No Energy Near Support

Weakness is present in every pocket of the market. After opening up around 50 points, we've faded again. I would still be taking off short side bets here as 6 down days in a row seems a bit extreme. Once things clear up FDO and GHL are going to look okay, but patience seems more appropriate right now.

What does the government have left? Not much. Their actions thus far have failed to "prop up the economy", fill the gap in GDP, or stimulate demand. We have more headwinds as well. Demographic conditions will prolong the downturn. Housing prices continue to fall and consumers are making big changes in spending habits.

A long slow downturn and recovery is ahead. The situation has fundamentally changed and significant time is required before things get better.

Fade Not Surprising

The DJIA faltered up 50 which is not surprising at all. Government stimulus hype has now deflated leaving the market weak and vulnerable to news flow. The market's action is really weak as well. Nothing can be sustained on the upside and a retest of the lows seems inevitable now. S&P shorts should be held until the 750-760 level has been hit. Financials are getting burned and the XLF continues to moves lower. That sector seems to be pulling down everything else. Only the most defensive stocks such as TEVA, WMT are surviving.

Merrill is looking at 12x $55 earnings on the S&P leaving the market at 660 this coming fall. I think that is a very strong possibility. What may happen now is we get a slight bounce from the retest and then tread water before going into another downturn a month from now. At best we stay range bound from 750-950. The data is not able to support a move above those levels and consumers/businesses are unlikely to change tepid spending behavior in the face of job losses/lower home/equity prices. Thus, I'd keep short term focused with an eye out for future deterioration.

Sell With S&P Up 10

I'd look to sell and short into this rally for a trade. There isn't much upside here and the market has a significant chance of fading.

Update

GHL rallied all the way from 55 to 70 over the course of last week. DV had a nice spurt but then came off pretty hard. Mid-week it started acting terribly and was down multiple days in a row even when the market was rallying. It couldn't gain any traction at all. LO has started failing after stalling at 62, but I don't think it'll make it back down to it's previous base.

The market is treading water for the most part. The broad market opened lower today, but has been holding firm here and is moving slightly higher with the Nazz actually showing relative strength and holding positive. This will be three down in a row and looks like it may be a good place to buy for a quick trade. It's not breaking lower, so there's a good chance we might see positive today or at least move close to break even on the S&P. A day out doesn't look so bad either.

No Obama Rally; XLF at New Lows

The S&P slid over 5% today while the XLF slumped nearly 17%. Stocks are getting killed on the back of continued economic weakness and poor financial earnings. It looks like the lows made back in November may be tested sooner than later. There were very few stocks that were spared in the beating today, DV, FDRY, TMTA some of them, and oil continued on its path lower as well.

Even the "survivors" are getting mauled. JPM, WFC, and BAC are all down substantially. However, the risks are a bit more balanced now that everything has been substantially trashed and there is a threat of significant stimulus being put out. As far as individual stocks, I'd keep an eye on LO with a bias towards the short side as it rallies to an area where it has previously peaked. DV has been showing relative strength but looks more like a long. GHL on the long side is starting to look interesting too as it comes back down to the 36-37 area. It has shown solid relative strength throughout this entire crisis.

Nancy Havens Likes Arb Spreads

Check out www.bloomberg.com to see Nancy Havens, head of Havens Advisors, talk about her view on risk arb and what she is doing right now. Their original fund has never had a down year, so her opinion is definitely worth listening to. In the video, she seems to really like some situations right now and points to several deals that offer good opportunity. These include CYCL, FDRY, and UST, two of which I mentioned in an earlier post.

Upward Bias; Suprising Resiliance

The tone in the market seems to have shifted in the short term. The market is rallying after breaking its lows and looks to be headed higher from here. I'd look to be buying morning dips in the broad market and take advantage of any 3 down days on stocks like GIS, GHL, and LO. Eventually, we'll likely be lower than we are currently, but the rally seems to have some steam.

Doug Kass Blip

Check out the newest Doug Kass article on www.thestreet.com here.

Here's the most important excerpt in my opinion:

"Consider the following four data points:

1. Six trillion dollars of wealth has been lost in home prices over the last year and a half.
2. Eighteen trillion dollars of wealth has been lost in global equities in only seven weeks.
3. Deleveraging continues to restrict accessibility to credit.
4. Job losses are accelerating.

The Great Recession is now upon us and will be with us for some time to come.

Stocks don't lie; people do.

Throw away your S&P 500 corporate profit estimates for 2009 through 2011, and disregard the economist you watched on CNBC yesterday morning and the other strategists who talk of mustard seeds and a consumer-led recovery next year -- it's pure pabulum.

Stocks will, at times, afford us trading opportunities, but, for the foreseeable future, we will get no satisfaction in investing opportunities.

Only the most facile traders should be on the playing field."

Risk Arb Strategy Outperforms

BUD turned out to be an amazing trade and the deal closed very smoothly. LDG and CVS seems to be a done deal too. Strategic buyers have swept in to buy companies on the cheap during recent market turmoil. However, investors have been skittish about risk arb and spreads have been larger than usual due to general risk aversion and also concerns over deal financing.

But according to this Motley Fool article, risk arb funds have been significantly outperforming this year. I'd look to buy FDRY and CYCL as a bet that these strategic, mid sized deals keep getting done.

ATVI/ERTS

ATVI continues to outperform ERTS. On the day, ATVI is up 1.66% while ERTS is down 2.44%. Since Recommendation the trade has performed well too. ATVI is down 9.7% while ERTS is down 29.4%. ATVI outperformed by 19.7%.

I would look to sell ATVI and cover ERTS here. ERTS is getting killed, but could be in a capitulatory stage. Since ATVI has held up pretty well lately, it could be vulnerable to a bear raid.

Tired Market

The market looks extremely tired and cannot bounce. That's what you call bad news, bad action which is a good tell that the market is heading lower. I've continually called for a break to new lows and it looks like that will happen. Shorting the SPY is a good idea in my view both intraday and for the intermediate term. Markets have been range-bound today and I'd look to short the extremes up (over 100 up on DJIA, up 10 on S&P) as a continuation of that. I don't think we have anything that will propel us higher here, just lower.

Spot On

We've broken to new lows. Not a big surprise from my viewpoint. The facts are just too overwhelming and the Treasury/Fed's resistance is too little. No one is going to step in and be a hero in this market. If you do, you're just asking for your head to get taken off as all the other bottom callers have in the recent past.

Dow Should Moderate

I think the DJIA will likely moderate at some point today from the 100+ gain this morning. I'd look for it to eventually pullback to at least give up about 50 points. The weak jobs report was just another report that was already largely discounted. However, it's enough to give traders pause about rallying straight out. Moderate gains just seem more appropriate than an outright bull rally.

I still think the market breaks to new lows sooner or later. Continued bad news will prick away at market conditions. The fed/treasury has run out of tools and lost credibility (as shown by decline after decline). Lastly, even though a lot has been priced in, it seems like analysts and investors are too optimistic about the time it'll take to recover and the magnitude of the recovery. I expect a longer recession based on declining demographic trends and poor credit conditions. At best we get sub-par returns from here--not exactly an environment to be all-in long in.

Middle of a Trading Range

The S&P is in the middle of a trading range from 850 to 1000 and right now there's more room to the downside than the upside. Accordingly, I'm looking at things a bit more negatively right now due to the run-up we've had and the lack of a catalyst to propell stocks higher. If you look back at days where we've rallied and then had a nice red bar turnaround at resistance points, the following days have not been pretty. Back in September this was the case, as it was twice in October. I'd look for this mornings shallow decline to deepen a bit as the day goes on.

Bad economic news continues to come out. Upscale/Mid-Tier Retailers such as Macy's and Target continue to get hit by consumers trading down to Wal-Mart/Cost-Co and pulling back altogether. But a lot of this has already been discounted (as shown by the gains in many retailers today) making the environment that much more difficult to work through. GDP was negative in Q3, but the market stayed decently strong in the face of that as well.

The global slowdown is in full-effect though and you have to think it'll be hard to continually shrug off these nagging problems. The BOE cut rates 1.5 percentage points this morning. The ECB and Fed are chopping away too. But as it's been shown over the past year, cutting rates does not necessarily lead to cheaper and more available credit. So in the end, you have a slightly more positive near term outlook just because of the indiscriminate negativity and the momentary warming of frigid credit conditions, but also a backdrop that's failing to improve and that is incredibly persistent.

I'm not sure who is brave enough to go out there and start buying. Hedge funds that have gotten burned this year and they are too busy selling to raise money for redemptions. There just doesn't seem like there is any room to rally as investors have adjusted their time horizons and economic data does not improve. One things is for sure: we're not going straight up. It'll take time to work through the problems. New lows are not out of the question, but we're likely in a range for a bit.

Feel Good Rally

The coming certainty of a new president in addition to a more liquid and available short term paper market has led the market higher. A Barack Obama win will probably boost the market a bit more here. Right now we've gapped up 2 bucks on the SPY. It should fade back towards the 50 minute moving average. The rally may continue from there or could slump. Obviously, I'm looking for it to move higher. However, now that we're moved up so much I'm concerned about the potential upside on more than an intraday basis. There is resistance above and the market may very well be tired. CEC is exhibiting poor relative strength and should be sold.

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.