Friday, August 28, 2009

In his latest dispatch, David Rosenberg, chief economist at Gluskin Sheff, says no one should feel guilty taking profits in a market trading at 130x trailing earnings: "Boy, with all that good news - Case-Shiller, housing sales, durable orders, consumer confidence, Bernanke (!) - one would have thought that we could do better than 2.6 points on the S&P 500 in the last two days. It could well be that the buying momentum is subsiding. Indeed, over 50% later, it would make perfect sense for the market, which investors were buying on rumours five months ago, to begin to sell on facts; nothing wrong with taking profits in a market trading at 130x trailing reported earnings. Moreover, sentiment is a clear obstacle here with Investors Intelligence flagging a 51.6% bullish chorus with just 19.8% of respondents in the bear camp - like Tuesday's bull-bear ratio in the August consumer confidence report, we haven't seen market sentiment this smug since the autumn of 2007 (right before the fall). Is that all there is? Despite the good news the S&P 500 is up only 2.6 points "The real enemy for the equity market is Mr. Bond - that pesky Treasury market that just won't sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% - especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Meredith Whitney gave the green light to Goldman, and Roubini declared the recession to be ending, and what a

We hold the Jan 130 - Oct 130 put spread four times for _____.  We've been trying to buy an out-of-the-money call as a hedge, so far with no success. However, option volatility has been falling, and we could catch a lucky break today if we underbid the market. Accordingly, I'll recommend bidding 2.10 for a single September 170 call,  contingent on the stock trading 164.20 or higher.

The robust impulse leg that formed in the E-Mini S&P after DaBoyz sprung a bear trap early in yesterday's session suggests stocks want to go higher.  My hunch is that it if you're going to catch a relatively riskless ride, it will have to be before the opening bell.

If bulls can get something going today, they'll announce it with a close above 954.70. That's the Hidden Pivot midpoint of a pattern stretching back to July 29 on the 30-minute chart. Success would hint of more upside early next week to at least 978.00.  A success of greater magnitude would be predicated on a rally leg that is unbroken on the 30-minute chart between  959.90 and 963.10.

Yesterday's trampoline rally looks like it needs more corrective action to set up a C-D follow-through. However, its potential power is unmistakable, given the fact that the intraday high exceeded two external peaks (see chart).  As of 9 p.m. Thursday I could find no handholds for night owls to bottom-fish the so-far shallow correction. What this implies is that you will need to find camouflage on the very lesser charts to enter with the trend when it turns bullish again. I cannot predict at this point whether the opportunity will come at night, or after the opening, but it looks like it could be worth your patience and diligence._____ UPDATE (12:33 p.m.): DaBoyz evidently sensed there was not enough buying power on the opening to take stocks seriously higher, so they instead goosed stocks into a fleeting short squeeze that allowed them to unload the inventory they'd accumulated overnight. In the wake of this bull trap, ES has sold off 15 points, but it may be ripe for bottom-fishing momentarily. To that end, I've posted a 1019.75 correction target in the chat room, and you can bid there with a 1.00-point stop-loss. I've also suggested entering on camouflage, using the first signaled point 'X' after 1019.75 is hit or approached within a few ticks. [Epilogue: The futures went no lower than 1022, so we did nothing.]

The stock rallied away from our bid, but we'll keep trying. There are two attractive bottom-fishing options at the moment: at ____, a Hidden Pivot midpoint; or at _____, its 'd' sibling. For today only, I'll recommend bidding 0.1204 for 5000 shares.

Putting aside the broad bullishness of today's commentary, the lesser charts suggest that stocks are too overextended to embark on a new leg up without some sort of pullback first.  The hourly chart of the Dow (see inset) yields only one logical target at the moment, _____, but the imagination balks -- mine does, anyway -- at the notion of another thrust as steep as the A-B impulse leg already concluded. Just in case, though, the midpoint pivot associate with the target is ____. Strictly speaking, it should serve as our minimum upside objective for the near term.

It's been more than two years since we've seen the Dow Industrials rally for eight consecutive days, but it happened yesterday with a little help from Boeing, which gapped almost $4 higher on the opening bell. If you're wondering how the Dow's winning streak in April of 2007 fared, it turned out to have been just the beginning of a spectacular run-up that carried the blue chip average to its all-time high six months later, in October. The rally stalled along the way and went into a nasty dive in July, but the recovery was nearly as steep and eventually carried the Indoos up to 14198, the highest peak ever recorded. Could we be witnessing the start of a similar mania? In fact, the rally from March's lows already qualifies as a mania, since the Dow has gained 49% in just five months. If stocks are about to move into an even steeper trajectory, that would imply a blowoff to who-knows-how-high.  The round number 10000 would seem like a logical one to use, but getting there would only take a relative hiccup from the current level of around 9580. Meanwhile, the Industrial Average need only exceed 9654, equal to a peak made last November, to demonstrate that it's got the moxie to at least remain buoyant for the rest of the year. Nailing the Little Porker... From a tactical point of view, we'll be trying to short this market every time it pokes its scruffy little snout above the old recovery high. Using Hidden Pivot targets, we've minimized the risk of doing this, and we've actually made some winning trades with stocks going against us. Earlier in the week, for instance, Rick's Picks recommended shorting the E-Mini S&P at 1034.00 with a very tight stop-loss of 1.25 points. The actual top occurred