Markets Reverse Back to Top of Trading Range

We had a difficult week as our inverse positions were squeezed by the market moving higher towards the top band of its trading range and then stalling right below the June 11th highs.

Several of our macro market signals have reversed back into bullish modes and so we’re fractions from reversing to a “Green Flag Flying Mode.” This week we switch from “Red” to “Yellow”, indicating choppy prices ahead and an uncertain direction.

This extremely rapid reversal in market tone was primarily due to the super spike on Wednesday which came on less than normal volume and so it’s difficult to know if this is a valid turn or not. The fact that the upside momentum stalled just below the June highs is suspicious, as is the lack of volume and muted response to better than expected earnings news.

The View from 35,000 Feet

This week the news was all earnings reports as first Goldman (GS) and then Intel (INTC) powered the two big up days. But then GE (GE) wasn’t able to follow through with a greater than 40% drop in quarterly profits and a lower profit forecast along with Google (GOOG) and IBM (IBM) citing weak revenue growth.

As I reported in my mid-week commentary, “Dr. Doom,” Nouriel Roubini was quoted as saying his outlook had improved which sparked a late day rally on Thursday and after he issued a correction, that in fact his opinions hadn’t improved, the “Roubini Rally” was not sustainable.

Bank of America didn’t light up the boards with its declining profits and worries about higher credit card and home loan losses going forward and CIT continued struggling to avoid bankruptcy with the discussion on Friday turning to “debtor in possession” financing which is a nice way of saying that they’re heading towards bankruptcy court.

Railroad giant CSX reports declining shipping activity on its routes and Marriott had a greater than 70% drop in revenue along with the deadly hotel bombing in Malaysia to make for a very bad week.

Core retail sales were down for the 4^th month in a row and the July Philly Fed survey of economic activity fell for the 19th out of the last 20 months.

But on the positive front, initial jobless claims on Thursday were down which was certainly good news on the employment front and housing starts were up in Friday’s report.

And on Friday after market close, we had our weekly Fed seizure of the 54^th and 55^th U.S. banks to fail this year.

The Week Ahead

Next week is light on economic data but heavy on earnings as almost a third of the S&P 500 report quarterly earnings. Big names include Apple (AAPL), Microsoft (MSFT), Yahoo (YHOO), Caterpillar (CAT), Coca Cola (KO), Boeing (BA), Morgan Stanley (MS), Wells Fargo (WFC) and American Express (AXP).

Also, Ben Bernanke heads for Capitol Hill to face Congress and that should be an interesting meeting as more and more discussion about the need for a second stimulus takes center stage.

Monday: June Leading Economic Indicators

Thursday: Initial Jobless Claims, June Existing Home Sales

Friday: June Michigan Consumer Sentiment Revision

Sector Spotlight

Leaders: Home Builders, Mexico, Brazil

Laggards: Treasury Bonds, Japanese Yen

Disclosure: RWM, SEF, EUM, DXD, DUG

Comments

[Old Trader:]

Watch the USD tank if it looks like there's another stimulus plan coming down the pike...

Jul 19 09:20 AM

[Roger Knights:]

"we had our weekly Fed seizure of the 54th and 55th U.S. banks to fail this year."

Followed by the 56th & 57th.

Jul 19 10:04 AM

[lazzybum:]

The glass is half empty. The market expected an empty glass in March. May be not entirely empty. Just 90% empty. Most of the traders and Bears want you to believe the glass is broken. Do we expect CSX to increase its revenue ? Do we believe BAC and C are not zombi banks ? Do we expect the retail sector come in with great profit ? Do we expect the unemployment rate will stay below 10% ? Of course not. If we do, why are the stocks are priced so low ?

GS's trading profit may or may not be sustainable. It is not a great investment for average Joe. When the company makes maoney the majority of the profit will be paid out in salaries and bonuses. When it lost money, we pay for it. All those great and almighty traders almost drove the company into bankruptcy when the time is not right. Why do we think those great and almoight traders and managers should be paid in 7 figuer bonuses ?

The housing data is turning up in California two months in row. GOOG, IBM, BAC,INTC, and countless other companies turn in better than expected result. The market went down since June 11 with little expectation. Now we got one week of up market and the bears are complainning !

Jul 19 12:02 PM

[TheFounder:]

This market makes no sense to many experianced professionals. In that regard, it follows the oldest and strongest rule: a mechanism designed to cause maximum loss to the maximum possible number of players.

Perhaps a decline after the double top?

Jul 19 02:47 PM

[dasv:]

bombings were in indonesia (jakarta) not malaysia

Jul 19 06:26 PM

[dcb:]

I hate to insult you pros, but lets think a minute.
1) there is low volume and liquidity in the markets
2) there is ample evidence of manipulation
3) those doing the manipulation have a huge incentive to keep the markets up
4) they see the head and shoulders patterns too.
number four the most.

last week was the most manipulated week I have seen trading. the extent of the move and it's size was crazy, esp when you include all the fundamental headwinds. in this environment it doesn't matter what the real situation is when a few people have unlimited firepower over the markets at cheap government funding.

did you really think they were going to let things get below 880.
I hate to say it, but you can't have a drop unless there are enough people to sell and in the market and push it down against people with billions to throw at things.

there may be a slight fall back, but things are going up, it's because that's what they want. everything else and debate is really stupid at this point.

If I can figure this stuff out, and I am not a pro, why can't you.

Wake up. the manipulated market isn't going to e be allowed to drop!!

Jul 19 09:52 PM

[dcb:]

this is about the third attempt at this shit.. which means it usually works.

when you talk about this stuff, and leave out the manipulation factor to be honest it makes you sound stupid.

Jul 19 09:55 PM

[dcb:]

the decline will not be allowed!!!!! DUHHH


On Jul 19 02:47 PM TheFounder wrote:

> This market makes no sense to many experianced professionals. In
> that regard, it follows the oldest and strongest rule: a mechanism
> designed to cause maximum loss to the maximum possible number of
> players.
>
> Perhaps a decline after the double top?

Jul 19 09:56 PM

[dcb:]

stocks are not priced LOW. this is not correct. fair value on 10 year cyclical earnings PE on the s&P is about 800 (i believe.).
at this level we are at the most expensive market price to earnings since 2002-3 (bloomberg). when you consider the support being given in the market by the fed, the headwinds facing the economy, stocks are very expensive!!!! they were cheaper based on earnings at the peak of the market!!!!


On Jul 19 12:02 PM lazzybum wrote:

> The glass is half empty. The market expected an empty glass in March.
> May be not entirely empty. Just 90% empty. Most of the traders and
> Bears want you to believe the glass is broken. Do we expect CSX
> to increase its revenue ? Do we believe BAC and C are not zombi banks
> ? Do we expect the retail sector come in with great profit ? Do we
> expect the unemployment rate will stay below 10% ? Of course not.
> If we do, why are the stocks are priced so low ?
>
> GS's trading profit may or may not be sustainable. It is not a great
> investment for average Joe. When the company makes maoney the majority
> of the profit will be paid out in salaries and bonuses. When it lost
> money, we pay for it. All those great and almighty traders almost
> drove the company into bankruptcy when the time is not right. Why
> do we think those great and almoight traders and managers should
> be paid in 7 figuer bonuses ?
>
> The housing data is turning up in California two months in row. GOOG,
> IBM, BAC,INTC, and countless other companies turn in better than
> expected result. The market went down since June 11 with little expectation.
> Now we got one week of up market and the bears are complainning !

Jul 19 10:00 PM

[dcb:]

once more you do not know what you are talking about. it is the size of the move and the span of time of the move. one month of dropping and made up in five days? drops are supposed to happen faster than rises. yet vix goes down. have you done so little trading you can't see a manipulated fall to exactly 880 and then the rise. give me a break. what the bears want is a non manipulated market that is allowed to find true pricing, not one determined by the prop desks at JPM and goldman.

I don't want the market to go down but I don't want to have to overpay because someone is controlling the markets with government consent.

The bulls don't get it.
if you want to buy stock you will be forced to pay more than you should from a market maker like goldman who is going to be selling you the stock they have bought. they will make profits and reduce their risk hedge leaving you stuck when their are no more buyers for the security.


On Jul 19 12:02 PM lazzybum wrote:

> The glass is half empty. The market expected an empty glass in March.
> May be not entirely empty. Just 90% empty. Most of the traders and
> Bears want you to believe the glass is broken. Do we expect CSX
> to increase its revenue ? Do we believe BAC and C are not zombi banks
> ? Do we expect the retail sector come in with great profit ? Do we
> expect the unemployment rate will stay below 10% ? Of course not.
> If we do, why are the stocks are priced so low ?
>
> GS's trading profit may or may not be sustainable. It is not a great
> investment for average Joe. When the company makes maoney the majority
> of the profit will be paid out in salaries and bonuses. When it lost
> money, we pay for it. All those great and almighty traders almost
> drove the company into bankruptcy when the time is not right. Why
> do we think those great and almoight traders and managers should
> be paid in 7 figuer bonuses ?
>
> The housing data is turning up in California two months in row. GOOG,
> IBM, BAC,INTC, and countless other companies turn in better than
> expected result. The market went down since June 11 with little expectation.
> Now we got one week of up market and the bears are complainning !

Jul 19 10:08 PM

[dcb:]

poor comment stream. snide comments, make you look bad, and makes me not want to follow what you post.


On Jul 19 11:49 AM Mad Hedge Fund Trader wrote:

> That hurt! The “head and shoulders” is off the table, and now the
> S&P 500 is looking at a double top at 950. This is why I hate
> listening to technical analysts, and why they shop at Men’s Warehouse
> and drive Hyundai’s instead of Bentley’s (see my earlier criticism)
> . Generally, technical analysts tell you to buy every rally, sell
> every dip, and in a market that’s going nowhere this is a perfect
> formula for losing money. Watch them tell you to load up if we hit
> 950. It is clear from the ferociousness of the 70 point, three day
> rally, that too many hedge funds were drinking the Kool Aid and the
> blood is flowing as a result. One meekly explained to me that “head
> and shoulders” formations fail only 6% of the time. Well, welcome
> to the 6%. They are going to have to invent a new name to describe
> this formation (“head and shoulders with a hump back?). This is why
> I issued my now famous “Sell in May and Go Away” piece, because the
> quality of the trades you usually get in the three months that follow
> is uncommonly low. Look at the chart below that has ensued so far.
> It looks like a lot of nothing.

Jul 19 10:11 PM

[StreetMedic:]

Mad Hedge Fund guy,

Why do you spam all the article with various copies of the exact same post with only a few words changed? It's stupid.

Jul 19 11:50 PM

[jambo:]

Re: Mad HF trader aka John Thomas; He is talented and accomplished in ways many of us could only wish at. Why he dips to that shite is beyond me. Also many of his posts seem to indicate he believes that this "stimulus" activity has value. Dichotomy incarnate.

And dcb, P/E s are worse than that. I saw a graph today by Martin Weiss that shows it at 132 if you use gen accept acct pract, (no one time -yet curiously repetitive- charge offs) fahhhk!

Jul 20 10:20 PM