Friday, July 17, 2009

July expiration could exaggerate whatever trend develops today, but the market is also likely to be fixated on Google, since it is one of the few large companies doing well without TARP money or smoke-and-mirrors. My bias remains bullish in any case, and I will continue to tie it to specific numbers in the E-Mini S&P. _______ UPDATE: We neglected to consider that the trend has been...trendlessness; the mood, the asphyxiating ennui of mid-summer.  No question that July's expiration is exaggerating all of this.

The futures bounced from a low yesterday of 934.50, the precise  midpoint of a corrective pattern projecting to 930.80.  The latter number is a buy, even if there was no evidence the futures are about to give up that much ground before resuming the uptrend.  Camouflage will be tough to find if you want to board with-the-trend, but I'd suggest using a 939.30 print as a breakout indicator.

The rally off the recent low near 300 shows promise, but we'll break out the bubbly if and when it clears two peaks made since early June, the higher of which lies at 373.52.

The lnatics were out in force after the close on Thursday, trying frantically to read meaning into the $4.07 billion earnings Google just announced for the second quarter. This beat analysts expectations by a hair, and the company called it a "very good quarter."  However, traders were reluctant as always to act as though any such pronouncement could be taken at face value, and as a result, the stock was gyrating wildly early Thursday evening. It is trading at an indicated 427.41 at the moment, but we'll go out on a limb with a prediction of _____ before buyers are spent for the near term. 

Just because there are a dozen great reasons to hate stocks right now doesn't necessarily mean they can't go much higher. Not only that, the bear rally could continue for quite a while - till 2011 and beyond, even - without distorting the bearish look of the long-term charts one bit. Take a look at the monthly chart below, which shows ten years' worth of price action in the S&P 500 futures. Nine of those years have seen a bear market brought on by the collapse of tech stocks in 2000. But notice how, when the major bear phase ended two-and-a-half years later, the S&Ps embarked on a rally that lasted five years and which recouped 80 percent of the losses. It is categorized as a bear rally nonetheless, rather than as a bull market, simply because it failed to exceed the all-time high recorded in 2000.  If a similar rally is under way now in the S&P 500, it would imply that the S&P futures, currently trading around 934, will hit 1407 by mid-2014. Our speculative price bars (in red) show how the rally would look if it reached 1407 somewhat sooner, in early 2012. We think this is extremely unlikely, given the disastrous state of the economy. Where some optimists purport to see green shoots of recovery, we see the early stages of a collapse that eventually will be recognized as a full-blown depression. Under the circumstances, it's more likely that, come 2014, the S&Ps will be trading closer to 400 than to 1400. Even so, we cannot rule out the possibility that the irrational surge begun in March will go significantly higher than anyone believes it "should" before sputtering out and reversing with a vengeance. The rally presumably would occur even as state and local governments slip deeper

Perhaps I've been beating the bullish drum a bit hard lately?  I do it to remind myself -- and all of you -- that stocks can and will continue to move higher as long as most of us continue to be outraged by the very audaciousness of it. We know the rally cannot be anticipating "recovery," since even blithering-idiot bulls can see that no recovery is even remotely possibly over the next two or three years for state and local governments. But what does that matter when you have short-covering panics capable of turning bearish head-and-shoulder patterns like the one shown in the chart into launching pads almost overnight?  The rally looks hellbent on challenging June's highs, and I wouldn't bet too heavily on a failure at this point. In any case, shorting just below these highs looks like Russian roulette to me -- with three bullets chambered.

An hour or so before yesterday's close, a hawk-eyed pivoteer found the 1521.25 target show in the chart. Alas, the futures titillated with a last-minute push to 1520.25, leaving too little time to initiate a trade with any hope of exiting comfortably before the close with a gain. Even so, the analytical usefulness of the target remains, since, if it fails to contain short-covering this morning, we should brace for panic buying that could push the futures as high as _____ over the near term.  In case you're interested, that target comes from the hourly chart, where A=1346.00 (May 26).