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Checking Out Capital One


What's in its wallet?


Don't look now but that feeling is back. You now, that sense that the train is pulling out of the station, creating a sense of urgency to be long stocks.

I guess the interesting thing is that for the most part the market continues to be a zero sum game in the sense that all equities aren't up at the same time and often one group is higher at expense of another being lower.

Since the groups getting hit are all major drivers of inflation (see crude oil, agricultural products) there are few tears on Wall Street. (I think the agriculture plays will come back but it could be a long time before they gallop along like wild stallions. Earnings from these companies should beat consensus for many quarters to come but comparisons will be tougher and folks will extrapolate negatives.)

The real buy signal comes when all stocks are higher across the board. Of course, that would mean the masses are involved: a sell signal in its own right.

We are such a long way from wider participation in the market that bringing it up now is folly or a moot point. In fact, as long as the pools of funds earmarked for the stock market remain limited we will continue to see these incredible gyrations and bifurcation of fortune.

Speaking of gyrations and fortunes the correction in crude oil continues to be jaw dropping. From a technical point of view, the crude oil chart has acted 100% in accordance with the textbook. Violations of key moving averages have lead to further moves lower, just as a successful test of the bottom of the channel resulted in ensuing rebounds and moves to newer highs. Yesterday, crude oil was hovering right above its 200-day moving average and key support point of $110.00 and found buyers. I think buyers will rotate back into crude, but initially it will be at the (limited) expense of equities unless it begins to surge again.

I think if crude makes a stand it would only be range-bound, with resistance points up to $120.00 and key support at the aforementioned $110.00.

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The market does lack a few elements beyond the universal belief it's better to be in the mix rather than on the sidelines.

  • Leadership: There's a difference between oversold stocks that make stock bounces, like the airlines, financials or home builders, and sectors and niches of the market, like metals, commodities and others that were zooming but didn't have coattails. The market needs technology leaders, industrial leaders, and blue chip leaders. These don't have to be the strongest stocks in the market, per se, but they can't be laggards.

  • Fewer doubters: I naturally dislike doubters. I still bristle at people that told me I couldn't make it and shouldn't even try. I look askew at folks that always root for the favorite because they don't have faith in the underdog. (Note: I am rooting for the US men's basketball team even though they are heavy favorites. There are exceptions to most rules.) The market needs fewer doubters. A certain amount of skepticism is great as we don't want everyone to be bullish, but when the whole world gives up then the whole world loses.

  • Clarity from the financials: There's so much speculation swirling that financial companies will need to raise money, a lot more money, to make it through the rest of the credit/housing crisis. Making matters even more intriguing for today's session is the Securities and Exchange Commission's emergency rule that temporarily banned naked shorting expired at midnight last night.

    On July 15th the SEC imposed that temporary ban on 19 financial companies in an effort to stop a different kind of run on the bank. I would imagine professional shorts are licking their chops. The fact is shorts have still been busy as an army of killer ants as I'm told the short position in Washington Mutual (WM) alone is 350 million shares. Wow. These guys are betting the company goes out of business or maybe they're trying to put them out of business.

The financials rallied after the announcement and again after the initial grace period was extended on July 21. In the last week, however, financials have been very choppy as volume has declined and resistance has held.

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Charts of the Day

The action in Capital One (COF) caught my attention early in yesterday's session as it seemed to have more vigor than the rest of the financial space. By the end of the session 13.6 million shares changed hands which is impressive (average daily volume 11.6 million) but not as much as recent sessions. The company missed the Street by a dime in the last quarter, which isn't too awful in this environment.

However, there were 47 insider sells against only three purchases for just 6,500 shares. Despite all of that I've featured this stock in the past with great success after predatory lending masked the underlying value of the company. That was more of a public relations fiasco: The current situation is direr and will be tougher to remedy. Still, the stock looked very enticing yesterday.

When I see a stock with a break way gap opening to the upside (or down when considering going short) that is filled later (see two-headed arrow) and the stock turns higher that is a huge buy signal. By the way, there is a 19% short position.

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Any other session and Capital One would have been the most intriguing chart of the session but I think there were a few others that were even more compelling. One was Target (TGT) which saw its best volume day in the past 52 weeks.

The real buy signal came on August 8, when the stock broke through the long term trend line on convincing volume. Now it looks like it has room to $57.00.

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