Sax in the City
I'll be looking to fade rallies with defined risk.
Good morning and welcome back to the food for thought. With last week's meaty information still dangling in our digestive system, we power up our systems this morning to find another full plate. The three recent courses (Elmer, earnings and expiration) were a hearty start to the mindful diet but the critters know that we've only begun to cook. Last night, as they wound down from the weekend, the menagerie gathered at the Birdland for dinner and some Sunday night jazz. As the musicians tuned their toys, the conversation shifted to the week ahead. It went a little something like this:
Daisy: (eyes on the stage) I'm tellin' ya, I missed my calling--I shoulda been a singer. The world's first dairy diva!
Hoofy: (smiling) They'd call you J-low fat!
Boo: That may not be a bad idea. You guys may need a second income if I'm right in my big picture beliefs!
Hoofy: (holds up his hoof and shakes it) You see this? I'm quivering with fear! Seriously, Boo, last week's sell side inventory was meaningless--just a typical "sell the news" burp. The underpinnings of the rally are firmly in place and an accommodative Elmer isn't going to go away. The sideways action is healthy on the heels of the recent run. Simple digestion, thasall.
Boo: Dude, are you wearing rose colored glasses or beer goggles? I'll admit that there were some glimmers of light last week--particularly in the industrial space--but the market is pricing in a fairly robust recovery that nobody sees. Granted, the fundies aren't an out and out schvitz show but keep in mind that there was a ton of cost cutting mixed with a favorable currency (and rate) backdrop. End demand remains a huge wild card and those in the know couldn't hold any hands in that regard.
Sammy: The question we need to answer is whether these past couple of weeks were a basing or a churning. If it's the former, Hoofy's right and the Minx is catching her breath before another leg higher. If it's the latter, the tape may be exhibiting signs of exhaustion and "telling us" that a more defensive (bearish) posture is warranted.
Daisy: The word "churn" just agitates me.
Sammy: It agitates a lot of critters, Daisy, not just cows. But it's a little early to assign a reason to the rhyme. We've got another truckload of earnings this week, including 3M (MMM:NYSE), Merck (MRK:NYSE), Altera (ALTR:NYSE), Novellus (NVLS:NASD), Texas Instruments (TXN:NYSE) today and Amazon (AMZN:NASD), Amgen (AMGN:NASD), Broadcom (BRCM:NASD), Schlumberger (SLB:NYSE), Seibel (SEBL:NASD) and Sun Microsystems (SUNW:NASD) tomorrow. Investors will be paying close attention to the collective outlooks heading into year end.
Daisy: What technical levels will you be looking at Sam?
Sammy: The channel is the S&P is pretty defined. Since the beginning of June, we've been meandering between S&P 962 and 1015. A break of either level will garner excitement from the chart-heads (although S&P 950 is a fairly important level as well). In tech, NDX 1250 held on Friday (after struggling early) and that remains the supportive line in the sand. Also, the 20-day moving average "crossed" the 30-day moving average (S&P) for the first time since March. The buy signal worked then and while it remains to be seen if the sell signal follows suit, it's worth a mention.
Hoofy: Alright, so we've discussed the fundies, technicals, structural (liquidity) and we all know the psychology (no worries, mate). Have we missed anything?
Boo: How about the potential issue of confidence? It's certainly not on many trading radars--not with equities rising--but toss it in the pending file for review at a later date. We saw a decidedly less friendly hill last week when Elmer spoke his mind and that's a marked shift from what we're used to. If Fed credibility (Fedibility?) becomes a question, it could be problematic (particularly with sentiment skewed as it is). Also, and this is a touchy subject, we've still got a lot of our boys stationed in the middle of Iraq. As long as they're in danger, there will be a level of political unease in Washington.
Sammy: It's certainly alright to keep the antennas up, Boo, but those aren't tangible concerns yet. We've got enough on our plates without trying to trade the ghosts of innuendo. As we settle into the week, understand that information will filter out continually. Identify a time horizon, define your risk profile and await an edge...it's out there.
Daisy: Sounds good to me. Hey, by the way, what's the dilio with Toddo's big announcement this week? Any idea when the story will break?
Sammy: I spoke with him last night and he told me any day now--perhaps as early as tomorrow. I know the powers that be are working furiously behind the scenes and they want the unveiling to be perfect. Let's just take care of the minutes and let the hours take care of themselves, a'ight?
The lights dimmed in the smoky room and the snazzy, jazzy band emerged. Snapper took his usual spot to the right and readied his saxophone. The critters settled in, turned towards the stage and tuned out the tape talk. There was a full week of frazzled fray coming their way but they had some good tunes and great friends first. And they wouldn't trade that for anything.
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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