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Monday Morning Quarterback

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Maybe the snow will chase the slithery snakes away?

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State of the Tape

Good morning and welcome back to the frigid shack. It dumped 22 inches of snow yesterday but the critters are here and they're ready to play. On the heels of last week's bipolar stroller, we power up our frisky pup to find Hoofy emboldened after his frisky Friday comeback. The bruised bull had his back against the ropes, under resistance and under pressure, when he suddenly summoned one of his more memorable comebacks in recent memory.

The reversal of fortune saved face--and likely alotta weekend press--but challenges remain for the Matador Crowd. For one, and while fresh '06 lows in the S's and N's were staved off, both complexes remain ensconced in a series of lower highs. For two, the inverted yield curve, while flush with fervent rationalization, remains a stain in any bovine argument. And for sure, while it hasn't mattered yet, the disconnect between perception (low volatilities) and reality (geopolitical unrest) remains a rather noticeable chasm.

Rotation station has been a constant theme this year and it continued in earnest last week. Metals and Energy, once proud badges of bullishness in an otherwise unmotivated environment, took several lefts on the chin as they eyeballed spates of deflation. As a function of this slippage, the commodity proxy slipped below CRB 335 (support) and has cast a wary eye towards CRB 320 (the 200-day and trendline support from 2003). I have the CRB and the DXY (dollar index) next to each other on my fifth (of eight) screens as I continue to sense that one will trade as a function of the other (deflation or dollar devaluation).

Other vibes to start the week

  • Dodge & Cox, a long-term value fund with a very snazzy reputation, have effectively doubled their holdings in SunMicrosytems. They have now become the largest institutional shareholder in the name with 252,749,000 shares. President Fish has laid out his long-term thesis in the name and I've put some Sun away for a rainy day. This was before I saw what Dodge & Cox were doing but I certainly don't mind having them in my corner.

  • I nibbled on some IBM spring paper puts a few weeks ago. The thought process included some rather nosty dandruff (under the 200-day), a short-term hedge against my SunMicro holdings, relatively cheap vols and defined risk. As defined risk is only as defined as the discipline employed in our trading approach, I set a buy stop slightly above technical resistance. I haven't been stopped out yet but it's getting close. And if it triggers, I'll cover up without looking back knowing that the mechanics of the swing are more important than the results of the at-bat.

  • On Friday, we saw some stealth accumulation of the big cap stocks for the first time in quite a while. The outperformance of the small caps was all the rage in January but that shifted notably as traders eyed the weekend. Whether it was a one day wonder or the beginning of a seismic shift remains to be seen. But, for my part, I'm watching Citigroup (under $48), General Electric (under $35), IBM and Microsoft as moxie proxies.

  • Finally, Google was gonished in this weekend's press and will start the week down double digits. We recently noted the 200-day ($333), the rather large gap ($333-300) and the uber-twisty (oversold) stochastics. Keep these three inputs in mind, particularly as sentiment shifts south and the addition to the S&P edges ever-so-closer. At $475--with everyone bullish--is one thing. In the low $300's a month later, the field position is entirely different.

    Good luck today.

    R.P.
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