Monday, January 25, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 25

Year 3, Week 25 Major Position Changes

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

Cash: 65.4% (v 48.3% last week)
23 long bias: 26.2% (v 50.4% last week)  
4 short bias: 8.4% (v 1.3% last week) [Includes 2 option positions]

27 positions (vs 28 last week)

Weekly thoughts
How quickly things change....

Difficult to remember this but last week was holiday shortened and as we do the first day of almost every week (usually Monday's, but in this case Tuesday) shot out of the cannon as the week opened.  The market hit a 16 month high on Tuesday on anticipation of a Scott Brown victory and a return to politicians accomplishing nothing without a super majority for the Dems.  However this was a classic sell the news reaction, and combined with (a) Chinese tightening (b) Greece fiscal situation sort of mattering again (c) some rhetoric out of the White House that they will actually listen to wise Paul Volcker and not let banks use their federally backstopped deposit bases as sources of funding for their speculation desks and (d) some fear that the Champion of Wall Street, Ben Bernanke might not be confirmed - the market sold off sharply in 3 days. 

There was actually much more damage in individual names than the indexes - although the indexes took some damage to long term trends as well.  But nothing like some of the stocks we are watching, many of which gave back 15-20%+ in a matter of days, while breaking multiple support areas on their charts.  Bottom line is we have to return to a more protective stance until market direction clears itself up ... the question ahead is do we return to markets of mid 90s to mid 00s, or do return to "V shaped" recovery markets of 2009 where every sell off not only led to zero consolidation but a neck snapping punishment for short sellers who assumed technical damage in the charts actually had some meaning. 

A quick overview of the S&P 500, with parallels in NASDAQ and Russell 2000 .... first a 3 month chart

[click to enlarge]

.... next a 6 month chart

[click to enlarge]

In last week's summary things were moving along nicely, with S&P 1150 the obvious ceiling that we had pointed out and S&P 1020/1030 as the floor; 1030 being levels we had sold off to in the previous week, and 1020 being the level we broke out of "the box".  All systems go Tuesday... Wednesday the market sold off on "sell the Brown news" but we remained in the range of 1030-1050 that we had enjoyed for most of 2010, and then the wheels came off Thursday, with the chassis damaged Friday.  Once the S&P broke below 1020, the "breakout" from the base had been negated, which led us to begin taking evasive measures in a flurry of activity.  Further last week we had pointed out 2 gaps, reminding not to forget about them.  That said, we had no inclination that either would be filled in a 4 day week, but sure enough S&P 1104 was filled Friday. 

Looking at the longer term chart (6 month) another issue arises altogether.  For the first time in a long time, the market has made a new "lower low"; that triggered when late December 2009 lows of S&P 1115 were penetrated (Friday).  Since July 2009 there has been no threat of a real market breakdown other than a "Halloween surprise" where bears were afforded hope for about 48 hours before having their souls crushed in the now common "V shaped" recoveries.  Please recall as we said then, as we said throughout 2009, and as we said last week - "V shaped" bounces used to be a rarity ... anyone using historical references has been obliterated by this rally and hence the fear of shorts today.  The main difference between what happened Friday and in October or any period since July 2009 is a lower low has been created, while concurrently the long term trend line (signified by the purple line above) has been breached.  If this is a market of mid 90s to 2007, that should mean something - and not something positive.  Traditionally you'd now sell into rallies, assuming the market will dead cat (oversold) bounce into the trend line it just broke - and then selling would resume.  However bears have been so burnt, and 2009 had been such an atypical year will we continue to throw away historical references and assume the "invisible hand" will continue to make all precedent mean little?  I certainly don't know but this is the question I will want to see resolved.  After an invariable cursory oversold bounce - how does the market react when it reaches that long term trend line?  If the "free market" rules again we should see a rejection and sell off.  If the "Larry Summers market" rules instead, we'll just have another V shaped recovery and last week's events were just a bad memory.... carry on.

Bigger picture - other than some intraday positioning on a strong trend day - we are not interested in "being bullish" until we see S&P 1130 regained.  On the downside I marked a very obvious support level of S&P 1085.  This was the bottom of the "box" (base) the market built over 6 weeks in November/December 2009.  If that level is broken, I expect the computers to go into overdrive - certainly the "gap" at S&P 1170 is then in play, as would the probability of a test of the 200 day moving average.   That's the overall game plan for the larger market - as I said above, as damaging as last week's events were for the indexes, a lot more carnage happened to the charts of individual equities.  Certainly we should expect a day or two of a large OVERSOLD bounce soon... one should not feel bad if they don't catch it because to catch it, would mean you took serious damage being "long and strong"... the people who will most benefit from that near certain bounce will be people who lost lots of money last week, and are simply making up some of those losses.  So the bounce will not be surprising, nor telling.  What happens after the bounce is what needs to be monitored. 

As we enter the week, the confirmation of Ben Bernanke looks more clear and Wall Street of course is joyous.  News reports say the business community applied pressure to the politicos over the weekend, everyone from Warren Buffet to General Electric's CEO Immelt - remember, it's Cramerica; for the corporation, by the corporation.  When corporations say jump (or else you won't see a political contribution), politicians jump!  So that's 1 less issue for Wall Street.  In an ironic bit of timing the FOMC meeting is this week, but it's a foregone conclusion that "free money" will be available for "an extended period of time", so it's just a matter of the dog and pony show.   Speaking of dog and ponies... the State of the Union will be this week, where our Presidents tell us of grand plans to help "the people"- which by the time their speech is over, lobbyists are already hard at work unraveling.  Expect nothing less this time around.   On the economic front a relatively busy week - 

Monday: Existing Home Sales.  I'd expect a continued hangover from the "first time homeowner credit" orgy, combined with weak seasonality.  
Tuesday:  Case-Shiller home prices and a consumer confidence report
Wednesday: New Home Sales - not nearly as important as Existing since it's only a small fraction of the home transactions in America.  FOMC meeting announcement in the afternoon will dominate although it will be more of the same.
Thursday: Durable Goods - always volatile, we learned more from the railroads last week than any of these sort of reports
Friday: GDP, Chicago PMI.  

Some words on GDP - Please don't get excited about it - a very flawed figure in its own right.  First, it's going to be a high number - perhaps 4%ish.  It will reflect very little as the "strength" in the US economy is 70% morphine, 20% Asia.  If you ever study how this report is actually put together, many things that contribute to positive GDP are near senseless.  That said, after such a huge drop in 2008-2009 GDP should be jumping to the tune of 6-8% in some of these "recovery quarters".  You remember what happened last quarter right?  A home tax credit, cash for clunker full GDP was reported as +3.5%.  This set Wall Street off in a tizzy on "great news".  Then it was revised down to 2.8% a month later.  Then a month later to 2.2%.... almost all of which was Cash for Clunkers.  Hence as we watch the lemmings react Friday to a number that is vapor, and will be revised 10x to Sunday is just a great psychology experiment and frankly a waste of time - but since lemmings affect us, we need to pay attention. 

Lost last week in all the drama was this is still the heart of earnings season ... will "sell the news" reactions continue?

As for the portfolio it was a very busy week - I am not going to go through the army of transactions.  Needless to say when the technical condition of the greater market changed, we took a lot of action to switch the portfolio around on a dime.  Many stocks were culled back as they broke support (or punted out of the portfolio entirely).  We raised cash.  We added some short exposure.  I have more short exposure than intended coming into the week, as I expected an oversold bounce early in the week, so we'll get back down to the exposure I want very early in the week, and then assess how the market acts as espoused above.   Big picture - below S&P 1085 we are going to have a bearish bent, over S&P 1130 we will have a bullish bent.  In between is simply white noise, and more appropriate for "fast money trading" types - we'll participate here and there but can make no conclusions in that 45 point range, so we won't get excited about anything that happens despite the wall to wall coverage of market analysis on any moves in that area.

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