Expecting Resilience

I think the market could go decently positive today. It has opened weak and is fluttering around, but I think the fact that yesterday's rally was so powerful and the market held the 850 level will leave shorts a bit hesitant to jump back in right now and give longs a bit of confidence to step up and lead the market higher. Libor has trended down over the past 13 days and commercial paper issuance on Monday was 10 times larger than actual issuance during the prior week. This indicates that the credit market is thawing. I'm sure most will still remain skeptical, thus limiting the upside and keeping market action choppy. It only takes one adverse event to break the trend. One stock that could move higher here is CEC. It recently gapped down but looks set to fill at least some of the gap above. If the market rallies like I expect, it could have some decent upside here.

The Federal Reserve's decision at 2:15 should be a very big market event. The market will likely headfake and then swing big in one direction. The market's expecting 50 bps (taking the Fed Funds down to 1 %) and will not be too happy if the FOMC surprises with 25 bps. I doubt the Fed is in a mood to disappoint, so I think 50 bps is a given. Below is a quote from a recent post by John Jansen over at Across the Curve. He goes into a bit more detail about how the Feds actions will effect the yield curve and an opportunity for a steepening trade.

"If the FOMC adopts such a dovish stance as I suspect they will, I believe that augurs for a much steeper yield curve. The front end of the bond market will benefit from reduced funding levels while the weight of supply will depress longer maturities.

I also believe that reduced consumption in the US can perversely lead to higher rates in the belly of the bond curve. As consumption declines the trade deficit will improve and there will be less dollars sloshing around overseas for recycling back to the US market."

Activision - ATVI

While the rest of retail may be in a tailspin due to ever increasing economic pressures, I expect spending on video games especially on the well known franchises to hold up well over coming quarters. To play this, I think you should look at ATVI, the premier company in the video game space. ATVI is very growth oriented and own top brands such as Guitar Hero, Call of Duty, and World of Warcraft that are extremely popular and generate quite a bit of loyalty among gamers. Furthermore, the company appears well positioned for the holiday season with titles such as Call of Duty World at War, Guitar Hero World Tour, the official Quantum of Solace game, and a World of Warcraft expansion pack.

With all the market turmoil, shares have come off a bit, but I suspect that ATVI will outperform it's competitors, specifically ERTS, in the coming months. Why ERTS? ERTS is a more mature company with titles including Madden, Fifa, etc. Those names are a bit tired and lack significant growth potential. Furthermore, sports titles appeal to more casual gamers who are much more likely to forego buying a game due to economic pressures than Activision's typical customer who is likely to keep spending no matter what. For all of these reasons, I'd look to go long ATVI and short ERTS. Over the next several months I think the story will play out and ATVI will be the winner.

Buying the Dips

After consolidating the large gap up, the market has trended higher with very shallow pullbacks that have all been eagerly bought up. The move is pretty broad-based with the stocks that were hurt the most last week, rebounding the most today.

Right now, it's a day to day market. The S&P's up so much that it's hard to chase because the potential gains are limited and it's such a news driven market. Intraday volatility has created a decent trading environment though. Opportunities like today sprout up with decent profit potential.

Negativity has overcome the market and this bounce was due. How long it will hold on though is a different question. The fed better deliver on another 50 and more "creative" measures too or else the market may get thrown into a tailspin once again.

Cover Shorts

The market has broken its recent lows and is now down around 4+% on the day. Three down days in a row means the downside may be limited in the short term and I would look to cover into today's drop. FL has come down quite a bit in a very short period (2+ dollars since I recommended shorting). YHOO's down big ($2+ since rec.). Oil's dropped off as the global growth story has really come apart in the last week or two ($7 on USO since rec.). KBR's been more resilient but is still participating in the downward move (around breakeven).

By the way, interesting quote from Eric Bolling of thestreet.com confirming what I said in my last post, "Commodities are contracting, equities are falling and surefire "safe havens" aren't safe. Case in point -- gold has been on a losing streak in an environment that should be extremely friendly to the metal." This non-discriminatory dumping has killed investor confidence. Selling has led to more selling allowing days like today to occur. I'm sure an oversold rally will chop up every once in a while, but for now the trend in commodity and stock markets continues to be down.

Flight to Safety

Market participants have clearly embraced the flight to safety over the past few months. Treasury yields have been squashed to rates well below inflation while basically anything else has been crushed. Municipals are a good example. Typically, munis are beneficiaries of the flight to safety because of very low historical default rates. However, yields have come out as a result of the failing bond insurers and downright fear in the financial markets. The point is: it is clear investors are in protection of capital mode and are not concerned with taking undue risk. This does not bode well for a stock market recovery as investors shun risk and hide in the safest assets.

I continue to believe the market's risks are to the downside and the upside is very limited. Low credit availability, demographic shifts, a weak job market, and falling home and stock prices have set the stage for an extended decline. Sharp rallies will give way and lows are subject to be retested and broken.