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The Rain Stain


Anyone have a poncho?


Someone told me long ago
There's a calm before the storm,
I know...
It's been comin' for some time

(Creedence Clearwater Revival)

Good morning and welcome back to the scorning. Spring has arrived in the city of critters while traders digest a handful of jitters. The pain from the rain arrived late last week as Boo and his crew prolonged the bear streak. "The damage was deep and it hurts everywhere," said Hoofy the bull in a dazed wide-eyed stare, "I'm praying that we can shake the despair and begin the process of minxy repair." Does he have a hope as he twists from the rope or are we on our way down a slippery slope? We'll know soon enough as we ready to thrill and begin a new week with a romp in the 'Ville!

There aren't many ways to sugarcoat the action last week. After Tuesday's cruel upside head-fake, the wheels fell off the wagon as we edged towards expiration. While some will point to IBM's awful admission as the primary catalyst, the seeds of stagflation have been slowly sowing for quite some time. We've seen it evolve as inflationary pressures build on the input side and deflationary signs emerge on the consumer and manufacturing side. And all the while, our finance-based economy has grown increasingly dependent on low rates, credit-induced expansion and home equity financing. Scary stuff indeed.

I'm not gonna harp on the big picture as most Minyans know my humble thoughts in that regard. What I will do is share some vibes as we peer ahead and hope that it adds value to your process. These are trying times and we must remain lucid as we find our way through the minxy fray. With the meat of the earnings line-up quickly approaching, the noise promises to be loud and distracting. These are post-it notes that will remain on my monitors as we power up for this frisky pup:

  • Watch the breadth, it "tells" us a lot. Lotsa folks were pointing to General Electric (GE) and Citigroup (C) on Friday as reason enough to be bullish. Yet, despite a worthy effort by the two titans, market internals were horrible all session and pointed our compass straight towards Red Dye. A wise man once told me never to let an opinion get in the way of making money. I was actually eyeing a bounce (after "selling rallies" for quite some time) but deferred to my tea leaves and aborted the effort. Discipline over conviction.

  • Level Lore. The prolonged trading range encouraged complacency as folks were conditioned to buy dips and sell blips. One by one, over the past few weeks, the technical framework have steadily deteriorated. It started with the failure to pierce S&P 1200 and bled to the banks (BKX 99), the brokers (XBD 144), the techs (NDX 1460) and the DJIA (10,380) before coming full circle (when the S&P broke down). As past support is future resistance, these levels must remain on our radar as we edge ahead.

  • Perception is reality. Throughout 2003, a steady stream of negative news was brushed off by the bulls as they marched to Matador City. With the fundamental metric coming into focus this week, it's important to remember that the market remains a leading (not coincident) indicator. While the tape is certainly oversold (and prone to sharp sparks), there are alotta competing crosscurrents that could mute the relevance of these looming reports. In other words, don't fall in love with headlines or rationalize your risk--simply assimilate the inputs as part of a larger pie.

  • Keep it in perspective. Late Friday, as I walked through the eye-popping end results, I spent some time chewing through the VXO chart. After a three-day spike of 43%, my initial inclination was that this fear proxy was due to pull back. I then elongated my time horizon and viewed a five year chart of the very same instrument. Sure 'nuff, we're still near the bottom of the trading range and plenty of upside room remains. That doesn't mean we'll get there in a straight line but it added some necessary perspective after the volatility snoozefest we've endured.

  • Patience is a virtue. We often say that the ability not to trade is as important as trading ability. Capital preservation is the first step towards profitability and an advantageous risk/reward remains a priority. At the end of the day (year), nobody will remember we got to the bottom line as long as it's green and allows us to stay in the game. There is a ton of blood on the streets, my friends, and our goal in Minyanville is to arm you with the acumen to execute. Sometimes that means providing the insight and interpretation to provoke thought but mostly it means helping you hone the mechanics for your individual process.

  • Remember to breathe and relax your grips on the handlebars. Tension and pressure are intense emotions and can cloud the decision making process. If you've got too much exposure on (either way), taking some off is a good way to clear the conscience. A good trader knows how to make money but a great trader knows how to take a loss. We've all been there and there is no shame exercising your right to be disciplined.

We power up this crimson pup to find the world splashing in a crimson puddle. Asia fell off a cliff as the tricky Nikkei couldn't get sticky (-3.8%) and the wand across the pond failed to pull a rabbit from their hat (-2% across the board). After the carnage we saw last week, and with 3M (MMM) missing revenues this morning, Hoofy was hoping that we would start the session deep in the hole. That would be a more constructive set-up for an upside ride despite the fact that expiration may have exacerbated the late day volatility on Friday. As it stands, the stateside futes are flattish as traders digest a litany of news and ready to light the minxy fuse.

For my part, I wanna watch my tea leaves as they've paced the race for quite some time. The financials remain a focus on the heels of the BankAmerica (BAC) report (this morning) and Citigroup's (C) valiant effort (Friday). The internals will also stay center stage as they're the single best proxy of the overall intraday health. And finally, while many levels have grown increasingly distant in the rear-view mirror, the floors are now the ceilings (starting with S&P 1153-1163) that Snapper will have to eye if and when he finally arrives.

Good luck today.


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