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Trade the Markets 7-27-2009

admin on 07 27, 2009

The run continued last week aided by earnings “beats” of significantly reduced analysts estimates.  There has also been a good deal of discussion around “performance chasing” and other concepts like “have to be invested” or “can’t miss this rally”.  The “market as an indicator” theme also gained strength as did the references to algorithmic momentum trading.  This is all well and good and it’s times like these that we’re glad that we keep an open mind with regards to the market direction.  Sometimes it’s good to remind ourselves that “the market” and the economy are two separate things and that there doesn’t have to be a direct link at all times.  We learned long ago that nonsense begets nonsense in the markets and that it’s better to trade it if possible as opposed to fighting it with research and logic.  Fortunately we’ve noted on several recent occasions that the players have been “monkeying” around with key technical levels and patterns because: a) That’s what they do and b) That’s what can add fuel to movement.  It happened again last week as the DOW ripped through 9000 and then above 9100.  These areas were key levels at which we’d expect to see “pros” run things to in order to force capitulation of all kinds, be it from shorts, or ancy wannabe longs.  We warned about the haze of the summer a few weeks back because we’ve seen this type of activity in many summers of the recent past.  Lighter trading volume and the mass psychology of the seasons help to amplify the desired effect.  After all, it was only two “Augusts” ago that DENIAL made its final stand on the way to the all-time highs in the DOW only 2 months later in October.  Please recall the “Subprime is contained” mantra that most of the “experts” were bandying about at the time. This time we’re being told that the recovery will start sooner rather than later and most people are acting as if the investing paradigm of the past 50 to 60 years will be the road to investor salvation yet again.  In fact, we’re probably not too far off from the days when Mark Twain will be all too frequently misquoted in relation to “buy and hold investings’ demise being greatly exaggerated.” If our friends are able to goose the DOW back between 10,000 to 11,000 at some point in the near future remember what you read here today.  Those levels should sound ridiculous to you if you have an appreciation for why in great likelihood the economy of the near future is not likely to be one like those of the recent past but “ridiculous” could be the stock market’s middle name at times if it had one.  We have to remember that our pals need to rebuild their franchises and one leg of which is still standing happens to be “wealth preservation/wealth management”.  They fail to mention that really it’s THEIR wealth that is of primary concern in both instances but in all seriousness that “business” remains somewhat intact despite the fact that investors are open to change at this point in time like they rarely have been before.  The point is that an epic “jam job” to coincide with the recovery would be a shot in the arm that could go a ways toward restoring the asset management model for profits.

What we failed to mention above we’ll mention here now.  The cheerleading has been tremendous as it always is and though the “positive surprises” are many we’ll choose to stay fixed on actual improvement in the economy.  The maneuvers that enhanced the “beat the number” results may be fine for corporate accountants and shady CFOs but all of that cost cutting at the expense of what was formerly known as personnel is actually detrimental to the economy at large.  We still see far too many serious issues that we believe can retake the “front page” in the not so distant future for us to simply “buy and hold” style invested for the long run at this point.  We’ll still trade any rally or selloff though!  Trading and investing are two different approaches from our perspective and the macro backdrop is much less important to the former.

Our final note is that this type of surge is generally unsustainable and now that it seems, and we stress seems, that Cap and Tax and Healthscam may at the very least be postponed, and it’s quite possible that “gridlock loving” Wall St. might just “sell on that news” since all of US know it now.  Maybe we should all get together and get ourselves some lobbyists and analysts so we can know the likely news ahead of time too?  Of course, Nancy Pelosi is still threatening August as we write so one never knows…

The Technical Picture:

Above is a 30 minute chart of the SPYs.  The manic market rise that we’ve witnessed over the past few weeks just happens to coincide with the CBO releasing what’s become known as the $1 Trillion death blow to the healthcare rush/push.  We think that the boys would have used the earnings beats to maximum effect regardless but we believe that silver linings of gridlock really added to the velocity of the movement.  A double bottom back in mid-July helped to launch the news powered rally that we’ve seen and now we see what could be a double top.  Only time will tell but any type of Fibonacci retracement will result in a correction of significance in terms of points simply because of the great magnitude of the rise.  We could also be in the process of forming an ascending triangle as well and that augers more pain for the bears, at least in theory.

We’d think that smart bulls would even prefer a respite here to regain strength but with the volume levels reduced anything can happen especially if the news continues to be covered in as positive a light as possible and that’s a near certainty.  Housing sales are touted but the reduced prices that produced the sales are glossed over at best.  Reduced earnings estimates are surpassed on the backs of furloughed employees and new and federally improved accounting gimmickry and the wheel goes ‘round…  Oil back up and demand possibly heating up and thus driving up mortgage rates…  those don’t seem like good ingredients for the recovery cocktail but they may not matter at all as only the nature of the markets seem to matter during phases like this.