The thinly traded holiday markets were exactly the right recipe for bullish market maneuverings, which concluded on Black Friday with “Markup Madness.” The rally had everything going for it except that it didn’t occur under normal trading conditions… and the volume levels really left something to be desired. Which, when you get right down to it, is another way of saying that the rally only had “price” going for it. Unfortunately Friday was a “half session” and thus our 9000 target couldn’t materialize in time… 8845ish is about where the DOW ran out of steam.
As a result, Monday morning’s trading brought a large dose of reality creeping back in despite “better than expected” holiday sales data from many retailers. The DOW looks to us at the moment like it will see at least a 400 point drop. We think of this as the air coming out of last week’s “Griswold Family Turkey” styled rally. Everything looked great on the outside… This is where we depart to an extent from the “price is everything” crowd of market commentators. We believe that price alone isn’t enough to “sniff out” the truth in the market. No one variable really is… and that’s why we’ve always been about a composite approach in our investing and analysis.
President-elect Obama will officially announce several new key members of his cabinet this morning. We have a sense that the markets, always with an eye toward the future, were looking for a sign from Obama that he would be aggressive with his plans, even before being sworn in. The markets seemed to be selling off to some degree based upon the uncertainty over his appointees and follow through plans vs. campaign rhetoric. Once Obama stepped out front and center with his bold economic appointments the markets have responded much more favorably to this point.
Obama is close to rounding out half of his cabinet at this time, and by removing uncertainty he is providing assurance on some level. This is normally applauded by the market and… all things being equal… we’d expect that to continue to be the case. Glancing at the headlines in the USA and around the world, it becomes clear that the world desperately needs stability and reliability.
One of the long term pluses that we saw last week came in President-elect Obama naming Paul Volcker as the head of a top economic advisory panel. Volcker is a former FED chairman, and at one time he was largely responsible for throwing “cold water” on a raging inflation fire in the late 1970’s and early 1980’s.
Volcker was followed by Alan Greenspan, and the rest is history. Volcker wasn’t popular in D.C. and that to us is a very good sign. Looking at the destruction that’s been wrought by both of the “big” parties over the years, it would seem to be a good thing that Volcker was in favor with neither. Volcker’s attitude and approach have been sorely missing since he stepped down.
In a way, Volcker was and hopefully remains the “Anti-Greenspan.” Volcker has never been a big proponent of “easy money” and allowing Wall St. to “police themselves” because, well, because he knows better. “Easy” Al Greenspan on the other hand inflated bubble upon bubble and marveled at the wonders of “financial engineering”. Sorry Al, but your approach really didn’t withstand the test of time… unless the test of time is conducted over a nanosecond.
We’re hoping that Volcker isn’t just “window dressing” to attain superficial (read “mass media”) approval, and that he in some way can prevent Congress, the new administration, the lobbyists, et al. from getting back to business as usual… since all that has really done is to have smoothly paved the way to the abyss that the USA is rapidly approaching.
Volcker has never really been appreciated by either big party, but he’s supported members of both in his time. He’s much more of a realist and pragmatist than an ideologue. This entire country could use a good dose of “Volckerian”-styled “medicine” at this point.
Things need to become grounded again. If Volcker has a real say in things, there’s still hope. We believe that at least “on paper” he is yet another more than solid choice on the economic side of things for Obama.
This week’s Earnings roundup:
This week’s earnings are littered with stocks in weak markets. Retailers and housing make up most of the large names this week.
Dec. 1 SNDA - Shanda Interactive Entertainment Limited, an interactive entertainment media company, operates online games in the People’s Republic of China. Earnings will be a driving force in this stock. It has recently fallen through its July low of $20.85. There is more room to the downside, with support coming in around $15, then $13. As you can imagine the implied volatilities are extremely high on a stock that has dropped from $40 to $20.
Dec. 2 MRVL - Marvell Technology Group, Ltd., a semiconductor company, engages in designing, developing, and marketing analog, mixed-signal, and digital signal processing, and embedded microprocessor integrated circuits. The stock price has now fallen to $5.32 from $18 in July. This could be an interesting long term play, once you feel the market has settled in. In the short term, it does have support relatively close in dollars terms, but very large percentage moves. Support comes in $4.48.
Dec. 2 SPLS - Staples, Inc., together with its subsidiaries, engages in retailing office products. Its retail products include office supplies and services, business machines, computers and related products, and office furniture. SPLS has a nice consolidating triangle forming. With the height of the triangle, this stock could explode in either direction by $3-6.
Dec. 2 SHLD - Sears Holdings Corporation operates as a broadline retailer. The company operates in three segments: Kmart, Sears Domestic, and Sears Canada. This is another retailer in a recession. There is not too much to play here. The stock has come down from the mid $190s. Most people were long this stock for the real estate play. The thought was that the holding company would be able to sell off the large amount of commercial real estate that it owns. The longs have been crushed if they held onto this stock. We would not get in this stock until we see a significant base.
Dec. 2 BZH - Beazer Homes USA, Inc. engages in the design, building, and sale of single-family and multi-family homes in the United States. This stock has gone from $82 to $1.59. We think there will be plenty of time to start to get into the homebuilders. Real estate takes a while to make its major move in a recession. Excess inventory will in the housing market drives down home prices and anyone that holds a home will see those values decrease.
Dec. 3 ARO - Aeropostale, Inc., together with its subsidiaries, operates as a mall-based specialty retailer of casual apparel and accessories. This is another retailer heading in the holiday season. The only problem is that we are in a recession. Stock has gone from over $36 to under $14 in about 2 ? months.
Dec. 4 TOL - Toll Brothers, Inc. engages in designing, building, marketing, and arranging finance for single-family detached and attached homes in luxury residential communities in the United States. TOL has been in a sideways trend for over a year now. It first hit $20 in Aug of 2007. Since then it has gotten as high as $28 and as low as $13.55. With it trading right now $18.40, we would look for some short term support at $16, then the low. The credit crisis and foreclosures need to stabilize before there is any real bottom in housing market.
Dec. 4 WSM - Williams-Sonoma, Inc. operates as a specialty retailer of home products. WSM is a retailer with a high of $37 and low of $4.35. It is currently trading at $6.06.
Dec. 4 GES - Guess?, Inc. designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. Not much to say here, the stock has gone from $57 to $11.9, with a recent low of $10.26.
Dec. 5 BIG - Big Lots, Inc., through its subsidiaries, operates as a broadline closeout retailer in the United States. High over $34 and low below $14, with the current price of $15.83.
Earnings with average volume greater then 500,000.
Economic Calendar
On to the Technicals:
Above is a chart of the DJIA and you can see that we’re keeping it simple. The DOW exhausted itself at 1. This was a Fibonacci level in actuality but our thoughts were that the thinness of last week would allow the 9000 level to act as a magnet. It turns out that the “fib” level had other ideas and was probably aided by 2. At 2 you can see just how absent volume has become as this rally has progressed. That’s not a good sign from our charting perspective.
For our second and for the second week in a row we’re back with the DOW since it remains quite “gamey” these days. Please follow along with the numbers again. 1 at 8300 is the first support level we’d expect to put up a fight should the DOW continue to tail off. 2 at 8140ish is the second and more important number. If that fails to hold should it be tested then fear and panic selling could be back on the front burner in a hurry. 8140 needs to act like the Jack Tatum circa 1976 in terms of support defense. If the DOW gets near there it needs to be SCARED higher! A breach of that and the “support team” will be demoralized. Not good.
3, 4, and 5 are on the much more optimistic side. 3 would be initial resistance since the market was “sent packing” from there last time around. 4 at 9141 and 5 at 9663 are both important price structure and Fibonacci levels from our perspective and thus should act as significant resistance levels. Normally we do not note levels so far away from current prices but this has been the “year of volatility” and it seems like it wants to close it out that way as well.
Sources: Options University
Tags: market update
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