Selling SHY into 50 sma

Short rates have made a strong move downward and profits should be taken into the 50 sma.

Pressure on Financials

Financials took a massive beating today after Wachovia downgraded Goldman and Goldman put Merrill and Citi on its conviction sell list. The VIX spiked up a bit but is still well off the 35ish level that market the last market bottom. Oil rallied strongly late in the day along with natural gas. Like I said earlier, you have to be mighty brave (and a nut) to short oil here. Oils now higher than the current highs of the consolidation range. We'll have to see if those levels can be held tomorrow. Short term yields fell hard and the SHY continues to move higher as traders reduce bets that the fed will hike rates and investors flee to safer assets. It seems to becoming more clear that financials are still in trouble, the consumer is spent up and might be jobless soon, and housing prices continue to fall.

The DJIA is now below its "Bear Stearns" lows. After the BKX and HGX indices (Banking and Housing) failed to hold their Bear Stearns lows, I guess it was just a matter of time before this occurred. The S&P is around 8 points off the low currently and should find its way down there soon.

I think its foolish not to cover some shorts with a rout like today (see previous post), but things still look quite negative. As long as oil continues to move up and bad news clobbers the financials, you'll have a downward trend in the broad market.

Gains in HOLX and ESLR

21.77 seems like a decent place to take gains on the HOLX short. ESLR's taking a big hit as well and should be covered around here as well.

Gains in Nat Gas

Nat Gas (the UNG) has completely reversed course and is up strongly to as much as 61.50ish this morning. Taking some gains up here seems like a very prudent move given this strong reverse.

Wasn't Oil Supposed to Fall Off a Cliff?

You would think from all the talk on CNBC the other day after the Saudi's agreed to increase production and then yesterday as oil inventories grew that it was the end of crude as we knew it. Then today, what do you know, crude's back higher at the top of its range. It's acting very bullishly but something drastic is eventually going to have to push it through the top or bottom of the range. I'd definitely be leaning to a break on the upside, but until that comes you should look at it as a range (could be shorted somewhere above 112 with a tight stop above its range highs at 112.75 if you're brave).

On the other hand, as I stated yesterday, nat gas has been coming down for a few days and looks to be finding a near term low to rally off of.

Other notes:
DGLY - coming back to 8.50. Can go long off of/near that level and stop out below.
SHY - still moving up. It's becoming more apparent that the federal reserve does not want to take the chance and tank the economy. All those cuts the market was pricing in for this year? Good chance they are not going to happen.

UNG Pullback Could Offer Opportunity

Natural Gas has been on fire lately and a pullback could offer a great opportunity to get long. The commodity is clearly trending higher and as long as it stays above its 50 sma, the trend should continue. It is now down two days in a row. If tomorrow is down at all I'd look to start buying right around its trendline.

On Hold for the Fed; Good Oil Bottom

Oil continues to hold in its broad range and as I've said before I think it should be bought around 107, the level it held successfully this morning despite a higher levels of inventory than expected. However, it is still down on the day which has helped to fuel the ongoing rally.

The market has pulled back from its highs but seems to be stalled out a bit prior to the fed decision.

The Afternoon Slide; Fed Tomorrow

The market slid back this afternoon and could not hold its gains as oil turned positive and financials weakened into the close. Overall though, the S&P ended much better than what could've been.

Today's data was not very encouraging. Although the Case-Shiller fell less than expected and there were some month over month gains in the index, the 20 city index was still down 15.3% year over year, a significant decrease that shows home prices are still steam rolling to the downside. Furthermore the Conference Board's consumer confidence survey fell more than expected while inflation expectations remained stubbornly high. Obviously, things could be better.

The fed will announce their decision on rates tomorrow which will surely be a market moving event. I still side with those who think they will be on hold for the rest of the year as the economy remains fragile. One thing shaping my view on this issue is a paper written by Bernake in '97 which states his position on this issue pretty clearly. He and his co-authors found that "a substantial part of the recessionary impact of an oil shock results from the endogenous tightening of monetary policy rather than from the increase in oil prices per se."

Recovery

There's been a nice recovery this morning after the XLF failed to push lower on the day and oil has moderated to even. The XLF had been down as much as a percent and a half but suddenly shot to up a percent while the broad market was strongly negative. This did not make sense with the recent relationships between the XLF, USO, and SPY. Therefore it was a very good time to get long and ride the recovery.

The XLF is still climbing and should lead to more gains from here. A turn in the etf or a spike in oil would not bode well for any continuation.

More of the Same

Oil continues to show strength and remain in its 5% consolidation pattern. A Saudi increase in production failed to bring down crude prices as their actions were either a) already baked into the cake b) were not done with enough conviction to convince anyone c) a combination of the two. Furthermore, the XLF took a massive beating during the day. Banks, brokers, and regionals were all down strongly. It surprised me that the broad market was not down more off of this action. However, I had a good idea that it would not end positively (as it was at one point) leading to a good short was when the market started going positive in the afternoon.

The Big Picture Blog (Barry Ritholtz) posted a very good chart today. As you may know the VIX spiked at or near 30 on the last three bottoms, but has failed to do so yet. He states that he thinks we have more to go based on this, that the action hasn't become capitulatory yet. I agree with him and would stay balanced/less invested overall until it starts to really spike.

Links

Bill Gross says to buy BRIC equities on underestimated US inflation. Morningstar agrees.

American's cut back on driving.

China increases fuel and electricity prices.

The wild card for a housing recovery is recession.

Traction

Oil broke violently from a triangle after rallying off of yesterdays lows. This drop has energized the broad market and really got the financials going. Financials are leading the rally almost in a straight line.

USO/XLF

The USO is down big off of news that China will raise retail gas prices by 17%. Even though it is experiencing great downward pressure, the USO is still holding above its range low, has put in a lower high and is moving up from yesterdays lows. Financials are slightly weak again relative to the broad market. It'll be hard to sustain much (as has been the case today) with weak financials failing to participate.

Oil Sours the Market

Oil (as judged by the USO) continues to trade in a range from 107.50ish (which it bounced off this morning) to 112.50. It still seems to be a good bet to buy the low and sell high (range trade). Strength in oil has influenced stock prices heavily lately and that relationship does not seem to be letting up. The broad market still looks very tired and the trend is still down.

On the other hand, financials did not push lower after they gapped down and actually ended higher than their open. Morgan Stanley reported and ended up on the day. Goldman was up as well. I think it is a positive that they were not absolutely crushed.

Going forward, its important to observe these two elements of the markets as they basically encapsulate the themes participants are concerned with: inflation and the health of the financial system. I've also listed some other stocks/etfs I'd keep an eye on.

Watch List:
USO - oil continues to dictate market action with strength leading to weakness and vice versa
XLF - weak financials also for-tell broad market action. Concerns over the financial system colors market sentiment, weighs on indices, and influences fed policy (dollar, interest rates as well).
BUD - Buffet will likely be on board. Shareholders are tired of lackluster stock performance. A dip at this point looks like a gift.
SHY - fed talks tough but action is another thing. The bond market is pricing in 2.75% at the end of the year, but will have to adjust its expectations and short term rates once reality sinks in. See Robert Novak's article from the Washington Post and Catherine Baum's on Bloomberg
ESLR - waiting for a spike to 12 to short. It has not made it much above that level on several recent tries.
DGLY - great story stock, undiscovered by the street, support at 8.50
BIIB - Carl Icahn pushed to get this stock sold. It actually got an offer for around 82 bucks a share (its trading at 58.50). It has behaved well in this market and is nearing support at 55 where I have recommended it before.

Speaking of Carl Icahn, he is finally going to start blogging!!!! According to Reuters, Carl will become an active blogger on his site http://icahnreport.com tomorrow. I'm planning on becoming an avid reader.

Sell GOOG at 574.50

Sell Google up 31 bucks from the buy point. It's made a solid move and is now up 4 days in a row.

Buffet Gives Go Ahead on BUD Deal; Early Trading

The Belgian newspaper De Standaard, citing sources, reported that Buffett backs the $46 billion, $65-a-share offer that InBev has made for Anheuser-Busch according to www.marketwatch.com. If this is true, it would be a nice step towards getting the deal done. Berkshire Hathaway holds 5% of BUD and when Warren Buffet says/does something, people listen. BUD is currently at 61.30, 6% off the offer price. You can check the Market Watch article here.

Also, you may want to take a look at a new WSJ Deal Journal blogpost that gives BUD a D for its treatment of shareholders.

The market is lower this morning off of weak action in the financials. Oil (as judged by the USO) gapped down on the open, spiked, then successfully held its lows only to bounce strongly again. It's currently trading around 108.30ish near a support level at 108. Looking a bit more broadly, the USO seems to be in a range from 107-112.50.

HOLX

HOLX has rallied after a strong move downward in May. It is now nearing its 50 sma and weakly consolidating. I don't think this stock has any fuel left in the tank and leaving it very vulnerable here. The 50 sma should definitely act as resistance, but it may not even reach that level. I'd look to short around these levels in anticipation of a pullback down to 21/its recent lows.

Friday Trading; Links

After spiking in early trading the SPY and XLF sold off hard as the XLF failed to confirm a new high in the SPY. However, that drop reversed around 1:40 as the financials took a leadership role and led a rally into the close.

Oil, as judged by the USO, gapped down on the open, bounced briefly, then retested that level providing a good low risk point to get long. It then treaded up to sideways for the rest of the day.

A FEW LINKS:
Crossing Wall Street finds no edge in buying up days like today.

Is oil a bubble?

Vince Farrell keeps inflation in perspective.

GOOG

GOOG has come down to a support level and is currently trading right next to its 50 sma. I'd buy against that and stop out below.

Articles Worth Noting; Markets Moving

The markets are moving slightly higher now that oil has taken a hit and the VIX is coming down. The Nasdaq continues to show weakness as it did yesterday and there seems to be a lot of churning going on. Given that the sectors are not confirming each other (they're moving in different directions), I would not suspect any real rally. Rallies tend to lift all sectors.

Another Few Links:
Right now, it seems the fed is trying to tame inflation by speaking out. However will they actually raise rates later this year? John Jansen at Across the Curve doubts it.

Goldman and Lehman are not convinced either.

I would look at the SHY (the trade that John Jansen suggests). It has come off steadily since March but may now find support at 82.26 on its 200 sma

Gap Down But XLF Holds Strong

Rate hike fears drove the market to gap lower. However, financials are holding strong and negativity looks to be overdone. Yesterday's lows have held and the market looks to be good for a short bounce. For more than a short bounce, several things will have to align including lower oil and a sliding VIX, which are not happening right now.

Bernake talks tough on inflation.

Quantifiable Edges performs a study on when down volume swamps up volume but the S&P closes higher.

Across the Curve comments on Bernake's speech and assesses movements in the fixed income markets.

Buy ETFC on Spike Downward

ETFC is spiking downward and is currently down to 3.68. Volume is spiking as well and looks like this move is getting overdone. I'd look to buy here for a quick reversal.

Data Dooms Market; Hefty Drop in the Cards

"The U.S. lost jobs in May for a fifth month and the unemployment rate rose by the most in more than two decades, signaling that the world's largest economy is stalling." Access the story here.

The indices are pointing down and will likely have further to go after the open based on how big this story is and the spike in oil. Any JCG longs that were put on yesterday should be sold up or stopped out right below the entry point. With a drop today, a retest of the recent low has become likely.

DPS Jumps; Broad Market Strong

Dr.PepperSnapple has popped big today after they announced that earnings grew 37.7% from the same quarter last year. It has traded as high as 26.38 (5.52% higher than where I recommended it) and now has pulled back to 25.77 (3% higher than where I recommended it). While some gains should've been taken on the pop (it is likely to give back some of today's gains in the near term), I continue to think that company is undervalued compared to its competitors and should make further gains in the intermediate term.

The yen dropped today against the dollar and euro and looks like it may have broken a short term support level. Furthermore the 10 year treasury note yield has rallied back strongly to 4.04% and may soon touch its recent high of 4.13% if this stock rally can continue. These two factors signal that risk appetite is coming back into the market as investors look toward higher yielding assets and stocks instead of risk free bonds. However, what makes the market's move even more impressive is that it did it in the face of a strong move in oil. All of these of moves bode well for the continuation of an upward move in stocks.

Right now I could see the S&P making another attempt at the 200 sma which is around 21 points above current levels. To play this, you may look at JCG (currently at 36.34) which put in a short term double bottom on Wednesday and has the potential for a snapback rally after being sold off 13 bucks over a very short time period.