Good Luck Minyans!
Good morning and welcome back to the quiet riot. While I'm "officially" on vacation this week, I wanted to pen a some quick thoughts to ye faithful Minyanship. Whisper thin conditions will accompany skeletal staffs to the office this week and they'll join forces to create some whippy trips. Fair warning: Regardless of which way the tide turns, there will be a camp that rationalizes the action (as a function of the holiday). As our bottom line makes no such distinction, however, we'll need to proactively navigate these crafty currents. Grab your paddles and climb those saddles, Minyans, the fun in the sun is set to begin!
As we power up for another cup, the obvious battle is one of leadership. The saucy semis broke out through SOX 400 (early last week) and were given a further spur by Intel's (INTC:NASD) upside surprise. The chipper chips led the four-letter freaks to new highs for the year as acne quickly spread through tech. While names like Intel, Texas Instruments (TXN:NYSE) and Advanced Micro Devices (AMD:NYSE) broke out, the financial sector began to pout. The piggy banks were trading heavy all week and they finally pooped into Friday's closing bell.
I've been a long time bear in the financial space and continue to feel that these names are the most vulnerable. With that said, there wasn't specific news in the group to lead the crimson tide on its wild ride. A spate of rate concerns, rotation (into tech) and mortgage related anxiety was assigned the blame but something didn't smell right in Banksville. Perhaps I'm just being paranoid (who me?) but I urge you to monitor this sector regardless of your posture (or which asset class you're trading). Citigroup(C:NYSE) (support at 42 1/2), Goldman Sachs (GS:NYSE) and Fannie Mae (FNM:NYSE) (support at 60ish) remain my trifecta tells in that arena while Microsoft (MSFT:NASD) and General Electric (GE:NYSE) should be included as broader market proxies.
My stated worries notwithstanding, there have been impressive elements nestled in the recent action. The combination of industrial strength and pharmaceutical weakness are historically bullish trading signals and there's clearly been an intra-market rotation. Breadth, for the most part, has been relatively healthy, Boo hasn't been able to string together any meaningful winning streaks, Elmer and Dubya have clear agendas (I don't agree with them but I respect their beer muscles), fresh breakouts are emerging (does S&P 1020 have to confirm?), the potential for (further) positive confirmation exists and performance anxiety will kick into high gear as we edge towards year end. That's Hoofy's case in a nutshell and it's what he'll take to the final four.
On the other side of the fence, Boo and I have been mumbling about the widespread complacency (VIX), crowded bull camp (Investor's Intelligence), multiyear dandruff (textbook spike to resistance), historic levels of insider sales and ever-expanding bubble trouble (housing, debt & derivatives). As these warning signs haven't mattered (yet), more and more players have begun ignoring them. That, to me, only adds fuel to the eventual fire sale. I am also growing increasingly concerned with the Middle East region and the potential for an oil shock to act as a downside catalyst. There's really no way to game this (and, until it becomes an issue, it'll be considered a non-event) but I wanted to communicate the thought nonetheless. With tensions growing within Iraq, continued conflict between Israel and Palestine, a massive wild card in Saudi Arabia, our soldiers at risk daily (waning domestic support) and the constant threat of terrorism, there's a lot of moving (and unstable) parts to digest.
One of two walls will soon emerge and it will either be full of writing or built of worry. I've been relatively vocal that this phase will lead to malaise but I'm respectful of the process and know that the Minx is much smarter than I am. As such, I've attempted to construct a risk profile that allows me to participate if my thesis evolves but protects me if I'm wrong (or early). I know many Minyans don't share my horizon or stylistic approach (positive gamma), but I can only (and will always) tell you what I'm doing. With that said, I will (humbly) offer that in "my" big picture movie (that plays out in the years ahead), both bonds and stocks appear quite vulnerable. After migrating from the deflation camp earlier in the year (when Elmer started his printing press), I've now pitched tent in the stagflation camp. To me, an environment of sluggish economic growth, high unemployment and inflation (via a devalued dollar and rising commodity prices) seems most intuitive.
First things first, we've got a waify week to feed and the technical levels to monitor are as follows. On the big board, the G-Spot (S&P 1000) remains a tender zone even if it's only psychological. Above that, we have our obvious resistance at S&P 1010-1015 (1020 is considered 'the' breakout). Underneath the sheets, S&P 990 (50-day moving average) is the first support while S&P 960 will break a triple bottom (at the bottom end of the range). In tech, the breakout was confirmed and, as such, NDX 1300ish (past resistance) becomes the first support. If they dribble through, NDX 1250 (50-day) and NDX 1200 (bottom of trading range) are the next areas of stickiness. Other technical zones to monitor include Dow Jones 9400 (breakout level), Dow Jones 9185 (50-day), Dow Jones 9000 (bottom of range), SOX 400 and, perhaps most important, BKX 850. That is the neckline of a pretty hairy head & shoulders and if (big if) it confirms the break, there's a clear void of support until BKX 800 comes back to daddy.
Please understand that there are viable (near-term) arguments to be made both ways and the gorillas are gonna try to swing the cage while the ranks are thin. Remember to remove emotion from your decision making, define your risk (when possible) and, above all else, think positive. There are sure to be a few banana peels littered about and the last thing we want are any injuries heading into the holiday. Good luck, my friends, and let's end this summer with some jingle in our jeans and a smile on our puss.
Fare ye well!
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