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Monday Morning Quarterback: Calm Before the Storm

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If things happen as expected, watch for a downside slide.

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You got to cry without weeping
Talk without speaking
Scream without raising your voice

(U2)

Following a sneaky stretch that saw the critters Running to Stand Still, we power up this frisky pup for a fresh five-session set.

To be sure, the tape had every reason to retreat last week. Consumer prices upticked (pundits are quick to note that it was limited to silly things like food and energy), the financials were funky (under resistance but oversold), technical levels were breached (S&P 1350 was ultimately recaptured) and retail sales, while doubling expectations, were juiced by a one-time stimuli.

In our A.D.D., immediate gratification profession, you're only as good as your last trade. As such, there's a tendency to extrapolate the previous tick to the next session. That used to work a lot better than it does now, which is a function of intense news flow that is facilitating our bipolar stroller.

I've learned two consistent lessons throughout my career-stay humble or the market will do it for you and discipline must always trump conviction-and I always attempt to thread them throughout my trading and writing. With that said, I will offer that the risk of a seismic readjustment is higher than most folks currently believe.

The market is fluid and multi-linear, which is a fancy was of saying that "things can change and they often do." Still, there are a few dynamics that I'm currently eying which will help shape the tape and my perception thereof. If these three planets align, we'll likely see a downside disconnect that will define 2008.

The Bank Bungee

As go the financials, so goes the poke. We say that a lot in the 'Ville and for good reason. The BKX (bank index) has been a prescient precursor for the S&P 500 for many years. The fact that so many have now called for a decoupling between the two only serves to solidify that the more things change, the more they'll stay the same.

Quite simply, either the banks must find a sustainable bid or the S&P will get sloppy in a hurry.

China Rider

I know you rider gonna miss me when I'm gone? Jerry may have had something there as we watch Shanghai slip through the all-important 3000 level.

Last week we touched on the importance of this level. It's where the bubble first broke out in early 2007. It's a 50% retracement since October. 50%--cut in half! It's where China should have held, particularly if it's gonna light an upside torch into the Olympics.

You can learn a lot just by watching and I'm keeping a close eye on China. It was widely credited as an catalyst on the way up and the price action warrants respect the other way.

Let's Get Technical, Technical

While S&P 1350 is the loudest level in the marketplace-it's the midpoint between the March and May rally-I'm eyeing S&P 1370 as a level of lore.

That's a head and shoulders resistance level-drawn with crayons, not pencils-and a zone I'm using to define my short side risk. I like this level for a few reasons, not the least of which is that it gives me some room with which to operate.

Sticking with the trading theme and tying in the above bullets, I've also been thinking about some pairs trades (above and beyond gold-crude). Initial vibes include long financials-short retail (the former is down 45% from all-time highs, the latter a mere 15%) and long consumer non-durables, short retail.

Just thinking aloud as we fit together the minxy pieces.

Random Thoughts

  • Minyan Michael Santoli of Barron's mentioned this weekend that the financials have given back $1 trillion dollars and consumer discretionary lost $350 billion while the rest of the market shed 2%. That fits nicely into the pairs discussion we've been touching on.

  • My favorite factoid from all of last week? Energy overtaking financials in the S&P weighting totem pole, a vibe we first shared with ye faithful as far back as 2003.

  • Let there be six! I, for one, was rooting for the Lakers last night if only because I don't want the Finals to end.

  • I got word over the weekend that Lehman Brothers (LEH) executives were summoned to the company's headquarters. My first thought was the thought below, which was posted on Friday's Buzz:

    I just picked up a story that Goldman Sachs (GS) was going to buy Lehman (LEH) over the weekend. When I chased it down, I was told that it came from... me.

    To be VERY clear, I'm simply sharing an opinion. As I offered yesterday, my sense is that there are decent odds that they're gonna cart the injured player off the field before he screws up the game for everyone. IF that were to happen, it was (is) my sense that it would be a "take-under" in the teens.

    There aren't many candidates left who could absorb Lehman. Goldman remains on a very short list, if they're not
    the list.

    We don't "do" rumors in Minyanville and it certainly wasn't my intention to source one. After seventeen years of trading, I've learned to trust my eyes and gut. Still, so it's said and so you know, I have no position in either stock (after selling my Goldman calls on Thursday).

  • Blackrock (BLK) is sharp, we know, but so was Joe Lewis. Not saying Lehman is Bear, mind you, I'm just saying that while history doesn't always repeat, it sometimes rhymes.

  • Gold bugs would be wise to watch GLD $85. Technicals are but one of four primary metrics, we know, but it's a piece to the overall puzzle.

  • Good luck Minyans-let's hit this week hard.


R.P.

No positions in stocks mentioned.

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 todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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