The ride just keeps getting wilder every week and
this one was a doozy—but even in this wild market---
WE’VE FINISHED A RECORD TWO MONTH WINNING
STREAK THAT’S SCORED PROFITS EVERY WEEK SINCE NOVEMBER!
Until this week this is—our amazing winning streak
was finally broken as we took a bullish play on Apple going into the big
MacWorld event last week. Fortunately after a nice rise on Monday we
raised our hard stop so that even after the stock gapped lower on
Tuesday we still managed to get out at a very small loss before Apple
fell off a cliff later in the day. This play reminds us that no matter
how great the potential, moving stops up to protect gains is
critical—especially in markets this volatile.
The irony is our other play—a bearish trade on
Capital One Financial (COF) would have been very profitable if our entry
had been triggered showing that at least our thinking on direction for
the stock was right on the money.
But that’s all water under the bridge and with our
capital still intact and being all back to cash we are once again ready
to stalk the big profits—with two outstanding plays ready go. I’m super
excited to tell you about them but before we do let’s take a good look
at…
WHERE THIS MARKET IS HEADED
As you can see from
the charts the markets plummeted off a cliff last week tracing the
biggest drop for the S&P in more than 5-years and the worst start to a
new year in market history.
Housing, banks,
brokers and chip stocks crashed the furthest with small caps and
transports the next hardest hit, while the large cap indexes plunged a
mind boggling 15%. Amazing when you consider the whole thing toppled in
little more than two weeks.
The bank and
brokerage stocks are the biggest anvils continuing to drag the overall
S&P numbers straight to the bottom. Fourth quarter earnings in the
financial sector are now expected to fall as much as 99% over the same
period in 2007. The entire sector is only expected to post earnings of
$586 million compared to $55 billion in Q4-2006. It is hard to
comprehend the damage to the financial sector with individual firms
losing billions each but the charts give us a pretty good picture.
The S&P-500 chart
clearly shows the support break at 1405 with a potential target of 1225.
The S&P is more bearish than the Dow and Nasdaq and is colored by its
21% weighting of the financial sector. With the rating downgrade of the
big bond insurers like Ambac, and the likely downgrade on MBIA, the
financials are going to be bearish for a long time--and you know we
haven’t seen the lows yet.
Next week the
floodgates of confession burst open gushing forth over 450 companies
earnings reports. These earnings--or more importantly their guidance
going forward--will be the catalyst for market direction.
The challenge is
the incessant howling about the impending recession---with the current
mind-set CEO’s are likely to be super cautious about guidance. The
street expects it and the company a free pass for next quarter. If the
CEO guides cautiously lower during earnings this week and then beats
estimates in March they’re a hero. It is a win-win scenario. For that
reason guidance could be weak pulling the markets even lower.
Next week the big
focus will be on the tech stocks led by Apple, Ebay and Microsoft-- plus
quite a few chip stocks, roughly 10 or so---earning that will help tech
investors gauge the ongoing health of the sector.
The Nasdaq chart
came to a dead stop at horizontal support at from the March lows--if the
Nasdaq breaks support here it could be a long drop to something in the
2000 range. With potential earnings problems from AAPL, EBAY, QCOM and a
dozen chip stocks we might see a short term pop at best. The big hope in
the tech sector this week is Microsoft and if the Nasdaq breaks down
early one stock that doesn’t report until Thursday won’t likely be able
to support it. The bottom line is we could see some lower lows for tech
stocks.
While the market’s
been burning the Fed has been fiddling but even if they do act
decisively investors are losing faith another rate cut will suddenly
blast us into a new bull market
Fed Funds Futures
are showing better than a 136% chance of a 50-point rate cut at the
January 29th meeting. The whisper on the street was for a pre-meeting
rate cut possibly last week---but so far we haven’t seen a thing—and the
market action shows it. Bernanke appears to be putting off the rate cut
until the last possible moment. The Fed still believes the U.S. will
avoid a recession but that is quickly becoming the minority view.
The inflation
numbers for the week saw the Consumer Price Index (CPI) rise another
+0.3% to an annualized headline rate of 5.6%--way too high. The core
rate increased slightly to 2.4% and right at the upside edge of the
Fed's comfort range. Even so the risk of recession should be outweighing
the risk of inflation and Bernanke has good reason to cut rates quickly.
We could easily see a market rise going into the Fed meeting on the 29th
and maybe even a celebratory pop afterward but any jump should be seen
as a shorting opportunity and nothing more.
Volatility is
spiking back into the upper 20s on the VIX to levels last seen at the
August and November bottoms. The market is running on fear and these
things tend to get overdone before they end--but even so the VIX is
telling us another spike higher will likely signal at least a temporary
bottom.
Option expiration
on Friday increased the volatility and there is the potential for a peak
VIX spike higher when the market re-opens if the market spikes lower on
Tuesday. This could be the selling climax we need to see a new buying
opportunity. A lot of put writers will wake up with new stock in their
accounts on Tuesday morning from exercised puts and they’ll likely be
hitting the sell button at the open to unload unwanted stock creating
the potential for an opening spike lower.
The internals are
also getting progressively worse and suggest we are building to a
selling climax. For example new 52-week lows were rising dramatically
every day last week with a daily high of 1373 on Friday along with
extreme volume levels. The internals paint an extremely oversold picture
and suggest at least a temporary relief bounce soon.
In spite of the
likelihood of a spike lower at Tuesday’s open followed by a sharp
rebound higher it's obvious in looking at the fundamentals we haven't
hit bottom yet--and we haven't seen any true market capitulation. If we
do see a bounce higher this week you’ll want to watch to see how long
lasts before turning into a new entry point for shorts and puts. That’s
the state of the market--the question is…
HOW DO WE MAKE
MONEY ON IT?
We’ve got two plays
lined up this week—the first bullish and the second bearish. The great
thing about these two is they are likely to go their own way in spite of
what the rest of the market is doing---our bullish play has already
shown remarkable relative strength and likewise relative weakness on our
bearish position.
Our first play is
bullish and it’s on a medical services provider that is relatively
recession proof—and the stock shows it. This one was busy climbing
higher Friday right while the rest of the market was plumbing the
depths—now that’s some strength! Earnings are up, sales are up and the
stock is up—sounds like winning combination for new calls—especially if
we get that bounce…
Our next play is
bearish and there isn’t a whole lot that can help this one—the stock
doesn’t jump one way or the other—it just continuous rolls lower like a
freight train rumbling down out of the mountains—and by the looks of
things nothing is going to stop it. We’re going to jump aboard with some
well placed puts first thing Tuesday for what looks to be a sure-fire
winning ride---Allllll Aboard!
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