Seeking Alpha

Greg Sommer's  Instablog

Greg Sommer
Send Message
Portfolio Manager in Silicon Valley, CA.
My blog:
Greg Sommer's Trading Blog
View Greg Sommer's Instablogs on:
  • Up, Down, Sideways?

    It has been a while since I have written an instablog post and the market has gone through some major changes. First a large sell off due to the European debt crisis, a weakening Euro and subsequent sell off. The market then experienced an incredible rally with some resolution to the European crisis but as it proved, European leaders just kicked the can down the road so to speak.

    Now we are well off the highs of the rally due to economic uncertainty, political uncertainty in the U.S., re-emergence of European woes and slowing global growth. We have rebounded slightly after testing the 1275 breakout. Now we are trading sideways in a very wide upward channel. See below;

    (click to enlarge)

    There are really only two scenarios that can come out of this sideways choppy action. Option 1 entails some rebound in economic activity, an "end" to or at least some important steps in ending the European crisis. The Euro has taken a nose dive vs. every major currency which in turn will help boost European exports and hopefully support the Euro region. This is an excerpt from a WSJ article, "The Euro-zone trade surplus jumped to €6.9B in May from €3.7B in April, coming in higher than forecasts of €4B. Exports climbed 6% but imports stayed unchanged from a year earlier, indicating how domestic demand continues to be weak."

    If we get better data and some clarity on the direction of the economy we could see a return to this years highs. Another consideration is where risks lie in asset allocation. Fixed income investments yield very little and the bonds are being refinanced at lower rates due to extended Fed Policy. If the market moves higher there is higher risk fund managers will miss or be chasing a move higher.

    (click to enlarge)

    The second option entails further deterioration in the economy both domestically and globally. China growth slowing and the European recession could have a larger impact on other economies than we realize. Economies around the world are more correlated than they were 30 years ago so recessions do have contagion effects. A second consideration is the looming 'fiscal cliff' at the beginning of next year. Approximately $560 billion in tax increases and spending cuts has the possible outcome of putting the U.S. back into recession. J.P. Morgan has estimated it could cut 3.5% of GDP out of the economy. The Obama administration and the house has repeatedly shown they are unable or inept at formulating sound policy for the U.S. people. U.S. government and political in-action probably plays one of the biggest roles in hindering growth and prosperity. I think this scenario plays out as a rounded top and we see the bottom of the up-channel. Most likely at that point the uptrend won't even act as support.

    (click to enlarge)

    The best thing to do in this environment is to stay liquid and be able to move into cash relatively quickly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 17 12:48 AM | Link | Comment!
  • More lows for the SPY?
    At the end of July I wrote about a technical pattern developing in the SPY and the possible downside in the markets. (Link to article) Low and behold the pattern materialized and the market tanked.  Luckily I was in cash when this selling really took hold and took some selective shorts when the opportunity presented itself. 

    Now we have been chopping around in a very wide range in the S&P 500, approximately 1120 to 1220.  With the VIX at levels above 30 the daily moves in the market have been large and unpredictable.  With the headwinds in the world, both economically and politically, it's no surprise traders are hitting sell.  The European debt crisis is unresolved, the U.S. was downgraded from AAA for the first time, U.S. banks under extreme regulation, unemployment at 9.1% (and in some cases much higher depending on where you live), the U.S. has wars on three fronts now including Libya, turmoil in the middle east, natural disasters destroying infrastructure in the U.S. and Japan, the list can go on and on. 

    Now back to the charts, the SPY has been trading in an upward sloping channel for the past couple weeks and Friday we closed at the bottom of the channel. 

    Considering the extreme down move and the continued weakness in major names, I am looking for another move down below the channel.  Either we will retest the low of $110 made on Aug. 9th or we will make another low possibly down to the $108 to $106 level.  I am inclined to buy these new lows where you can get great value in some companies like Apple. Other companies I like and have been following include GMCR, LULU, HANS, UTLA, WFC,...

    Here are some fun facts about the state of our country.

    - U.S. Sovereign debt downgrade; first in American history
    - Federal Spending (25% of GDP); highest since WWII.
    - Budget Deficit (10% of GDP); highest since WWII.
    - Federal Debt (67% of GDP); highest since post WWII.
    - Employment (58.1% of population working); lowest since 1983.
    - Increase in nonfarm payroll employment (0.5%) since recovery began 26 months ago; slowest recovery from severe recession since WWII.
    - Home-ownership rate (59.7%); lowest since 1965.
    - Percentage of taxpayers paying income tax (49%); lowest in modern era.
    - Government dependency (47%), defined as the percentage of persons receiving one or more federal benefit payments; highest in American history. 
    - Obama administration that flip flops on policies including environmental regulations, how to reduce the deficit and how to spur the economy/reduce unemployment. Yeah Check. 

    One thing is for sure, things need to change in this country fast. 

    Sep 11 9:23 PM | Link | Comment!
  • SPY showing signs of more downside?
    It is safe to say everyone knows (or should know) about the impending deadline regarding the debt ceiling and political deadlock in Washington.  Some people and investors are shrugging off the possibility of default while others are waiting for the impending catastrophe.  I tend to agree with the latter.

    This problem has been in the making for a very long period of time.  Government spending has been on the rise for years with no regard for the gap in receipts.  It is a common theme now of only dealing with our problems when we are on the verge of catastrophe.  It happened with housing boom and bust and now with our ballooning national debt.  Unfortunately politicians in this country want their respective political parties to "win" instead of doing what is right for the American people.  The recession only worsened the financial situation in this country and now we need to take steps to correct and reverse the biggest problem our country is facing.  If the U.S. did not have the largest economy in the world we would be treated more like Greece or Ireland.  This is not a path we should go down and politicians are doing the American people a diservice by putting our AAA rating in jeopardy.  Not to mention the extra cost of servicing our debt if investors require a higher return on borrowed funds.  

    The smart move is to be very cautious in this market and for good reason.  Looking at the S&P 500 or the SPY there is a potential bearish head and shoulders pattern developing.  

    If the U.S. does default and we get more downside in the markets we could see this pattern materialize.  The neck line of the pattern is at approximately $126 with downside potential to $122 or even as far as $118 if things get real bad.  One thing to keep in mind is the 200-day moving average where we saw a bounce before. 

    The market has been in a range for months now and the only way to make money is to be a stock picker.  Long the stocks reporting outstanding earnings like LULU, AMZN, AAPL and GMCR and short the stocks that are struggling with the economy such as Ford or financial stocks.  If this pattern materializes and we do have more downside, it could be the opportunity to get into these high flyers.  

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jul 28 5:37 PM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.