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Monday Morning Quarterback: The Rubber and the Road

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Earnings will tell the tale.

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A new week has arrived, and the world awoke with a green gleam in her eyes. The reaction to Friday's news -- always more important than the news itself -- was on the margin positive as traders brushed off a prickly payroll report and chose instead to look towards earnings, which begin today with Alcoa (AA).

To be sure, there were flies in the jobs data. Civilization labor force participation was 64.6% vs. the five-year average of 65.9%. If those three million peeps were still looking for jobs, the "official" unemployment rate would have been closer to 12%. As it stands, the underemployment rate -- including those who've stopped searching or settled for part-time jobs -- is upwards of 18%. That's almost one out of every five Americans, many of whom continue to wrestle with outstanding obligations.

The genesis of Minyanville was predicated on there always being a bull case and a bear case with the residual grist creating fertile education. To that end, there are indeed two sides to the current story.

Hoofy will argue that Minyan Mason's salient script continues to play out; the realization that cash is trash, a rush of M&A activity, share buybacks, $1 trillion in corporate liquidity and "wide comprehension" that business has stabilized. Factor in the basing, breakout and retest of S&P 1120 -- the downtrend from the 2007 top and a 50% retracement of the entire decline -- and you've got a recipe for further gains.

Boo isn't having it, in more ways than one. Whether it's continued state conundrums, sovereign wrangling or the default of Manhattan's largest residential enclave, the worrisome writing is on the wall. Juxtapose these persistent underlying issues against layered resistance in the S&P -- between current levels and S&P 1200 -- and you've got plenty of cause for pause.

But wait, there's more! Lest you're relying on traditional influences for your decision-making process, the government (which owns mountains of toxic dormant debt on our behalf) has muddied the choppy waters. Word is that sweeping regulation will soon target short-sale rules, including weekly disclosures of trading positions. The administrative duties of such legislation, in and of itself, will preoccupy many professionals who would otherwise be trading (which may be part of the agenda).

Lot's to think about, for sure; compartmentalize, assimilate and think positive.

Minyan Mailbag

Toddo,

Happy New Year! You often write, "Technical analysis is but one of four primary metrics." I don't disagree with that view, but my question is how we make money from the other three? There are multiple opinions on fundamentals, structural forces, and psychology, but price action only has one; it is what it is.

During the NASDAQ bubble, deferring to fundamentals would have been a fast way to lose money. Psychology was bullish, but it stayed bullish for a long time. If traders paid attention to the charts, however, they would have had ample opportunity to make money both ways. With regards to structural forces, Minyanville was the first to alert investors to such issues in 2006, but the market rallied until the bubble burst.

My point is, as traders, we want the best possible opportunity to make money. In my view, paying attention to charts is the best way. If we let multiple opinions about fundamentals, psychology and structural forces enter our psyche, the value of technical analysis is skewed.

I must say that having a different viewpoint and being able to send such an email says a lot about you and Minyanville.

Regards,
Minyan Prakash


MP,

All of the metrics are inherently flawed when viewed in isolation:

  • Fundamentals: news best at tops, worst at bottoms.

  • Technicals: stocks are better higher and worse lower.

  • Structural: Doesn't matter (cumulative imbalances) until it does.

  • Psychology: Momentum works until exhaustion.

This is why I've traditionally tried to assimilate why, in my view, the government has drastically altered the rules of engagement.

We first spoke about this dynamic in September 2007, offering:

"Do you remember watching professional wrestling as a kid? They used to stage these steel cage matches, locking two behemoths in the squared circle.

Two men enter. One man leaves.

Such is the case in the modern day financial fray as the 800-lb gorilla that is the credit crunch battles it out with elephants in the room that are global central banks.

At stake is the claim to fame and new found riches as we unwind the twisted tale of our interwoven, derivative-laden, debt-dependent, finance-based market machination."


The point is that we're trading -- and living -- in a different world. Whether the "intervention" is consistent with what I offered last week or is more along the lines of Pep's vibes (which I enjoyed tremendously) isn't really the point. What is important-and what perhaps I didn't do a good enough job of-is adapting, but not conforming, while adjusting your style ("make it to take it" vs. trailing stops, etc).

Hope this helps; happy trading bubba.
Toddo

Random Thoughts
:

  • Did you know we're offering a special 60% discount on all Minyanville critter tee-shirts? That's ten bucks each, my friends; sport your favorite critter loud and proud!

  • Man, what an awesome game between the Cards and the Packers last night! There's nothing better than kicking back for playoff kick-offs, even if your squad is sitting it out. Dallas looked strong, as did the J-E-T-S.

  • Trade options? Steve Smith is one smart cookie when it comes to options trading and he lets Minyans see every one of his trades in our OptionSmith newsletter. Take a trial on us.

  • As I'm typically early, I can't help wonder if my 2010 Themes will take some time to work their way through the system.

  • Minyan Joey again notes Friday as a major time pivot for the tape. See it here, as well.

  • Talk about being early! "We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people." Daniel Webster, 1782-1852

  • Keep an eye on Amazon (AMZN), which is failing to participate in the early morning circle smirk. You can usually learn a lot just by watching.

  • Given our outsized obligations, you get the sense that we'll see regulation on our 401(k) accounts. The question is, does the government suspend tax penalties, flushing the system with further liquidity, or induce a mandatory allocation to treasuries to help soak up the supply?

  • T-minus 21 days left in my January cleanse (no alcohol, bread or sweets). While it's only been a little over a week, laying off that stuff does wonders for your mind, body and soul.

  • As banks brace for the bonus fury, expect to see further populous backlash, such as this suit against Goldman Sachs (GS).

  • Professor Jason Goepfert notes on this morning's Buzz & Banter that last week, traders spent $1.9 billion on call option premiums vs. $499 million on put options. Four-to-one isn't a shocker from a momentum standpoint, but it begs the question what the path of maximum frustration might be? That skew, he notes, has only happened once before (the week ending January 12, 2006) and the S&P topped, failing to score a new closing high for nearly two months.

  • Gotta hop to the Buzz Minyans; I'll see you on the other side of the fence. If you're not on the Buzz, why not a free trial? Have a fantastic week and remember to enjoy the journey!


R.P.

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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.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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