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Do the Bulls Have Room to Run?

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Traders hope to build on yesterday's rally.

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Pass the Dramamine please!

You can't blame traders for feeling motion sickness. After a gut-wrenching decline-1500 DJIA points and 150 S&P handles since we scribed our recipe for a market melt on June 18th-Hoofy put on his game face yesterday in front of the largest bank rally ever.

We opined yesterday morning in Minyanville that the big picture blues were baked in the cake for a trade-the second such time we've done that this year, with the other instance on March 17th- and I understand there's a difference between being lucky and being smart. We know all too well that if we don't stay humble, the market will do it for us.

In the absence of Serendipity3, however-this South Beach Diet is killing me!-I'll take traditional serendipity. Dry, with fresh lemon please.

The reasons for our constructive stance were mapped yesterday, with the nuts-and-guts takeaway being that we were either entering the apocalypse and it was game over for the global financial structure or the conditional elements for a massive, mean-reverting rally were in place.

Indeed, whenever the BKX can double and still be in a downtrend, we've gotta sit up and take notice.

So, what now? Professor Kevin Depew-in addition to scribing his required reading for all Minyans yesterday-offered an excellent perspective, drawing the comparison between our current stretch and in the early '90's. To wit:

It sure is exciting to see the Financials finally turning around. What kind of rally can we expect from here, and what happens after that? These are reasonable questions. For clues, Minyan GK directed me to the TOPIX Japan Banks Index.

In the early 1990s, shortly after forming a peak that was nearly identical to the recent PHLX Bank Index, the TOPIX Banks Index fell from a high of 1477 down to 554 on a closing basis, a 38.2% retracement of the bull market move.


CLICK TO ENLARGE


What happened after that retracement level was reached? The TOPIX Banks Index proceeded to rally nearly 80% over the course of the next 14 months.

Now, let's take a look at the PHLX Bank Index.


CLICK TO ENLARGE

A similar rally over the next 14 months would take us to the low 80s on the BKX.

Of course, the rest of the story is that after the TOPIX Banks Index rallied nearly 80% from 554 back to 962, over the course of the next 10 years it collapsed to 124. But why look a gift horse in the mouth?

Now, I'm not smart enough to know if we'll walk the same path-one could argue that the DNA of our market is entirely worse than it was in Japan-but, as discussed yesterday in real-time on the Buzz & Banter, I'm giving the upside some room. The metaphorical "two legs in the bull costume", if I still did that, would still be in place.

I'm still involved in many of the names on our Turnaround Tuesday laundry list-Lowe's (LOW) calls, General Motors (GM) calls, Freddie Mac (FRE) (sold 65% on the close), Wachovia Bank (WB) calls (if it's possible for a stock to be up 18%, close on its highs and still trade funky, this would be it), Gannett (GCI) (lottery ticket) calls and, as discussed, the USO puts added at Crude $145.

Many of them are trades-that's what I do-and I'll humbly feed some ducks into the morning mix.

Some udder, random thoughts:

  • Given JP Morgan (JPM) and eBay (EBAY), an "S's over N's" dynamic wouldn't shock me today.

  • I offered on Monday that the airlines had some snapper potential as peripheral crude play. Yesterday, following a 30% rally across the board, they started to get some mainstream press. They've still got room-Continental (CAL) can run to $16 before resistance comes into play-but structural issues exist.

  • Denial, migration and panic? Yep-textbook. The question I asked Mr. Practical on Tuesday night was if we could see capitulation in the financials without the washout in the broader tape. He agreed with me that as go the piggies, so goes the poke.

  • Hoofy's recipe, so you know, is three-fold.
    • The news in the financials turns from "not as bad as expected" to "Jeez, there's actually some good news out there" (keep your ears peeled for the phrase "write-up")

    • Crude continues to mysteriously drop into the election.

    • Hank and Ben's Socialization efforts-while disturbing-kick in and burn fur.

  • Bad seasons define good fans. Bad times define good friends. Bad markets define good partners. Remember that, Minyans-anyone can "be there" when the world is fabu.

  • Gun to head for today? Jump, test, run, rest.

  • Somewhere in the deep, dark confines of Boo's backyard, someone is thinking "the sharpest rallies occur in the context of a bear market."

  • Note Google (GOOG) can't find a bid despite the jiggy futures.That, as we know, implies supply.

  • Remember, when the choruses of "all clear" arrive, it'll likely be time to batten the hatches anew.

  • Somewhere in the deep, dark confines of MY backyard, I'm thinking "Frozen Hot Chocolate."


Finally, we don't hide from our losers, we learn from them!

Yikes, Lehman downgrades Scripps (SNI), Gannett (GCI) pooped the bed. What the heck is happening to these paltry little rags?

Some mea culpa thoughts:

  • The internet is the single biggest deflationary force ever invented and the "information deflation" is in full force.

  • Without a doubt, my bullish bent on the newspaper names was my single worst "call" of the year.

  • The thesis was that portals will buy the papers to feed content into their pipes.

  • That remains a viable option for some of the franchise properties, although it will seemingly happen-if it happens-from lower levels.


Have a great day Minyans-you most certainly deserve it!

R.P.

Positions in LOW, GM, FRE, GCI, USO
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