We’ve made some outstanding profits with no losses
for several weeks in a row now—the key is picking stocks ready to really
move in a certain direction. To get an idea where our next winners may
be let’s take a good look at…
WHICH WAY THIS MARKET IS HEADED
The markets were
looking pretty bearish until mid-day Tuesday when a bounce caught fire
turning into a rocket by Friday’s open. Oracle's earnings beat the
street by 4 cents boosting the tech sector and then Thursday night RIMM
announced that both earnings and revenue had doubled with sales of
nearly 4 million Blackberry phones.
All this much
needed good news in addition to an announcement from Merrill about a $5
billion infusion of cash prompted a huge gap open on Friday catching a
sea of traders leaning in the wrong direction.
Although the bulls
cheered the gap higher what happened on Friday has absolutely nothing to
do with the market's future--Friday’s jump was caused by one-time news
events that triggered a gap open on the one day of the month that
matters. S&P options expire at the opening price of the S&P on
expiration Friday.
When the flurry of
news stories pumped the overnight futures to extreme levels option
expiration panic ensued. Anyone managing their positions with the S&P
stuck under 1460 all week suddenly faced a gap open around 1475. That
15-point difference is a huge amount of money—and even larger when
market sentiment was bearish going into Thursday's close.
Put volatility was
off the charts while call volatility was negligible. There were a lot of
traders loaded up with shorts and the news and option expiration games
blew them out of the water. Friday’s action was 90% short covering and
odds are good this bounce won’t last.
We have two good
keys to watch for next week on the SP-500—the first is horizontal
resistance SPX 1490—if the markets break above that level it’s bullish
but remain cautious—the real level to watch is the downtrend line from
October, currently around 1550 but descending every day.
Historically the
next several days until year-end are normally bullish even if only
slightly so. The coming week is "markup week." This is where funds keep
making small buys on stocks they own to make sure they finish the year
as leaders. This dresses up their year-end statements and helps provide
a little more bullish sentiment to the year-end.
We could have
several tests of 1490 and keep in mind volume next week will be
extremely low so we won’t have good confirmation—but these levels should
tell us what we might expect for the beginning of January.
Believe it or not
there are sparks of hope forming in the credit markets. Just before
Friday's close the nations three top banks, CitiGroup, Bank America and
JP Morgan announced the potential $80 billion Super SIV Fund was being
abandoned due to lack of demand—and that is a good sign. Various private
rescues over the past ten days made the plan unnecessary. Possible users
of the fund had made it known that they no longer needed the money and
were finally able to trade their SIVs on their own. This is clear
evidence the excess liquidity being pumped into the system is finally
taking hold and the credit crunch is easing.
These private rescues are coming at a cost though—equity in the major
Wall Street firms is being sold off to get them out of the quagmire they
created. For example Merrill Lynch, with potentially another $10 billion
in write-downs coming in Q4, is said to be close to a $5 billion capital
infusion from Singapore's Temasek Holdings. Merrill has already taken
$7.9 billion in write-downs from bad bets on mortgage-backed securities
but analysts claim more losses are coming. The Temasek board has already
given approval to the investment pending pricing, timing and regulatory
issues. Some analysts speculate the number could rise to $8 billion if
the terms are generous enough.
The Temasek fund
was set up in 1974 to manage Singapore's investments and controls a
portfolio of more than $100 billion. In addition to the Merrill deal,
UBS announced last week that the Government of Singapore Investment Corp
is investing $9.75 billion for a 9% stake in UBS.
This unprecedented
dumping of money into the economy is definitely having an effect in
other areas as well. The recession debate rages on but there is evidence
we’ll be dealing with massive inflation before recession. The Personal
Income numbers showed a headline rise of +0.4% and personal spending
jumped +1.1%--well above expectations. It was the largest increase since
July 2005 and not a sign of a pending recession but of inflation. The
preliminary numbers coming out of this retail season are showing the
same thing--higher consumer spending in-spite of an economic slowdown.
While the spending
numbers were higher than analysts expected, top line inflation jumped to
3.6% and the core rate rose to 2.2%. Both of these numbers are over the
Fed's comfort zone and suggest we could have seen the last rate cut in
quite a while. If spending is rising unexpectedly fast and inflation
rates are following then the Fed will be changing their bias to
tightening very quickly. Once the markets get that figured out stocks
are likely to drop like rocks.
Next week is
holiday shortened by two days and it is going to be a slim week for
economics. The only reports of interest will be the two Fed regional
surveys and the Chicago PMI report. The PMI falls on a Friday that will
see even less trading than we just saw last week. With no material
reports and the way the holiday’s fall this year suggests any economics
will be passed over until the New Year.
So we’ve got a
holiday shortened week with very low volume and a market coming off a
big spike higher —the question is…
HOW DO WE MAKE
MONEY ON IT?
This coming week
will be short and trading will be thin but we’ve still found two good
looking opportunities to set up for the big volume returning in January.
This may be a good week to kick back and enjoy some lounge time with
family, friends and food but these two new set-up still look pretty
compelling—one is bullish and the other bearish.
Our first play is
on a stock looking poised for a big jump higher. The company is in the
recession-proof business of electrical generation is has been trending
higher for months. Earnings and growth forecasts were excellent at their
earnings announcement in November and now the stock is bouncing off
support for a new run to the upside—a run we’ll be taking advantage of
first thing Monday!
Our next play is
bearish has been hit by so many round-house punches it’s lucky to still
be standing—but by the looks of its chart it may not be for long. The
stock is headed straight for the basement based on a huge lawsuit the
company just lost plus massive losses in it’s real estate portfolios.
Investors are looking for any bounce to sell the stock and we got just
such a bounce Friday—but it failed giving us the green light to hop on
board with some well placed puts—a position we’ll be jumping on first
thing Monday morning!
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