Broken Robots? (Market Wrap Up 04/06)

A major theme of The Fly’s postings lately has been of the absurd nature of the stock market of the past several months.  Even to the non ZH tin foil hat crowd, the end of the day speed buying and after hours action in the futures that we have seen so much of is a little alarming. I have been saying for months that bull markets climb a wall of worry, so perhaps this is all part of the game.  I would be remiss, however, if I did not mention that saying we are climbing a wall of worry is not my way of whistling past the graveyard.  Rather, I am keenly aware of the monetary and fiscal problems facing our county.  Frankly, the fact that we have oil prices above $85 a barrel, combined with historically very high unemployment and a federal government interfering with the private sector in a way we have never seen before, should be enough to short stocks indiscriminately in and of themselves.  Despite all of the above, however, my money will continue to be bet based on price action and volume primarily. To sit here and regularly argue with the market would be nothing more than a good way, as usual, to lose a lot of money.

MARKET SUMMARY

The $SPX inched up 0.17% to closed at 1189, as the slow drift up continues.  As I have noted before, the crash of 2008 left a “vacuum” where we are basically inching higher without much volume.  I expect that this phenomenon will continue until around the 1225 level. The chart BELOW should illustrate my point.

Recall that the most of amount of longs before the crash were trapped in late summer of 2008, when investors mistakenly believed that the Fannie/Freddie bailout was THE bottom.  When we finally get back to that 1225-1250 level, I expect the supply that hits the market from those longs–who have finally been made whole–to be a formidable adversary for the bulls.  At that point, I believe the bulls will need more convincing volume than we are seeing now to break above those levels.  Until then, the drift up inside the vacuum continues.

INDIVIDUAL TRADES

As noted in this tab and in The PPT today, I took profits in $CROX and $PRGN because I thought those charts looked a little too slow for my taste. I would rather redeploy that capital in names with more momentum right now.  I also made a quick intraday scalp in $GGC and bought some $AIG for a long swing trade. I still have around a 20% cash position and will look for the best setups.  My top picks as of now are $ETFC and $ZAGG, both of which I am long.

Back for more charts later.

We’re still going on a bear hunt, and it is, indeed, a beautiful day. We’re not scared. (Lunatic, 2010)

I took some profits in $CROX earlier at $8.91 (bought at $8.40), as it looks a little tired at these levels and I will redeploy the capital to more energetic issues. I also caught a great entry in $GGC earlier this morning at $19.78 and have since seen it sprint much higher.  Keep a close eye on $AIG for a long swing trade. I posted a chart a while back saying that if it can hold $36 then it looks great from there.  I do own a small bit of that as well for my long term account.

Finally, $ETFC and $ZAGG are my top picks. Both are penny stocks with huge upside from here.

Bear Hunt

Do you remember during the great bear market of late 2007-March 2009, when the bears would arrogantly shoot down any argument by the Larry Kudlow-types on those rare, oversold days when we squeezed 30-40 handles or more higher on the $SPX? Do you remember what they would say? They argued, these types of huge rallies do not occur in bull markets. They are merely exuberant but short lived dead cat bounces. New lows are coming! In a true bull market, stocks climb steadily higher at a slower but more lasting pace.

They were, of course, 100% correct. Indeed, after all of those violent bear market rallies, we quickly collapsed and made new lows.  Now, however, after we have reclaimed all of the major moving averages and have sustained higher highs and higher lows broadly since March 2009, those same bears now argue that we are unconvincingly drifting higher by a mere 5-10 $SPX handles a day. Yet, that kind of steady climb higher was how they defined a bull market a mere year ago! So, you see, the bears will always be unhappy with the tape, except of course for those times when we crater every day.

My point is this: we continue to see bull market action.  There are no signs of an exuberant intermediate or long term top AT ALL. Many charts have had time to develop constructive, bullish formations and are working their way higher.  While it is true that we do not have impressive–or even good– broad market volume, I continue to argue that is what happens when you have a crash like we did in 2008, as ferocious as it was in a short amount of time. It leaves a vacuum that allows us to drift higher unsupported by volume because the sellers already panicked and capitulated with such force like we have not seen in a generation at least.

With respect to today’s action, the $SPX climbed 0.79% to finish at 1187.  The chart above shows that, although we remain on the overbought side of things, the Full Stochastics and RSI indicate we can get more overbought in the short term.  Above all else, we made fresh multi quarter highs without any signs of a blow off top. Fighting the tape is still not advised, although many still insist on doing that. As the chart below shows, we have now NEGATED the outside reversal day from March 25th, by way of closing at fresh multi quarter highs after the bears had almost two weeks to try and take us down.

Just as I wrote last night, energy stocks are looking strong.  It seems to me that we are in the early stages of fund managers allocating capital into the energy and industrial/material complex. I am stalking those sectors and looking for leaders. If my thesis holds true, then the leading stocks in those sectors will be extremely profitable.

So far today, I have taken profits from my purchase last week by selling out of $VLTR . It may turn out that I sold out of that one too early, but the chart looks to have gone parabolic on a short term basis.  So, I can take my money off of the table and live with whatever happens. The only purchase I have done was to buy $HMA. Along with me holding $PSYS, I am betting that healthcare facilities continue to act strongly on the back of the healthcare bill. Regardless of your political views on the bill, or should I say the new law, you might as well figure out a way to profit from it.   Here is an updated chart showing my reason for buying.

The stock needs to get over $9 to break out of the bull flag, and it appears on the verge of doing just that imminently. Note also that these firms have been heavily rumored as takeover candidates, which is a pleasant bonus to owning them.

For the remainder of the session, I will probably not buy or sell anything.  The action is decent today, as we are in the green.  However, I would like to see more volume and overall vigor before going all-in.

After last week’s holiday shortened trading, I expect more conviction in this week’s action.  Despite the run up we have had since mid February, the bulls still have a decided edge here.  Not only is seasonality in play, as we have four more full weeks before “sell in May and go away” is likely to take hold, but the market has also done a good job of working off the very overbought conditions and extended charts that were so ubiquitous two weeks ago.

My main thesis is that institutional investors are taking profits in technology stocks and shifting that capital into the energy and industrial/material complex. Many energy stocks have lagged not only the broad market but also the bullish action in the price of Crude Oil.  So, I expect those stocks to step into the spotlight now.  Also, the financials and insurance companies could see a strong bid here.  Again, money rolling out of the tech sector and into those areas is my thesis.  The Christmas shopping season is long gone, and with peak driving season just ahead, the strategy makes sense to me.  I will watch to see if this thesis holds true this week. However, I will not stubbornly stick with it. For now, though, I believe that it is the most probable scenario.

Below, please find my top setups for this upcoming week.

Also, monitor those high and tight bull flags on $POL, $VOLC, $TRLG, $DPZ and $TIVO. Regular readers of my work know that I have shown those charts many times.

Full disclosure, I am long $CROX, $VLTR, $PSYS, $ETFC, $PRGN. I also have a small position in $QID as a hedge against technology weakness (it is the double short $QQQQ).