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10/21/2010 - Pull your umbrella out

Oct. 25, 2010 10:47 AM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Market Forecast:

  • Cloudy with strong chance of showers worldwide

Trades:

  • research said Capital One (COF) had the most incremental mortgage putback liability, so shorted @ 89dEMA today, I was already technically and fundamentally bearish on financials (XLF), and with COF bearing a heavy cross from the mortgage crisis, it will suffer the hardest hits. COF is also underperforming XLF
  • closed PNK on morning up-move,

Macro:

  • Germany (EWG) is the best ETF & Japan (EWJ) is the worst, accounting for underlying economic and other factors.
  • China’s GDP numbers have been declining for the past 3 quarters, while inflation has been rising. This week, China raised its rates .25% with more increases suspected. This is good for the Chinese people as their will be less inflation and a stronger currency, but will hurt exports and slow business growth when other parts of the world, especially America, have not picked up yet. The Chinese are assuming a global recovery, and trying to cut investment/lending, etc., but if the global economy doesn’t pick up, it could be a somewhat minor problem for China.

General:

  • SPX has made a new high now with RSI divergence, the USD is still oversold, so I believe that there is a significant correction that will occur from here, so I think the market will go down and USD will rally and squeeze the shorts. Other major stocks such as Walmart(WMT) have formed head & shoulders patterns here, so some of these stocks have a negative outlook from here. The plus side is emerging markets recovering and moving average support, so if these stocks & indexes fall from here, they have a good chance of being caught at those points. But the market is very overbought and it’s due time for a correction.
  • Japan (EWJ) broke down below its consolidation range, while other strong country ETF’s such as Germany (EWG) are setting up 1-2-3 higher-top patterns. At this point any longs should be sold or covered via options, and shorts should be initiated today. VXX is making new lows with RSI divergence.
  • With the consumer confidence index down 4.7 points last month, Cons. Discretionary (XLY) looks weak technically and fundamentally, as does XLV due to approaching fib. extensions and weak volume. Not to mention a classic exhaustion day in XLY with the highest volume of the month, a new high, and a bad close. In the idea of the “circle of life”, I will use the profits from this short at Best Buy (BBY).


Disclosure: short COF and XLY

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