Securities Research Services

Thursday, October 28, 2010

Tech Leadership Still Looking Good

Leadership essentially rested yesterday as it slightly underperformed the broader market. The exception was tech, which continues to be strong and continues to see big upside pops on earnings.

The dollar was up on big volume yesterday but closed at resistance. The dollar may eventually gain some traction, which of course is likely to coincide with a market correction, but that correction may come later as opposed to sooner. Perhaps next Wednesday's FOMC meeting will be the catalyst triggering a dollar rally. In the meantime, we believe there are still more gains to be had in tech stocks here given the solid behavior in the group.

Thursday, October 21, 2010

Yesterday's Rally Did Nothing To Taper Risk

We are at a very tricky juncture here.  Sentiment remains sky high and the VIX remains near extreme lows - both of which indicate too much complacency.  The dollar pulled back sharply off of resistance yesterday as we indicated it was likely to do, driving stock prices higher.  Yet, the Dow remains firmly under resistance and virtually nothing out there achieved new recovery highs on yesterday's rally, meaning that all major indices and most stocks failed to break above Monday's highs.

None of this is to say that prices can't continue higher here frustrating our short positions.
However, if prices do break higher, the risks of a reversal sometime next week are extremely high so if there is upside left before a more serious correction kicks in, it is likely to be muted.  The real money, in our opinion, is going to be made on the short side over the next few weeks.  The tricky part is going to be getting the timing right.  

Bottom line, we will just have to wait and see if yesterday's bounce was just a one day phenomenon that will quickly reverse.  Given the way the dollar typically behaves when it is correcting, probabilities are reasonably high we will see yesterday's rally faded today.  This is not a prediction, but rather an assessment of probabilities based on past market behavior so we will just have to dig in today and see what develops before we act further.

Wednesday, October 20, 2010

Dollar May Give Market A Short Term Breather

The dollar was up on heavy volume yesterday and of course this hit equities hard. As we have been trying to drill into everyone's heads over the past week or so, the risks of getting long when the Dow was at resistance, the dollar catching a bid, and sentiment levels too extremely bearish were just too high.

Yesterday the market caved into this high risk scenario and marked a distribution day.

The dollar, however, is back at resistance measured by its 20-day average. The dollar generally doesn't turn on a dime so there is a good chance those who are short here will be frustrated the rest of this week when they don't get a waterfall to the downside like many are no doubt hoping for.

Nevertheless, the dollar is bottoming and preparing for a corrective bounce of one sort or another, so pressure on equities is likely to remain over the next few weeks and those trying to play the long side in this market are likely to be frustrated as upside participation thins out and as smart money sells into strength.

We aren't calling for a market top here mind you. Rather a much-needed correction that will likely last until the typical end of the year ramp up kicks off sometime next month.

Monday, October 18, 2010

If You Like Risk, Then By All Means, Buy on Apple Earnings

On Friday the Nasdaq diverged sharply from the Dow and S&P on the back of Google's earnings report.  After today's close Apple earnings are out.  Given how sharply AAPL shares have risen into earnings it's pretty much a given that the Apple report will provide the sell-the-news type of event that early entry tech buyers have been looking for.
The major indices don't diverge for long and given the idea that AAPL earnings will offer a profit taking opportunity we suspect that the Nasdaq will come back to earth as opposed to the other indices playing catch up.
The S&P has now given us 3 reversal signals in a row and with conditions this overbought, we are looking for some type of correction early this week.  What we do know is we won't be drawn in by a strong opening either today or tomorrow as the chances for a reversal after the AAPL report are just too high for our level of risk tolerance.

Thursday, October 14, 2010

Dow Resistance & Other Worries

A nerve-wracking market just got a bit crazier.

Take a look at the Dow via DIA.  It tailed off at resistance yesterday.

Meanwhile, AAPL hit $300 and the QQQQ chart looks pretty much like DIA.

A person would have to be crazy to buy at these levels, especially with the financials failing to come along for the ride.

Nevertheless, crazy may just be what the doctor ordered.  SPY still has room to move, the Fed is friendly, the dollar, as measured by UUP is probably on a collision course for $22 and believe it or not, the weekly charts look much less fearsome than the daily charts.

We've bitten our fingernails down to a bloody pulp here but this bull train is rolling.  A weak financial sector and roaring bullish sentiment are likely going to be an issue moving forward, but here and now we may just see those betting on a double top DOW get their rear ends handed to them on a platter.

Even so, we're hedging our bets here and if DOW resistance becomes an issue we'll be quick to play the other side.

Wednesday, October 13, 2010

A Swing Trading Stop Loss Strategy That Will Keep Your Accounts Growing

What if we told you that a swing trader who picks the right stock just 55%-65% can be hugely successful?  That is, if just one out of every two of your swing trades earn money then you can make a lot of money over time.  However, it is also possible to be right 80% or even 90% of the time and still go broke.  All it takes is one or two big losses to wipe out all of your hard-earned gains.  The difference between a successful swing trader and a failed swing trader has as much to do with how risk is managed as it does in making good stock picks.

In fact, a good swing trade money management, or stop loss strategy is just as important as picking the right stocks.


Investment Advice from the Devil

Watch CNBC.

These guys are smart and have no ulterior agendas. They must, they’re on TV and have been thoroughly vetted by the market and their casting agents.

Look for bargain stocks that hit new lows.

Everyone knows cheap means quality and that the market is always wrong.


Fed Indicates a Continued Agressive Posture

After yesterday's FOMC meeting the Federal Reserve issued a statement indicating they are leaning toward quantitative easing measures and perhaps a second round of economic stimulus. In plain English, they will likely be buying more treasury bonds to drive down loan rates and continue a weak dollar strategy at the risk of future inflation.

So while we continue to be nervous about the overly bullish market sentiment out there, the fact that the dollar base that was potentially forming gave way changes the picture somewhat for as we have also been saying, a weaker dollar likely means higher stock prices; especially in manufacturing and heavy equipment companies that are likely to continue to see sales increases from overseas buyers.

The semi conductor sector in particular has been taking a leading role of late and with Intel beating estimates yesterday, things continue to look good for the sector, which could push the QQQQ up into the $50s setting it up for a retest of almost 10 year highs.

We will be partially unraveling our short hedge position today and adding at least one long position. However, before we are completely out of the woods, we need to see QQQQ actually break resistance here and we need to see follow through higher today as opposed to an ugly fade-the-Fed day, which isn't unknown following strong late day rallies spurred by the FOMC statement.