Caveat Venditor

Ignore the daily charts of $AA and $VALE at your own peril. I am still probing my working thesis that we will see a rotation out of technology and into the industrial/material/energy complex. Thus far, the materials appear to be leading that group. I saw yesterday on CNBC that noted bear James Chanos is shorting basic materials firms as a way to short China.

I do not care to dispute the long term success of that bet. In the short term, though, contrarian bears like Chanos are often very wrong before they are proven to be wholeheartedly correct. It is simply the nature of his niche. You should not let his longer term thesis, of a time frame of several years, interfere with objectively reading the price action and volume patterns, such as in the charts seen below.

Let the seller beware…

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…back to the 1131 zone on the S&P 500 cash, or 113.20 on the $SPY ETF. Buckle up and wait to see who wins the battle this time, before leaning one way.

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I made two trades today:

• I bought a 3/4 position back into $HMIN, based on the chart below.
• I got stopped out of my $NYT position for a loss. I will consider revisiting the stock as per my thesis that it will benefit from the e-reader market.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 42%

• LONG: 42% ($ATPG $BTU $HMIN $RDN $VMW)

CASH: 58%

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After Tuesday’s Fed announcement, which not only held rates at 0% but also hinted at the possibility of more quantitative easing, it should be pretty obvious that individuals and households are nowhere close to revisiting the go-go days of the middle part of last decade. Sure, the American pastime of conspicuous consumption will not disappear anytime soon, but consumers will cut corners here and there in order to compensate for paying $500 for an outfit consisting of $TRLG jeans and an Ed Hardy shirt.

As an example of such cost-cutting measures, instead of paying $40 for popcorn and a ticket at their local movie theater to see Tom Cruise play a one-eyed Nazi, they will either subscribe to $NFLX, or conveniently choose movies on a whim, a la carte style, at a strategically placed Redbox (a subsidiary of $CSTR) in their local pharmacy, supermarket or McDonald’s. We know $NFLX has seen a tremendous run over the past several quarters, but $CSTR may be tapping into an unfortunately growing market of low-end consumers who refuse to subscribe to a $NFLX monthly fee. In addition to their Redbox DVD rental business, Coinstar also has a strong self-service coin-counting machine business which, again, is going to continue to flourish so long as unemployment is high (think digging though sofas to find loose change to buy a Value Meal).

Looking at the daily chart, seen below, I believe an attractive risk/reward long setup is upon us. The stock had a huge spike in late April, and ever since has been working through a falling channel. Currently, the stock is awfully close to completing the gap full back to April, as well as touching the 200 day moving average. I have the stock on my list of scans, and will be watching it closely in the coming days.

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MARKET WRAP UP 09/21/10

To give you an idea of how much ground the market has covered in just the past two days, coming into Monday I discussed the idea of 1131 on the S&P 500 acting as a price magnet pulling us higher. Today, the S&P came within a point and a half of hitting the next important price level, 1150, before turning back and finishing down 0.26% to 1139. Indeed, we saw the usual pattern occur on days when the Federal Reserve makes an announcement: dead price action before 2 p.m., followed by violent intraday whipsaws for the duration of the trading session.

Across many indices and sectors, as well as on the individual charts of some key stocks, we printed long legged doji candles. In Japanese candlestick terminology, a long legged doji is one of the exaggerated types of doji candles, denoting extreme indecision. During the course of the candle’s time frame (here, it is one trading session), the buyers were able to push price higher before a sharp bout of profit taking kicked in. Even though price finished the session relatively unchanged, when you see this type of a candle after a prior uptrend, it warrants caution in the immediate future. As is the norm with single candles, confirmation to the downside will be needed to at least drive home the fact that many areas of the market need to take a pause.

One way to think about some of more extended sectors and stocks of late is that they have just enjoyed a hearty five course meal over the past few weeks, when many traders had been betting that they would be in line at a soup kitchen begging for scraps. Now, after their feast, some might say that they ate too much and will be sick to their stomachs. However, another possible scenario is that those extended parts of the market merely need a good liqueur, such as sambuca, to help with digestion of the recent big gains.

Incidentally, that latter scenario would neatly fit into the idea I talked about on Sunday evening of a sector rotation in lieu of a broad market swoon. The technology sector continues to look a bit frothy here, while many names in the industrial/material/energy complex look ready to move higher after building mulit-month bases. I have been considering putting on a pairs trade, going long $QID (ultrashort $QQQQ), while making bullish bets on the aforementioned energy/materials sectors.

Regardless, we came awfully close to hitting 1150 on the S&P today, and if you will recall that price marked significant resistance back in January of this year. To blow through both 1131 and 1150 in a matter of days may very well be in the cards for the market this week, but I will take a pass on chasing that scenario…for now.

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As is typical of days when The Fed makes an announcement, traders are reticent to make any big moves before 2 p.m., EST. The S&P 500 is down slightly as of this writing, and it can be argued that many stocks are taking a healthy respite after yesterday’s rally. It will be interesting to see if there is any kind of sustainable move after the announcement today, in either direction. We all know the economy is still weak, and any type of recovery is fragile. Thus, it is hard to see any kind of surprise rate hike.

We have also become accustomed to nasty whipsaws in the minutes immediately after the press release, but at this point it is hard to envision The Fed announcing something that would greatly surprise the market. I expect daytraders to try and catch the moves after 2 p.m., but beyond that, the healthiest thing for this market would be to close the day right about where it is churning now.

Truth be told, I am just as much in a holding pattern as everyone else is. In an hour or so, we should have a better grip on just how strong the underlying bid to this market truly is. Sit tight and buckle up.