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The December Digestion

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Crosscurrents abound as 2010 looms.

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Turnaround Tuesday is upon us and the natural question is therefore begged: will the tape, uh, turnaround? We walked through both sides of the current equation yesterday in an attempt to examine the residual grist that defines our bottom line. To wit:

Hoofy is pointing to the path of least resistance into year-end, based largely on the tone of the credit markets, sideways basing (working off the overbought condition as a function of time), stubbornly sticky breadth and the perception we side-stepped a debt debacle in Dubai.

Boo will note the less-than-thrilling reaction to news (Dubai, M&A), continued drag in the financial complex, resistance above, which remains in place until proven otherwise, and the cumulative global imbalances that are starting to perk up in Eastern Europe, among other places.

Price, as is often the case, will be the arbiter of variant views and time will serve as the jury.


While I've been trading around some short side gamma in the S&P (under 1120), the market feels like it wants to try and climb through the window of opportunity between perception (all is well) and reality (it's really not). As I've learned over the course of my career that the market is never wrong -- we're just pawns in her game, our job to is to adapt (not conform) and the difference between perception and reality is where the profits are found, I most certainly wanna see both sides of our current equation.

Today will provide a healthy, two-sided test. Wells Fargo (WFC) is higher on word it'll repay TARP. Never mind it's substantially increasing the shares outstanding (which is dilutive), there were evidently whispers that the offering might have been upwards of $20 billion. With Citigroup (C) fresh in our keppes (down 7% yesterday after a similar course of action), Letter I, er, Wells Fargo should remain on our radar.

On the flip side, we've got a meaningful uptick in producer prices (which will either pass through to a strapped consumer or squeeze margins for corporate America), an Empire Manufacturing report that missed by a mile (2.55 vs. est. 26, a five-month low), foreign investment (net long-term TIC) flows 44% lower than expected (any hint of isolationism or protectionism is not where we want the needle to point), fresh worries regarding Dubai, a margin miss at Best Buy (BBY) (which could be extrapolated to the holiday retail season), and the US Dollar is up sixty bips (the inverse correlation is a bit too "mainstream" for my liking but the big picture dynamic remains in place).

In short, there are plenty of reasons for the market to trade lower today and if it doesn't, the action will speak louder than these words.

Please remember there are a multitude of agendas in play on numerous levels -- the government hand, financial service firms, hedge fund performance anxiety, and John Q. Public -- so keep that in mind as we edge through the grind. Again, this is an important technical juncture, one that we've been watching for the better part of the year, so remember there are all sorts of buy-stops set on the other side of S&P 1120, if and when. Respect, but don't defer, to the price action and trade to win; never trade "not to lose."

Random Thoughts


R.P.

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