Sunday, July 5, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 48

Year 2, Week 48 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 72.1% (vs 69.9% last week)
27 long bias: 22.1% (vs 28.6% last week)
7 short bias: 5.8% (vs 1.5% last week)

34 positions (vs 36 last week)

Weekly thoughts
First to our 2 charts, simple versus exponential....

On the Exponential moving averages, we spent the early part of the week making progress - attempting to make another run at the 200 day moving average. Wednesday was driven by the upteemth (4th) Chinese Purchasing Managers Index report showing expansion (again a fairly new report from a country that can say anything they want engaging in the type of loan expansion in 2009 that brought the Western world to its knees). However we closed near the lows Wednesday and then the rally attempt failed on the "jolt of reality" Thursday (monthly jobs report). The classic head and shoulders formation is still intact in terms of slow formation; I had pegged S&P 915-925 as the "right shoulder", but indeed S&P 930 seems to be the intraday peak the market has trouble with. A flurry of selling brought us below the 50 day moving average - normally this would be bearish but we did the same thing the previous week - and promptly within 2 days burst right back above the 50 day moving average.

On the Simple moving averages, we are still "holding" the quickly falling 200 day moving average. I've outlined S&P 880 as the line in the sand bulls need to hold - we have an interesting situation developing in this chart; the 200 day is falling so quickly it could hit my 880 line in the sand by mid week. So in theory we could keep falling - hit the S&P 880 level but bounce off the 200 day SIMPLE moving average and can still call it "bullish" I suppose.

Again, I typically use Exponential moving averages but am showing both since the longest term trend line (the 200 day) is at 2 very different spots on the 2 charts. More broadly what I am seeing above is similar to what I am seeing in a lot of individual charts - the first strokes of "distribution" ... a market (or stock) trying to go higher but not making a new high; yet still bouncing and not ready to break yet.

But again as we take 3 steps backwards we can see, we remain RANGE bound since the beginning of May - essentially a 70 point range of S&P 880 to 950. While I have a growing cash hoard, the last 10% or so is not due to being predicative... I am simply letting mechanical stops taking me out on charts that are weakening. Of course, if we have a bounce to the top of this multi month range we'll be dragging in performance, but this has protected us to the downside as well. As I've been saying for a few weeks now I see no reason to make big bets here - all I see are computers and daytraders jumping in and out of themes based on a knee jerk reaction to the daily news flow. It's all very short term oriented and not much can be read in it; I am more interested in the next fat pitch and am ambivalent which direction it is. Logic would dictate down since large moves generally are retraced to some degree, but I am not counting on anything in this market that seems to act very different than the ones of the past 10+ years. The general tone I continue to hear is "I cannot wait for the 10% correction so I can load up for the 2nd half run". I doubt it will be that clean and easy.

Let's focus on a few more charts, many swiped from [Jun 11, 2009: The Market in ETFs] to see where key groups are.

The incredibly crowded "reflation" trade from a month ago has taken it on the chin; this is dominated by the momentum crowd, many of which are the program traders and hedge funds (retail traders also love this group but their impact is nothing compared to the big boys) After breaking through the 200 day moving average ever briefly just after I wrote my June 11th piece, sending a false signal of bullishness - a quite stark reversal took place.

So just like that we've gone from being above the 200 day to sitting on the 50 day, another key support line. Reflation has been a failed trade for 3 weeks, I am surprised traders have not made a go of it at least one more time during that time frame. While that index is important, I truly think the whole reflation trade rests on one stock which has taken over the reigns, even from oil this year.

After putting a big scare in reflation bulls about 2 weeks ago, Freeport has recaptured the 50 day and is sitting right above it. This is the name I am watching... for example I have a short in Potash (POT) we put on Friday - if Freeport begins to bounce strongly next week, I'll have a sense my Potash short is over and the hedge funds are back for a quick trade in "reflation" again. Based on any fundamental reason? Nah - it's just a trade! Other than simply as protection versus the weakening dollar, I really find this whole trade extremely premature as most of the major economies in the world have no driver other than government spending. In about 12 months this "thesis" will make more sense to me... but as we've seen of late, it really does not need to make "sense"; it just needs to move rapidly and traders (or computers) will embrace anything.

As for oil, the ETF of choice is USO - we saw a gap down Thursday as the employment report knocked some sense into traders looking for any impending recovery.

And while oil is a global commodity so I can at least buy some of this move, natural gas is a local commodity and other than being driven up at times by so much Federal Reserve money finding its way into speculators hands, its showing the true state of the US economy.

Another place to look at the US economy is transportation - there is a simple ETF to look at here....

Next, let's look at 2 places institutional money is hiding out because its "safe" - (a) decoupling 2.0 is shown in the emerging markets and (b) technology is immune from the economy. The irony is both these thesis were bandied about 15 months ago for the exact same reasons - they failed, spectacularly ... but people have very short memories. (p.s. does anyone not own Apple?) If we have a sustained downturn I actually expect these 2 very crowded trades to go sour very quickly just like "reflation" has begun to. But for now, they are still in decent position - that said, NASDAQ failed to make a new high this time around similar to the S&P500, but unlike the S&P500 we are above the 200 day exponential moving average.

Within technology the all important semiconductor index - until this breaks down it will be hard to embolden the bears. Again much like consumer discretionary semiconductors are the "go to" sector to go for ahead of recovery.

One more to close - developed Europe; one ETF is iShares Europe 350 (IEV) which is a bit UK heavy (30% of the fund) but gives you a good look at the major European markets - France, Germany et al. If one thinks the US market is overpriced, developed Europe is much worse.

We can see after a head fake (oh nasty) on Wednesday to give bulls joy - the employment figure out of the US returned her back below the 200 day moving average. A tricky one here.


Outside of squiggly line world, we begin traditional earnings season with a company who misses 9 out of every 10 earnings reports - Alcoa (AA). This is an aluminum producer and part of the above mentioned reflation trade. I could care less what they report; all I care about is how the stock reacts and how the computers react (pile in or out of reflation stocks?). Then after this week comes the heart of earnings season next week through the end of July. Mostly big companies report early - and with so many heads chopped in America, I can see another quarter of "beats" on the bottom line while missing on the top line (similar to last quarter). How many times will we hear "better than expected"? (too many to count) We can also expect another great quarter out of banks since they are borrowing for almost nothing and lending at something.... plus the most secondaries done EVER in a quarter as we diluted shareholders like never before; huge wins for the investment banks.

(click to enlarge)

Since our accounting board (FASB) is under political pressure and broke down in March handing banks what they wanted (which basically started this rally) and we no longer care about balance sheets in this post modern world of ostrich head in sand analysis, the banks look fine - just fine. Dandy in fact. So I expect another quarter of shrinking companies, whose revenue is morphing downward but enough Americans were taken out of their jobs to create a bevy of "better than expected" earnings. That was good enough 3 months ago for tears of joy; the all important question is now that everyone knows this, and sees this is the obvious way companies are "winning" - will we be "surprised" again and take stocks up 10-20% off more shrinkage of unnecessary expenses (people, 401ks, healthcare, travel, et al).

Bigger picture, don't focus so much on earnings (easily gamed) - but the reaction to earnings. Remember what I said with Corning (GLW) last week - it had good news, but the stock was down a few days after the fact. So as these earnings roll in and Goldman Sachs (GS) reports a quarter for the ages let's see if the stock reacts up or if everyone already knows they are milking the system for all its worth - same for every other stock. We can only "Shrink to Prosperity" for so long; revenue (lack of) growth is showing you the true "health" of the economy.

The only major economic report in my eyes this week is Monday's ISM Services; with services now dominating the US economy this report is much more important that ISM Manufacturing. As for my guestimate of the week I am expecting a bounce somewhere soon - Thursday seems like ages ago right? Those job losses are in the rear view mirror and its time to chew on green shoots. Hopefully China has an economic report or two which we can drive S&P futures premarket up 1% one of these days. As I wrote in the "Simple" moving average section above - we almost have a perfect set up mid week (Tue-Wed?) to fall to S&P 880 and bounce off it) - this would send in the "powers behind the curtain" who have quite possibly the best technical analysts on the planet based on each point the market has bounced "out of the blue" the past few months ;) A lot of the charts I see above that fell below their 200 day are now sitting at the 50 day, ready for the "computer driven, futures rally" to churn them back up. Ready, set, manipulate!

Key areas I watch daily are (1) Apple (AAPL) [key to NASDAQ], (2) Freeport [reflation holding by edge of teeth], (3) emerging markets [look ma, we decoupled again! don't need no stinkin US of A], and (4) semiconductors [its not inventory restocking, really!] Again, aside from quick trades in and out on indexes or ETFs I don't see any particular reason to risk a lot of capital here. When this range is broken, I'll deploy cash one way or the other (dark or light sides of the force) ;)


p.s. let me give kudos for this disclosure from VP Biden. One good thing about Joe (do you mind if I call you Joe? *wink wink*) is with his foot in mouth disease we get to hear what the powers that be are really thinking rather than "happy talking points". However, I am not sure what to be more scared of - negligence or incompetence among the elite. The "top economic team" in the country really had no clue how bad it was out there - even with the Federal Reserve braintrust to help (while lowly bloggers such as myself - granted ones with Economics degrees - nailed it) ... this is the bubble of the powerful elite; they have no feeling for what "median John Doe" is living. Touching median John Doe at townhalls or reading a few letters while living on 6 figures with gold plated benefits packages (paid for by median John Doe) is a bit different than struggling thrugh John Doe's life or at least interacting with him / her on a constant basis.

  • Vice President Joe Biden said in a broadcast interview Sunday that administration officials "misread how bad the economy was," when the stimulus package was being put together at the beginning of the year. Unemployment, at 9.5%, is far higher that the 8% top promised at the time the stimulus was passed. But Biden said in an ABC interview it was too early to say whether additional stimulus money was needed, noting that billions of dollars in projects included in the current bill won't come online until September

So if you had read the depths of the situation correctly what would of changed? Instead of $800B of stimulus (half pork) maybe $1.5 Trillion?

Yawn... just imagine how bad the employment situation would be if not for all the "shovel ready" projects going on across the land. Anyhow, the "top economic team" now tells us we'll be fine later in the year as stimulus kicks in. Just like "subprime is contained" (early 07) Hank Paulson and "he knows nothing!" Ben Bernanke - I'm sure the powers that be are correct this time around. I mean with that track record....

I eagerly await that positive GDP number that is coming late this year that only cost our grandchildren $800 billion... and stimulus 3.0 to win the election of 2010. Thanks grandkids!

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