There is something to this planetary plot, a cosmic occurrence we are reminded of three times each year.
"It's getting hot in here (so hot) so take off all your clothes. I am getting too hot, I wanna take my clothes off!"
"On Monday, January 28th, 2008, Mercury the cosmic trickster, turns retrograde in Aquarius, the sign of the Water-Bearer, sending communications, travel, appointments, mail and the www into a general snarlup! This lasts for three weeks or so, until February 19, when the Winged Messenger reaches his direct station. At this time he halts and begins his return to direct motion through the zodiac. Everything finally straightens out on March 10, as he passes the point where he first turned retrograde." Astrologycom.com
Well there you have it. For first time readers of this column, let me assure you that I'm not into butterflies, moonbeams and fairytales unless Jimi, Sting or Stevie Ray are involved. But there is something to this planetary plot, a cosmic occurrence we are reminded of three times each year.
For those of you who haven't experienced it, consider yourself fortunate. If you've felt a bit of a funk, however-a failure to communicate, issues with your technology, misunderstandings with a loved one, travel travails-there are higher powers in play. I am reminding myself of this dynamic as we ready for one of the more important sessions of our young year.
Given your likely time constraints-and considering mine-I'm gonna get to it with hopes of covering gainful ground. There's a lot going on right now and my goal, above all, is to communicate clearly. No small task given the wry smiles from the Trading Gods.
Fed Thing's First
A week ago today, we offered Five Reasons for Optimism, a column that scrunched a slew of noses throughout the Street. 500 DJIA points (and 830 points off the low) later, the mood on the Street has shifted to cautious optimism and guarded bullishness. There is still trepidation, as evidenced by this morning's Investor's Intelligence reading of 40.2% bulls, but the short base and bear case has clearly been shaken.
Fed Fund Futures are pricing in a 58.5% chance of a 50 bip snip by the FOMC, which will be announced at 2:15 EST. These odds have lowered considerably since last week (after the rally and yesterday's durable goods report) but I remain of the view that anything less than a 50-50 split (Fed Funds, Discount Rate) will be sold by the Street.
There is a growing contingent arguing that Big Ben will only cut 25 bips in an attempt to exude confidence in the economy and recapture lost credibility. I'm not in that camp. In fact, 50 bips would bring the cumulative ease to 225 basis points (half way through the cycle) and tag Fed Funds at 3%, which is in-line with what recent rates at the TAF auctions have been.
Where Art Thou Now, Market?
The more pressing question, I suppose, is whether or not we're in a recession. While dining with my friend Jeff Saut last night, we discussed his recent article and our collective thoughts on the state of the tape. While he was quite cautious into year-end, he added exposure last week (on a trading basis) and is more sanguine than I on the bigger picture.
Be that as it may-with a conscious nod that he's as good as it gets-it's an academic discussion for the time being. The Art Carnage since last summer has already discounted a slowdown. The question now is two-fold. First, how severe will said recession be and, second, can the credit contagion be contained. And no, these are not mutually exclusive discussions.
We agreed that this is going to be a fifteen round bout that has only just begun. That makes this juncture particularly prickly as both sides of the ring have a thing or two to prove. We are at a crossroads-this is either 1998, where the Fed will reflate, or it's 2001, where their moxie is done. See both sides but understand that the margin of error is razor thin and painfully sharp.
Last week I offered that we have room to run into the downtrend line of lower highs. There are three resistance levels to watch as we find our way: S&P 1365 (right here), S&P 1405 and the downtrend line, which is a ways away near S&P 1450 (and fluid as a function of time). I remain of the view that longer-term players can use higher prices as an opportunity to lighten up.
Yesterday, despite the fugly chart and recent reactions to tech earnings, I was nibbling on some Yahoo (YHOO) defined risk calls for an upside schnitzel. The stock has rewarded my efforts with a 10% haircut and a not-so-subtle reminder that nobody is smarter than the market. Grrr… have I mentioned that I really dislike Mercury Retrograde?
I have March paper and I'll again say that, in my edgeless, humble view, I think somebody, either within or outside the company, will monetize their massive eyeball base. No post-rationalization here-I was wrong, my hand is raised, there are corks on my forks-I simply wanna watch how the stock trades.
The upside of anger is that an assimilation of our four primary metrics-fundamentals, structural, technical and psychology-tempered my enthusiasm and mitigated my risk, both in size and approach. It still stings, but the goal, when trading, is to trip, not fall. I'm trippy, but I'm still here.
More consistent with my recent musings, I'm looking at the Huggies and Druggies (consumers and pharma) as "places to go" on the long side. I'm there, albeit not in huge size, in Schering Plough (SGP) and Elan (ELN) and continue to look at the Cokes (KO), Buds (BUD), Proctors (PG), Johnny Johns (JNJ) and Altrias (MO) of the world at the right price.
Odds and Ends
Yawn! Another day, another $4 billion in write-downs, this time by UBS (UBS) (which brings their total nut to $18 billion).
For purposes of perspective, the BKX is 22% off last week's lows and a stiff wind away from a 50% retracement of the downdraft. What is it they say about the sharpest rallies occurring in the context of a bear market?
The trannies, after taking a 10% hit to start the year, are now higher for 2008. Add those (along with the financials and beta) to our watch-list on the back of the FOMC.
And finally, Fed days are a tale of two tapes with 2:15 EST serving as the toggle. It's gonna be thin, whippy and binary on the news so keep powder dry and perspective in tact. And remember, Minyans, the first move is typically the false move.
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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