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Surfin' the Seas


Watch S&P 1015 (this week's high)--if we can scoot through there, traders will use that as new support.


Good morning and welcome back to the agenda splendor. With so many crosscurrents blowing in the wind, yesterday's hide and slide was par for the Minxy ride. While the beta-chasers sought refuge in the four-letter freaks, the financial follies caused their big board brethren to dip and slip. Was the burp a presage to an equity regurgitation, or will the hiccup prove to be yet another shallow Hal? After the close, the critters and I gathered at the Four Seasons with a gaggle of Grey Geese and discussed the tape. The conversation went a little something like this.

Hoofy: Yo, Toddo, if you're calling yesterday's action a dip and slip, you're reaching for more straws than Dorothy on Cinco De Mayo!

Boo: Hold on there fella, and don't be so quick to beat your chest. While the broader averages were pretty much a nonevent, there was some underlying weakness in the mo'mo' names. Biotechs were down more than 4% and the homies and brokers both took it on the chin. These were the sectors that led the beast up, if you recall, so don't ignore them when they take it on the chin

Snapper: Yo bro, it's called rotation -- you know, kinda like the rotating screw that's been driven into your temple all quarter? The groups that were lower have had the biggest gains and investors took some profits and shuffled into other areas (like the semis). It's no biggie -- the tape shrugged off weak financials, 2:1 negative breadth and a claw full of preannouncements to close just fine.

Daisy: Toddo had that stud Brian Reynolds in for lunch yesterday and I know they discussed the bond-to-stock trade its potential to buoy equities. With the fixed income market getting smoked, maybe that had something to do with it?

Sammy: Perhaps, cowgirl, but there's also low-level chatter that a large Japanese bank liquidated its entire fixed income portfolio. There's obviously no way to confirm this but the JGB's were down a chunk and somebody opened a can of whoop ass on the Treasuries.

Boo: Let's think about this for a minute: The structural metric has force-FED equities to investors as rates are almost a memory. What happens if the bond market continues to slide and rates tick higher? That sounds like a pretty toxic potion for stocks, no? There are a lotta balls in the air right now but pay particular attention to the fixed income markets as a potential equity tell.

Hoofy: Were you the kinda cub that always thought there were monsters lurking in your closet?

Boo: Keep taking pot shots, Hoofy, your 15 minutes are almost up. While the Investor's Intelligence numbers aren't a timing mechanism, they're certainly ticking. The forest is full of dry leaves and massive complacency -- all we need is a spark. The only question is when the collective psychology shifts from the invevitable second-half recovery to the recoverless second half.

Snapper: Hey Boo, didn't Brian already address bond outflows? If memory serves, he opined that three things could happen. One, the money goes back into money markets (bad). Two, they flow into corporates (good). Three, they return to stocks via the bond-to-stock trade. Those seem like decent odds, no?

Boo: All I'm saying is that there are potential flies out there. While everybody is focused on the potential jam job into quarter-end, there's cause for paws. Project yourself out a three months and look back at this juncture. There's a LOT of speculation (look at the charts of LEN, BTK, XBD), most bears have capitulated, index volatility is super cheap, there are yet to be discernable signs of a second-half recovery and the tape is pricing in a best-case scenario. It'll seem obvious in hindsight -- but in the middle of the forest, sometimes the bark is dark.

Hoofy: The charts in the Nazz and S&P are stairways to heaven, cookiepuss. As long as we hold the trendlines in the averages, I'm not gonna sweat it. Higher lows, higher highs... it's all good. Now, if you'll excuse me, I'm gonna take some of my winnings, grab my date (literally) and enjoy a night on the town. She stuck with me when the chips were down and tonight, I'm gonna rub her like Kobe beef!

The "it" couple excused themselves from the table as the rest of us let the conversation soak in. There was certainly a lot to think about and the steaks have never been higher. The economic numbers and expiration loomed large and, as the next few days promised to be hairy, we made a conscious decision to leave the tape talk be for a bit. After all, all work and no play makes bitter critters of us all.
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