Wheel of Fortune
The futures are sitting right on top of their gap levels!
The wheel is turning and you can't slow down
You can't leg go and you can't hold on
You can't go back and you can't stand still
If the thunder don't get you then the lightning will
Good morning and welcome back to our financial piñata. Yesterday's thataway served two purposes: It whipped traders who tried to squeeze profits from a stone and it flummoxed those who tried to identify a discernable pattern. In other words, it was textbook bear market material as the Minx continues to stroll down the path of maximum frustration. She's been saucy of late -- that's for sure -- but when the going gets tough, us Minyans first get going! Let's get to work.
As you're aware, it's considered bullish from a trading standpoint when there are large shorts in the market. Conversely, when the short base is low, a wave of buying (covering) is removed from the supply/demand equation and is (ironically) bearish. Late last week I picked up a data point that the "bigger" hedgies were short and staying that way. That can be looked at two ways: that these guys are the smartest of the smart and they don't believe the hype or that there is the potential for an exacerbated move higher.
I took a poll this morning among my best option coverage and found that, on a scale of one to ten, they felt that the short base is about 3 1/2. That's a very low number -- lower than I thought -- and somewhat inconsistent with my information last week. Still, I wanted to follow up (as I said I would) and keep my fellow Minyans in the loop. My own personal sense is that Monday's reversal, while catching longs, sucked in some fresh short money as well. That could have something to do with yesterday's grindy and inconclusive action.
I've been staring at my Bloomberg charts of the S&P and NDX (GIP 21) and see both sides of the coin. The bulls are pointing to the potential reverse head and shoulders (in both) while the bears are targeting the next downside gap. It's a great illustration of our current battle and there are pretty definable levels. If Hoofy can hold S&P 873 and NDX 1045, the powerful upside pattern remains in tact. If they fail, however, the fillage works to S&P 850ish and NDX 1020ish (areas of congestion).
Research this morning is relatively light. Goldman got on the wagon and upgraded PepsiCo (PEP:NYSE) while downgrading Anheuser-Busch (BUD:NYSE). Goldman was also cautious on Microsoft (MSFT:Nasdaq) which is interesting because Cowen upgraded the same name. Deutsche Bank was cautious on Cisco (CSCO:Nasdaq), CS First Boston downgraded the European semis, Commerzbank punted Nokia (NOK:NYSE) and Lehman was cautious on semicaps.
I've been quite "guarded" of late -- perhaps too guarded -- but it's been consistent with my view of the world. Yes, this might be a massively bullish wall of worry and if it is, I'll likely underperform on the upside. I'm willing to accept that, however, as I don't "trust" 'em. There are a lot of things that can go wrong -- and even if they don't, things aren't so hot the way they are.
The goal, for me, is to identify advantageous risk/reward that fits my thesis. Typically, that style dictates that I patiently wait for technical set-ups and, once that happens, I'll monitor the mindset for psychological sea changes. In other words, my goal is to get as many ducks aligned as possible and strike when the quack count is high.
With that said, the structural metric continues to be the main driver of equities and we must respect the unknown. The dollar (DXY) and stock-to-bond trade are pushing the tape around and I'll continue to key off those (as well as crude/gold). Stateside tells will once again include the financials (banks and brokers have lofty stochatics), the semis (see Snoop's opening piece), retailers, breadth, cyclicals and, of course, our levels.
It's Hump Day in Minyanville, my friends, so take a deep breath and let's get this party started right. This is gonna be an important earnings season and you'll need to stay sharp and make lucid decisions. I know it's hard -- trust me -- but the onus is on us to adapt. Trade to win (never "not to lose") and think positive -- we'll get there.
Good luck today.
Daily Recap Newsletter