Weekly Financial Alerts
Greetings Volatility Traders, Market Raiders and Money Makers,
The ride just keeps getting wilder every week and this one was a doozyâ€”but even in this wild market—
WEâ€™VE FINISHED A RECORD TWO MONTH WINNING STREAK THATâ€™S SCORED PROFITS EVERY WEEK SINCE NOVEMBER!
Until this week this isâ€”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 criticalâ€”especially in markets this volatile.
The irony is our other playâ€”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 thatâ€™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 profitsâ€”with two outstanding plays ready go. Iâ€™m super excited to tell you about them but before we do letâ€™s take a good look atâ€¦
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 havenâ€™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 CEOâ€™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 theyâ€™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 doesnâ€™t report until Thursday wonâ€™t likely be able to support it. The bottom line is we could see some lower lows for tech stocks.
While the marketâ€™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 havenâ€™t seen a thingâ€”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 theyâ€™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 Tuesdayâ€™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 youâ€™ll want to watch to see how long lasts before turning into a new entry point for shorts and puts. Thatâ€™s the state of the market–the question isâ€¦
HOW DO WE MAKE MONEY ON IT?
Weâ€™ve got two plays lined up this weekâ€”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 itâ€™s on a medical services provider that is relatively recession proofâ€”and the stock shows it. This one was busy climbing higher Friday right while the rest of the market was plumbing the depthsâ€”now thatâ€™s some strength! Earnings are up, sales are up and the stock is upâ€”sounds like winning combination for new callsâ€”especially if we get that bounceâ€¦
Our next play is bearish and there isnâ€™t a whole lot that can help this oneâ€”the stock doesnâ€™t jump one way or the otherâ€”it just continuous rolls lower like a freight train rumbling down out of the mountainsâ€”and by the looks of things nothing is going to stop it. Weâ€™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!