of interest. For the NDX, we've already traded through the comparable level on a closing basis while NDX 1350 is the intraday low.
Hoofy: Well, every time that fresh short money has been sucked into the mix this year it's been punished with reckless abandon. There's been, what, seven, eight dips since March? The bears stood on a soap box each and every time and declared the end of the world. We're just catching our breath (winks at Boo).
(Just then, Daisy walked into the room with a head full of wet hair and a white terry cloth robe)
Daisy: What's shakin' fellas?
Succo: (getting up to leave) That's my cue. I'll see you guys bright and early. And get your rest...we start it all over tomorrow. (walks out)
Boo: (leans over to me and whispers) Dude, was Succ just blushing?
I started to laugh and bit my lip as I, myself, stood to leave. "Listen fellas, if this year has taught us anything it's to expect the unexpected--so do yourself a favor and leave your emotion home tomorrow. Volatility is picking up (both ways) and with expiration on Friday, there's bound to be some whippy moves as dealers sort through their negative gamma. Remember, it became somewhat trendy to sell premium during the last few months. At a point, that'll have to be covered."
I smiled politely at Daisy, made eye contact with Boo, patted Hoofs on the back, nodded at Sammy and said 'so long' to Snapper. We all knew that the games had only just begun.
Good luck today.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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