SPX - At The Crossroads

Interesting action today, as we gapped open and remained in a positive territory most of the day, giving up some gains after Chrysler's Chapter 11 decision. We have been faced with tremendous amount of negativity, worse than expected GDP, BAC and C requiring more funding, and swine flu pandemic. But we keep marching higher. On a positive note, we have more than 60% of companies already reported and thus far the positive earnings surprises seem to prevail.

So today we find ourselves at the crossroads, with SPX still staying within a trending channel, a stone throw away from the major resistance - @875. The support remains around 860. Normally, such strong momentum deserves respect, and it breaks above 875 and holds it for a day or two, I think we can expect a move into 920 area. If we get some buying panic kicking in, (which I think would be likely) we could reach 950-1000 by the end of the May.

But, there is a clear divergence in stochastic, that is indicative of the momentum running out of steam. I think the odds now favor consolidation. A break below 860, would likely imply a move to 825 area, where I think we may hold, barring some new shocks.

So, tread carefully, while we are in the channel. Take some profits and go out and play a round of golf. Buy the breakout above 875, or bounce off of 860 level. Sell/short breakdown below 860.

Here is a chart so you can see what I am talking about:

TBT - finally a breakout

I have been watching TBT very carefully (this is one of my largest positions in my long term account, but I will be adding today to my trading account I maintain in MG). A few days ago, I posted on my blog, alerting readers to a potential brakout of cup and handle and trendline. Here is my post from yesterday which has the charts:

http://themrkt​maven.blogspot.c​om/2009/04/tbt-b​reaking-out.html

And here a post from a week ago or so, when I first posted about it:

http://th​emrktmaven.​blogspot.c​om/2009/04/​three-char​ts-i-am-wat​ching-tbt-u​up-and.html

I was worried, that FED might do something crazy today, as they did back in March, and commit billions of $$$, but after the announcement a few minutes ago, they decided to take mno further action at the moment. Makes sense. They threw a lot of liquidity to support the mortgage market and to stop gap the housing crisis, but in a process, contributed together with US Treasury in creating one of the largest financial bubbles. It may take a year or two, but I have a lot of conviction in this trade. For now, I would invite traders who have no real conviction in this macro trade, to play the technical breakout. I think the next target is $51-52, with possibly 25% chance we may get to $55-$56

TBT breaking out

A few days ago, I profiled TBT chart, pointing to a potential breakout scenario. Here is the original post:


http://themrktmaven.blogspot.com/2009/04/three-charts-i-am-watching-tbt-uup-and.html

Today, after a brief 'flight to safety' based on swine flu concerns and additional funds that C and BAC will likely need, the bond market reversed and is now trading down. Consumer confidence numbers came out above expectations,changing the negative market tone, and the long bond sold off. Additional $5b in 5 year notes auctioned today, did't go exceptionally strong, with supply continueing to come into the market.

Technically speaking, we are now seeing another test of the $48 resistance level. If we actually get a breakout from a cup and handle formation this time, (close above $48 and hold for a few days) I reiterate initial target of $50-$51, and potential run at the 50% fib retracement at $55.

TBT: Short Bet on Lehman 20-year Treasury Bond Index:

Comments from the front

Over the past few weeks, I met a number of senior executives from different companies. I wanted to share some of their comments.

From a CEO of a major retailing company:

"We are definitely seeing signs of improvement. March was pretty solid and April will likely be stronger than people expect. Although comps will remain challenging for the next few quarters, the biggest (positive) surprise will likely be on the operating margin level.

From CEO of a leading software company:

Although we don't have visibility into the second half of the year, our customers have become a lot more rational. There seems to be a sense of urgency to invest now, as the spending was virtually non existent for the last few months.

From a CEO of a major Telecom Equipment company:

" The trends since April have become a lot more positive. We believe that our customers' budgets were done later than usual this year, and now they have been set, the purse strings are loosening."

What it means to me is that we are seeing some clear signs of recovery. Its interesting how everyone pointed to March, basically coincidental with the recovery in the equities markets?

I continue to believe that we have seen the worst of the decline. It will remain a very tough environment through the end of the year, but what we have seen over the past few months was a complete and utter capitulation not only by investors, nd consumers, but also by business executives who had no idea how to navigate this environment. As we are beginning to at least temporarily stabilize, we may see some semblance of normalcy return to business decision making.

Solution to Fixing America's Economy

This is from an article in the St. Petersburg Times Newspaper on
Sunday. The Business Section asked readers for ideas on "How Would You
Fix the Economy?" I think this guy nailed it!

Dear Mr. President:

Please find below my suggestion for fixing America 's economy.

Instead of giving billions of dollars to companies that will squander the
money on lavish parties and unearned bonuses, use the following plan.

You can call it the Patriotic Retirement Plan:

There are about 40 million people over 50 in the work force.

Pay them $1 million apiece severance for early retirement with the
Following stipulations:

1) They MUST retire. Forty million job openings - Unemployment fixed.

2) They MUST buy a new American CAR. Forty million cars ordered - Auto
Industry fixed.

3) They MUST either buy a house or pay off their mortgage - Housing Crisis
fixed.

It can't get any easier than that!

If more money is needed, have all members of Congress and their
constituents pay their taxes...

SPY's Tough To Borrow - Hmmmm???

A story went around yesterday, that SPY's are now on a tough to borrow list. Supposedely, some trading desks reported this when they tried. This is tough to believe. My first reaction was to completely ignore this as just one of many market rumors. Today, however, I noticed a very low volume for SPY. It is almost 2.40 pm one the East coast, and only 193mm traded. The 30 day average volume is 340MM. The significance of such low volume is difficult to explain on a regular day like today. I suspect that there may be some truth to this, since without a 'normal' two-way market, SPYs liquidity may have dried up. Makes sense. If this is true, we could be a few 'good headlines' away from a major squeeze. To the moon?

Thoughts on Leveraged ETFs - Short term vs Long Term

For some time now, I have been a vocal opponent of using double and triple leveraged ETFs as long term investments. ETFs are a great way to quickly invest in a theme or bet against a sector. The 2x and 3x ETF's have become one of the most popular kind, providing investors with an opportunity to theoretically capture 200% to 300% performance of underlying bet by using swaps, that SETTLE DAILY.

The reason the long term perfomance of these ETFs falls short of the intended results is attributed to the compounding, which results in tracking error. The DAILY COMPOUNDING is the achilles heel of these ETFs. A recent article in Seeking Alpha, makes similar points. There are several charts there that illustrate the point.

http://seekingalpha.com/article/132329-leveraged-etfs-beware-the-performance-conundrum

I hope that everyone really takes the time to read prospectus or at least understand why they make a lousy investment. You can spot on your thesis and still lose money because of longer term effects of performance decay. Additionally, 2X and 3X are volatility beasts. If you get your timing even slightly off, you may need to kick you out the trade (unless you have unlimited resources or have the stomach to sit on a 50%-70%+ losses). Use them as short term volatility bets only.

Two Steps Forward, One Step Back?

Investors who are currently on the sidelines were hoping for a pullback. They got one yesterday. The selloff was a bit sloppy, as traders rushed to lock in their profits, using an overextended market and unexciting results from BAC. Add to that the expectations of the looming stress tests, the banks took it on chin yesterday, bringing down just about everything else. The breadth was pretty negative 28:3. Energy and energy related commodities, falling victim to a strong dollar, also caved in, exacerbating this free fall, as oil declined back into the $40's

The stage was set for more declines today, with a mixed bag of earnings from key companies like IBM, CAT, TXT, but after a gap down opening there was no continuation. The market rebounded nicely today, closing near the highs of the day, again with most of the upside and volume coming in the last hour. We may attribute it to Geithner's comments about the 'healthier', better capitalized banks, or comments from CAT management that said they may be near a through, or IBM that reported a pretty soft quarter, but reiterated the 2009 outlook.

But the same set of conditions just a few months ago, would have produced another 200-300 point pouncing. As I have been saying before, it all about market sentiment and it clearly feels like we are still happy buying the dips. I have posted before about several trillion dollars in cash or short term securities delivering near zero returns, and they are beginning to stir up some uneasy feeling among both retail as well as under invested professional portfolios. One can profess about a deteriorating economic conditions, unemployment, rising delinquencies, foreclosures...and on, and on, and on. I do not disagree, but I will caution one more time, to not confuse the NOW and LATER. Or to put it in a more familiar terms, recall the old adage - the trend is you friend.

Speaking of trends. Take a look at the SPY chart below. The long term trend, undoubtedly, is still very bearish, making the 'bear rally argument' highly plausible. The long term trend will remain in a bearish mode for some time, at least until we get above the 200 day moving average (about $97). The short term UPtrend was broken yesterday. The four week trading channel, was violated when SPY moved below 87. This is important, because this is the first break of this trendline since the March rally began. The test will come when SPY attempts to move back into this channel,closing above 87 again. If it succeeds, no real technical damage has been done and the intermediate trend would be deemed intact. On a flip side, it it fails to get above 87 and breaks below the next support at 80(defined by a straight trendline on the chart) it will be a lot more meaningful failure, and would likely foretell a move into the $74-$76 area.

So for now its two steps forward one step back. Let see how the rest of the week plays out.

SPY:

Correction or Selloff? Buy the dips or sell the dips?

The short answer - no way to tell yet, since none of the technicals have been broken. As traders we can quickly jump on it with FAZ, SDS, whatever..and jump off at he next stop...But as investors we must take a stand. I remain near term bearish as a trader...riding with the trend..which I believe is shaping like it will be heading lower for now. I remain bullish on the intermediate term, unless some of the technical levels I am watching, get decisively broken.

Strategy:

Near term: just trying to get out of the way, selling high beta stuff, which can really hurt you even in a mild corrective phase...Anything more than 7% loss is automatically out too (some exceptions). At the same time watching like a hawk for this correction to subside near technical support levels...watching action in the afternoon, etc, for some clues. I am also picking up some Gold/Silver stocks and wathicng for some oversold E&P and energy names that are getting killed today.

Intermediate term: Putting together a list of stocks I will be buying if we do get to hold, as I am expecting.

The rally is way overdue, so not surprising or terribly alarming. I am very encouraged by M&A activity, with four definitive agreements announced today. There are many more on prowl, especially in technology and healthcare. With strong balance sheet and many cheap valuations out there, startegi buyers are stepping in. Hopefully, PE is paying attention and gets involved. The VC and PE activity has been so weak, that anything is an uptick from here.

Technical Levels I am watching:

DJIA - 7500-7800
SPX- 800--820
COMP -1560-1580

Three Charts I am Watching - TBT, UUP and ERX

Lately, I have been spending so much of my time trying to identify where the market is likely to go and what sectors will outperform/underperform, that I have not had much time to run through my charts. I was able to do some of it today and would like to share the three that I like a lot. I will try to do a lot more next week.

Here is one of my long term positions. Fundamentally, TBT is a bet against the Treasuries. The bubble created by a 'rush to safety' trade, drove yields to unsustainable levels, basically near zero. We are witnessing some exodus from the safety of US Gov't bonds now. In the future, I think we will see the bubble burst and a spectacular run for TBT. The reasons for that longer term bubble burst I will discuss separatey. Technically, the daily chart has formed a cup and handle. TBT just broke out above 50 day MA. A Cup and Handle breakout above 47.50 could send TBT into low to mid 50s.



Here is one I bought for a trade today, ERX. This is triple leveraged energy ETF. Very very volatile beast. Handle with care! Not my favorite kind, but I like how oil is holding up near $50, and most of my oil services holdings are already in the stratasphere. This one looks like it may have some catching up to do. Top holdings are: XOM, CVX, COP, SLB, and OXY. A similar Cup and Handle pattern, as the chart above, with multiple tests of 50 day MA. It's been a difficult resistance for ERX to break, so I might be a bit early here, but there is some support near 10 day EMA at 26.38 and I want continue to add to my energy exposure.



Lastly, here is another interesting chart, a long USD ETF. Again, I am pretty bearish on USD longer term, and will likely buy UDN (a USD short ETF). For now, however, I would like to own this one, if for no other reason than to hedge my commodities exposure. This is just a trade.

Can you say ...Meltup?

This trading week will be over in less than 2 hours and if we end up on the day,the the score will be Bulls 4, Bears 1. Looking at my weekly chart, the score is 6-0. I wish my tennis game was that good.

This is a bit of irrational exuberance, but the reasons are clear and I have posted many times over the past few weeks what is driving this rally.

The earnings are coming in OK so far. Read that out of 40 companies that reported so far, 60% exceeded expectations. Does it mean much? Only as it relates to sentiment. The YoY comparisons are still ugly. The quality of earnings is clearly an issue, for every Financial company that has reported so far, but to be fair, the valuations are reflecting this to a certain extent. Think about it, if you can score a ticket to an NBA playoff game for $10, would you complain if you dont have the greatest view?

This rally has more legs than a centepede, fueled by what else fear and greed. But its the bulls now that are smelling blood and bears running scared. VIX has broken down, FAZ is a single digit midget.

Still waiting for a 3-5% decline, which I believe will be bought aggressively by underperforming money managers, that have not particiapted thus far. If we dont see a pullback soon, prepare yourself for a MELTUP - another leg up into 900-1000 territory on SPX.

The Greed is Back

Over the past few days I have really been spending some time trying to figure out this market…Yes, instead of watching CNBC or Bloomberg, I focused on reading the earnings press releases, analysts’ reports and watched the reaction to various earnings announcements. But most importantly, I was watching the tape. My conclusion is that the Greed is Back, Ladies and Gentlemen and the shorts a being run out of town. For now. Here are some of my observations.

Pullback - everyone agrees that some type of correction is way overdue after a 30% four-week rally. I was expecting one, going into this week, with so much earnings uncertainty, business outlook from key companies in major industries, a plethora of economic economic data, and options expirations. Adding, to this is what appeared to be some stalling at the key resistance levels for SPX and DOW. Expecting a correction I positioned my portfolios defensively …but I am now beginning to wonder if I made underestimated the strength of this rally. It is pretty obvious that even small intraday dips are being bought. The longer we go without a real pullback, the less likely it will be meaningful. Many investors are still sitting on the sidelines watching this unbelievable move and awaiting the entry point. I believe the kind of markets that we have seen over the past few days, create some pent up demand, and finally when no pullback comes, they just throw the towel and buy it.

Earnings in general are coming in OK…compared to severely slashed estimates that is. Yes, the outlook is still either very cautious or in many cases management has no visibility. But there is no real selling into this reports, I guess they must be good enough? Shorts are not working, bad pre-announcements, financial shenanigans are pretty much ignored. Could this be another bull complacency? Quite possible.

Financials – Over the past few days, WFC, GS, JPM all reported pretty good numbers. We can argue about the quality of these earnings, but overall, I was not disappointed. But who cares about what I think. The market reaction to this earnings was pretty positive. Even if you peel back a few layers, you just can’t argue that trading especially in commodities and fixed income was a bonanza for the few remaining banks. Add to that a steep yield curve (duh! borrowing at zero and lending at 5%+ creates an enormous profit leverage for them. They are taking share (look at JPM’s underwriting and I-banking, they knocked the cover off the ball, at the expense of WAC, C, LEH, etc). Of course credit card and other loan losses are still likely to continue for some time, but it is likely that provisions are getting to the right level. At least we should hope so. Having said that, I am not touching them now – way too overbought. But the time to short them indiscriminately is over in my opinion.

Final Hour - The action during the last hour of trading has been very telling. Almost predictable in a way. Down or mixed in the morning, while the earnings get digested with a definite pick up in volume after 3pm with a clear direction UP. Closing generally above the mean of the day. Just the opposite what was happening just a few months ago. Pretty bullish in my book.

Short ideas are not really working. Even when I was right in my thesis, at most I enjoyed a brief pullback, followed a bounce back to the pre-results level or higher. INTC is a good case in point. Short ETFs are getting decimated, and after a small losses I am staying away. March had one of the highest short ratios in history, and until some of the covering is done, it will remain a tough time for shorts.

To me, March rally seemed mostly trader-driven, short covering and fast money and technical traders jumping on to capitalize on extremely oversold condition. So that’s why the volume was so low…as everyone kept pointing out. This is changing as we are now seeing support from institutional money flowing back in, as well as retail. This could easily make this rally last a lot longer. The retail and institutional investors alike got beaten to a point where they just were not fighting back. Again, I think with a few weeks to regroup and even makes some money, some rationale is coming back to the market.

Still, with risk reward no longer favoring a huge move up, I am not terribly bullish; just recognizing the trend for what it is. I am comfortable with my risk controls and will be prepared to ride out a correction when it comes. For now I believe the bottom we put in March is place. We can pick up enough momentum to run to 900+ on the SPX. This week was pretty important as it set the tone for the next couple of weeks. As I said last Sunday, if we finish this week flat, it will be a win. One day to go.

This weekend will likely be spent going over my extensive buy list and prioritizing it.

Maven's Portfolio

Since Marketguru.com is no longer available, I will use this section of my blog to list my portfolio positions. Word of caution: use this portfolio, as well as any of my trades only as a rough guide of what I like at the moment and a starting point for your own research. I change my mind often and sometimes the positions listed here will be stale. ALWAYS do your own due diligence. You risk tolerance and investment experience should dictate what trades you may consider to follow in your real portfolios. Please feel free to leave your comments or ask questions.

Portfolio Tilt - Defensive

Open Positions:

Longs: AAPL, BAX, CEF, CELG, DNDN, DVN, FCX, GGN, GES, GDX, JPM, MOS, NKTR, REXX, SLB, TNA, WMT.

Shorts August Calls: AAPL, DNDN, FCX

Cash/Bonds 50-55%

Getting defensive, going neutral for now

If you have been following my posts, you should know that I had a long bias, since mid March, focusing on select names in oil&gas, infrastructure, healthcare, and Chinese US listed equities. I believe the risk reward is shifting towards neutral/bearish and I am switching to a defensive portfolio posture. I am gong neutral in my short term and intermediate term portfolios. Practically speaking, I am selling some of my winners, positions with over-extended charts, trading positions that are losing momentum, selling covered in-the-money or slightly out-of-the money front month calls. I am also booting some of the positions where my conviction level is not very high. Given the extent of the recent run up, options expirations coming up this week, and SPX unable to clear a very significant overhead resistance, plenty of earings still to come, I believe my caution is warranteed. I may also buy small positions in SDS and TWM or TZA (not FAZ), just to protect some of the remaining positions. I am going to the sidelines since I am not ready to go net short. I am however, carefully evaluating the possibility.

I will review and post my current portfolio shortly.

The Saga of Three Portfolios - Introduction

I will dedicate a special part of my blog to discussing my three portfolios. Each of the portfolios is designed to match my timeframe and respective outlook on the financial markets. I will update these portfolios as often as practical, with brief explanations for each position, conviction level, and stop loss/ target price levels.

To put things in perspective, I current;y manage more than one portfolio. Specifically, each of the three portfolios a designed based on a particular timeframe and my respective market outlook for that timeframe.

Each of the portfolios will have a slightly different strategy, which will be clearly outlined at the top of each portfolio section. For example, my long term view which is consistent with my expectations for 12+ months from now, may completely differ from my short term outlook, which is a few days to several weeks. I would welcome a discussion and feedback on these positions.

Chinese Economic Recovery Continues

Recently I posted about the ongoing economic recovery in China and how investors should position their portfolios to take advantage of it.

Here is the link to the post: http://themrktmaven.blogspot.com/2009/04/bullish-on-china-lets-get-cyclical.html

Here's an article with some comments from the Chinese Premier Wen, commenting on improving economic conditions in China.

http://news.yahoo.com/s/ap/20090412/ap_on_bi_ge/china_economy

Again, there are still plenty of opportunities for investors to profit from that, as the US listed Chinese equities are clearly lagging the Chinese domestic equity markets. The Shanghai Stock Market is up significantly this year, bid up by Chinese investors that are seeing first hand the results of $586 billion economic stimulus .

It seems that every couple of days we a re hearing about Chinese Central Government doing something to stimulate te economic rebound. Whether its amending the tax code, reforming the healthcare system, or providing aid to the real estate developers, these Chinese policies seem to be working.

Thougts for the week ahead - 04/13/08

I believe the next few days will be key in determining whether this market will remain range bound between 800-850 or move up into a higher trading range, perhaps taking a run at 875 or even 900 on the SPX. I don't really know any better than anyone else, but my analysis shows that the the odds are slightly in favor of a move higher, although some profit taking and technically overbought market will likely create some downside volatility. If we can go sideways and finish next week flat to slightly down, I will consider it a win for the market and will likely increase my long exposure by 10%-15%.

Here's my thought process and conclusions.

Positives:

1) We had a very strong start to the earnings season with Alcoa, which kicked it off, reporting weak, but better than feared results. This was followed by Wells Fargo, that positively pre-announced very, very strong profits, much better than the street expected. We also witnessed a number of other results that came ahead of the analysts' expectations, although most were pretty dismal, looking at YoY comparisons.
2) We did have a very strong, unexpectedly strong end of the week move, led a super strong showing from one of the weakest groups - Financials.
3) Closing at the high of the day is always a positive sign, generally leading to continuation of the trend. Technically we closed just above 850, which is a major resistance level for SPX.
4) The short interest is still very high, with March short interest hitting 4.3%, one of the highest readings since September 2008. It will need to work through the system.
5) Earnings estimates for Q1 are very sensible and seem achievable, as analysts already took a hacksaw to expectations. Ditto with ratings. The number of downgrades over the past few months has created an environment where the estimates and ratings already reflect a very very difficult economic environment.
6) Some of the industries are beginning to see stabilization, or in some cases, dare I say, improvement, as we are seeing some early signs of lending, combined with inventory replenishment ( inventories in some industries are running very low)
7) After almost zero activity for the last 6 moths, M&A chatter is picking up. There were some transactions announced over the past few weeks, and daily rumors are beginning to intensify. If we start seeing actual announcements this would add fuel to this rally, but in any case should keep the shorts on their toes.
8) Retail sales reported on Thursday were pretty bad, but again, already reflected in very very negative outlook for retail and consumer spending. Many of these retailers, to my earlier point, rallied on negative comps ( WMT being an exception).
9) We are not really reacting as badly to negative news, a clear sign of changing sentiment.
10) The mutual fund flows last week were a cool $12b, 4x what they were a week before. By some estimates, there is still over $3.5T of cash on the sidelines, that exited the market last year.

Negatives and Unknowables:

1) We are clearly overbought based on my short term stochastic indicators, and have overcome to very strong resistance levels, a trendline at 850 and .62 Fib Lvl at 860.
2) This week will bring more earnings and associated volatility with following key SP components reporting:

Goldman Sachs, Intel and Johnson and Johnson report earnings Tuesday, while Abbott Labs and Peabody Energy report Wednesday. On Thursday, J.P. Morgan, Google, Baxter, Harley-Davidson, Nokia, Parker Hannifin, Biogen Idec and Southwest Air report. Citigroup, General Electric and Mattel report Friday.

3) More economic data will be out next week, after a pretty slow economic news week, including Fed's Beige book, PPI, CPI, etc. We will see how it shakes out.

Strategy for next week:

I am currently net long and will remain so, unless we decisively break below 790. I may sell a few non key positions, but will likely just ride out the volatility since I am beginning to be more concerned that a real rally is taking hold. If we do pullback to low 800's and stall, holding all the major support levels in tact, I will be aggressively adding to energy commodities, select china and tech. I will be posting my trades on www.marketguru.com and will review some of them in detail next week.

The Anatomy Of This Rally - WTF is Going On?

This rally found a lot more mo all of a sudden. Just when everyone collectively braced for a 5-10% correction, which would not only be justified, but dare I say even hoped for? That's right, hoped for.

After all, those who were properly positioned in March to take advantage of this move and didn't stubbornly press the shorts, should all be pretty satisfied. Having said, I find myself wishing, almost masochistically, to give some back. Yes, I'd like the market to follow my plan - a 5-10% sell off, consolidate around a recent support, so those that missed this beautiful, scorching hot move, can put their money to work.

This holiday-shortened week, which also marked the start of the earnings period could have been a perfect excuse to take some money off the table, regroup and reset. But instead, we have now pushed above my 2nd set of targets. So what is going on? Clearly we are seeing a massive short squeeze, no question about it. The short trade has been such an easy trade for so long, it caused the same type of complacency that killed many longs last year. According to Bloomberg, most recent data shows that the short interest as a percentage of total shares outstanding jumped during the month of March, and now stands at 4.23% -- its highest level since last September. 'nough said.

I believe this rally was more than a bear rally, caused by a massive squeeze. This was a sentiment changing rally, at least temporarily. There are plenty of retail and institutional investors starting to feel anxious about being left out and missing the next leg of this bullish move. After all, think about it. Every bull market has always had a very strong initial move, followed by much longer consolidation phase, when returns are sub par. With $3-$4 trillion dollars in cash sitting on the sidelines this money is beginning to flow back into the market, adding fuel to this rally. According to TrimTabs, last week, ending April 8th, almost $12 billion flowed back into mutual funds, as compared to just under $3 billion a week before.

So what now? Is this a beginning of a new move? I am still hoping for consolidation opportunity which I am planning to buy aggressively. Will we see a 5%-10% move or will just continue to steam roll ahead? I don't know and no one else does either. So one needs to have a strategy to do take advantage of either one. Over the next few days I will outline my trading pan, including the specific themes, groups and stocks.

So stay tuned.

Bullish on China, Let's get cyclical, cyclical, I want to get cyclical...

We are clearly seeing signs of economic recovery in China. Obviously, the $800B stimulus package which they smartly focused on key industries like autos, steel, agriculture, etc is making a difference. We've been following statistics coming out of China and most of them are very bullish. Clearly, one needs to be careful when dealing with communist government statistics, but what they are clearly doing right, is both expanding bank lending and stimulating key industries through direct investment, subsidies, rebates and tax cuts. This should lead to a stronger recovery. Speaking of recovery, the 5%-6% GDP growth that I think we will likely see in China this year, may not be as ambitious 9%-11% growth of the past few years, and may actually come short of 8% growth that Chinese government is hoping for. Still, it will likely be the best GDP growth on the planet this year. Period.

Just this morning, China reported an extremely bullish auto statistic. China auto sales hit a monthly record of 1.11 million, exceeding US monthly sales for the third month in the row. Specifically, they government halved taxes on purchases of small autos and on subsidies for purchases of light trucks in rural areas.

I am hearing of utilization rates at the steel mills back to pre-meltdown levels. Real estate is beginning to show some signs of life, as evident by both pick up in construction and transactions in 2nd tier cities (like Xian for example). More demand for steel, coal, power, iron ore, crude, aluminium....

Based on this theory I am beginning to rebuild my portfolio to include a number of Chinese companies that trade in US. I am buying a small basket of a few cyclical names, to start. Each of these names passed my initial test. Once I have more time to dig in, I will be adding to some of these positions and will likely double and triple some of them. I am not chasing them here, but would buy when they settle down a bit.

Here are some of the names:

WH, GSI, WATG, CPSL, HRBN,

Let's FASe it, FAZ is cooked for now

Wells Fargo reported record profits and we are seeing a tremendous response as short covering and plain vanilla buying is rushing back into financials. A few days ago, I outlined my reasons not to be short financials, (see my post Why I would NOT be short Financials now) and we got some validation today. I am long UYG and BAC and will likely remain long a little bit longer.

I am also adding slightly to my energy exposure. I bought some VLO and RIG. I will be selectively adding to other positions today and will likely venture into a completely new sector, which should perform well, possibly as early as next week. I will do a bit more work and will post about it later.

And ...its gone..

Why I would NOT bet against Financials NOW

Over the past few days I have been involved in a number of heated discussions on some of the financial websites and with my friends and colleagues, about the near term expectations for financials and the two ETFs that inversely track them, FAZ (triple leveraged inverse financial ETF) and SKF (double). Many traders that have been actively trading FAZ (and very profitably until a few weeks ago!), bought into what I believe to be a faulty logic, that FAZ just can't go below $35-$40(was a damn good support for FAZ). Some of these traders are saying now that the FAZ is just too 'cheap' below $20.

I beg to differ. The problem is that for now, the FAZ train has 'left the station' and it ain't coming back to $35-$40, barring a complete near term collapse of our financial system, which I don't see happening. Notice, I am only talking about the near term, which I define as several weeks to several months. I sure appreciate all the problems that we will likely experience down the road, but for now I am NOT betting against Financials.

Below, I tried to summarize my position in 10 short points.

1) The Q1 results for financials and in general are expected to be pretty dismal. Having said that, it seems that the trends, at least in January and February were better. Not great, but less bad. March, according to JPM's CEO Dimon, was a bit more challenging. Still, with expectations pretty much in check, we may escape the bloodbath in financials during this earnings period.

The operating earnings could be even better than expected at some of the key banks, JPM, BAC, SST and even C. Brokers like MS and GS should do better too. The upside may come from the contributions from trading , while the pick up in refi's and fee income will help some regionals. We may actually see banks make money this quarter, according to Meridith Whitney! Yes, the extent of the write downs is still a big X-factor (and will likely remain so for some time) , but many investors have already braced for the worst. If the commentary from the top 5-6 institutions is even marginally better, we may actually see another rally in financials.
The action in these 5-6 financial institutions is what really matters for FAZ/SKF performance anyway.

2) We may get a gift from the SEC, possibly as soon as this Thursday, in a form of modified short sale and uptick rules. Yes, this could be significant, as it will reduce the appetite and opportunities to short financials and other stocks. Additionally, I believe financials are still one of the most shorted groups, and any short covering as a result of changing these rules could provide additional support both for financials as well as the market as a whole.

3)The institutional investors that are currently long financials, are not selling here, as they believe it's too late to sell and are taking a longer term approach. I agree, considering where these stocks have come down from. I am just not sure there is an attractive risk/reward for selling financials here..Of coarse, another 10%-20% rally in financials will result in some selling, but by then FAZ will likely be a single digit midget.

4) Most analyst ratings on financials are still neutrals and underperfoms. But there are signs that the sentiment is approaching an inflection point in the near term. I would expect that after Q1 results, more analysts will review their ratings...perhaps we may even see some upgrades, but I doubt we are going to see more downgrades. Case in point, Dick Bove initiated BAC with a buy this morning..he is is a well followed bank analyst with a very good reputation on the street. He was the one to make a pretty bold call that financials have bottomed and to buy BAC at $3-$4 a few weeks ago. I am not saying that he is right, just pointing out that he is considered a thought leader in this space and may lead to a change in sentiment towards banks. Similarly, Meridith Whitney was on CNBC today, also sounding a bit more upbeat on banks than in the recent past and specifically said that shorting financials is no longer a good idea. "Lay off on shorts, and don’t buy into selloffs," Whitney said. "The fundamentals are not getting any better but capital ratios should get better." However, Michael Mayo, another reputable bank analyst is out with a negative report today on banks. The report reads pretty ominously, but for the most part, his points are fairly well understood and hardly bring anything new or shocking to the light.

5) The fear of of wholesale nationalization of banks is no longer at the top of the investor concerns. Yes, there is still a possibility, that more banks will get taken over by the government, especially after the stress tests at the end of the month. But, unless you believe there is a strong possibility of major banks being nationalized, stay away from FAZ and SKF.

6) Geithner and the FED, are on the hook to show some success with their "financial engineering". They will continue to "assist" in whatever way they can to 'save the financial system'. I am not betting against the FED.

6) M2M - we can debate whether its just a band aid and smoke and mirrors, but what is important is that it will obscure the true balance sheet information and will artificially help banks report stronger results, even if its only an optical illusion. Whitney explained it well today in her interview on CNBC. Bottom line it will help improve a tangible book value, a key metric on which banks are valued, as well as improve a sentiment towards banks..

7) Lastly, the overall market sentiment is improving and we are seeing signs of money beginning to trickle back into the market. Much of it will find its way into brad market indices, like SP500. The index funds, that have ~10% weight in financials will need to allocate at least $10 of every $100 into financials. Well let's examine today. We had a very negative start to the day: 1) a very negative (and downright scary) report on banks from Mayo, 2) the nervousness about the upcoming earnings season, 3) looming stress tests for banks, 4) the selloff in commodities, 5) and oh yeah, some comments from Geithner yesterday about a possibility of removing more management teams at the banks that received gov't aid, and 6) comments from TARP watchdog, Warren, about possibly wiping out the common equity at these banks.
Last week and today there were several attempts to sell this extended market and scare some investors into locking in their gains following one of the most impressive rallies ever. But after all that, the broad market and financials were able to recoup most of the losses by the end of the day. All things considered, the financials held up OK and didn't get decimated as would have been the case just a few weeks ago. If you examine the action during the last 30 minutes of the day over the last week or so, you will clearly see some strong buying into the close. Draw you own conclusions. Don't fight the tape!

8) Now let's examine FAZ itself. FAZ is not an investment. Numerous articles examined the performance of these highly leveraged ETFs and concluded that their performance doesn't correlate to that of the underlying. Its more of a trading volatility tool which was very is helpful over the past few months to bet on a volatile and usually one-way trading in financials. Great for day traders that are good at volatility trading. Poor choice for investors.

9) Don't confuse NOW with LATER. Later, many of the problems that have been infecting our financial system over the last 25 years, will resurface. The extent of these problems and the unintended circumstances that our government is creating by trying to 'fix' our financial system at all cost, is still unknown. It will manifest itself again in the future. But for NOW, over the near term, we are likely to see some improvement in both fundamentals and investor and analyst sentiment toward banks.

10) Finally, in order for FAZ to move back up to $35 (more than 100% from today's close), financials would likely need to sell off to a tune of 30-35%. Which means BAC back to $5-5.50, JPM back to mid teens and GS back to mid $80's. It would take just as much of a meltdown as we saw last year, when the problems with finanacials just began to surface and they were all still trading at pretty lofty levels. Is it possible, yes, but not likely,

There will be time again to bet against financials. But NOW is not the time to be betting a farm on FAZ.

Are we there yet, is this pullback coming or what???

This market continues to push higher against all odds. With G20 carnival pretty much wrapped up everyone braced for ugly unemployment numbers on Friday. The majority expected some type of corrective action to take place but after a brief sell off, the market came back to close up again.

As of 3.20pm, the tape seemed totally calm and without much direction oscillating between slightly negative and slightly positive. But with less than 5 minutes to the bell, the financials took off like a rocket, a clear enough indication that institutional money is getting back into the market.



Several observations over the past two days.




1) Money continues to flow into cyclicals with industrials, oil and gas, consumer discretionary, financials and tech...while defensive and healthcare are cleasrly lagging for the last four weeks...

2) Gold and Gold miners are also seeing some selling today. I think it may be time to strat picking up some gold e.g. GLD, but gold miners are too extended to chase.

3) China and other emerging markets also continues to attract capital, but the sizzle is not there on Friday. Looks like this trade is getting tired as well.





We have now achieved or surpassed my 1st set of targets for DJIA, SPX and COMPs and there seems to be much more of a positive tone about. The short trade has gooten a more difficult as the easy one e.g buy FAZ, SRS, SDS, etc...has not been working and even the most pronounce bears are no longer willing to throw additional capital to average down the losing trade.

We are not out of the woods by any stretch yet, but the market psychology has improved, stimulated by positive headlines over the past few weeks and even negative news that in the past caused panic selling no longer seem to bring in any significant selling volume.



There are many professional money managers with sizable cash on a sidelines, waiting for this pullback, realizing that being in cash now could result in a significant underperfomance. If we continue in thesame fashion for the next week or two, we may see some of them get 'scared into buying'. I can see this scenario playing down the road if we don't get a pullback soon. Speaking of a pullback, I think we may eventually get one, but I believe it will be pretty shallow.



Here are my current pullback/move up targets:





SPX - 837. Support 800-810, Resistance- 860-880

DJIA - 7990. Support -7650-7700, Resistance -8400-8500
COMP -1615. Support- 1500-1550, Resistance -1630-1650



Strategy for next week:

I am still positioned for a shallow pullback which I would like to use to buy or add to several positions.


I have sold some near month calls against some of my most overbought positions. This week most of my buying was in a reflation trade names, gold, silver and some of the oil and gas and infrastructure names. Other areas of focus : technology, and some beaten down healthcare names.


Good Luck to us all next week....

THE VERY FIRST ENTRY EVER

I decided to start this blog after much encouragement from my friends, co-workers and family. I have been posting at several websites for a couple of months now and I feel it might be better to just start putting my thoughts together in a more organized fashion.

For the most part I will discuss my investment philosophy, economic and market outlook and political rants and raves. Occasionally, I might just write about something completely unrelated or to share something I feel is important or just fun.

But most of my blog will be dedicated to discussing my trading strategies and outcomes. I am not sure if anyone will ever read it by accidentally stumbling upon my blog or not, but I think it will both therapeutic and a good way to organize my thoughts.