Saturday, August 2, 2008

Just like every Saturday morning... a big pot of coffee and review the markets. The only difference this time is, my inner monologue is going onto virtual paper.

1. Start as I always do, with the general markets, represented by DIA, SPY, QQQQ. All of them look completely meh to me, just hanging out here in the middle of nowhere.

I'd call both SPY and DIA 3 up and 5 down, but slightly oversold by most of the oscillators. Interesting how both failed at the January and March resistance levels.

I see nothing that compels action. The levels to watch are S&P 1200, Dow 10832 for support; 1290 and 11600 for resistance.

For country-specific charts, I still have Japan and Taiwan on the watch list from last week. Watch both EWJ and EWT for island bottoms. Some pretty good positive divergences setting up here.

2. Moving to industry groups. With no clear signal on the general markets, a group signal will have to be especially clear. Where I start is with the BigCharts industry groups, moving from the 1 month to the 1 week performers.

a) One-month groups (industry name and percent change):

  • DJ US Airlines Index 40.87%
  • DJ US Paper Index 23.89%
  • DJ US Forestry & Paper Index 23.89%
  • DJ US Banks Index 21.41%
  • DJ US Railroads Index 15.40%
  • DJ US Biotechnology Index 13.52%
  • DJ US Industrial Suppliers Index 12.75%
  • DJ US Recreational Services Index 12.14%
  • DJ US Recreational Products Index 11.79%
  • DJ US Durable Household Products In... 11.39%
Airlines (UAUA, LCC, NWA, DAL) all pretty much look the same to me. V-shaped move, presumably on the thesis that oil is coming down hard. These things are trading as a second-order inverse derivative of oil. So why not trade oil instead?

Rails: CP is a laggard in a strong group. NSC is strong, has a gap to fill. I already own a chunk of that in a separately managed account, so I won't be buying any more.

Biotech. This week, you could summarize the move as DNA earnings, IMCL buyout, BIIB blowup. I have no edge on these fundamentally, but what I do see is that BBH made an island top and looks like a short close to 199.

b) One-week groups:

  • DJ US Paper Index 19.06%
  • DJ US Forestry & Paper Index 19.06%
  • DJ US Travel & Tourism Index 9.38%
  • DJ US Personal Products Index 7.97%
  • DJ US Banks Index 6.90%
  • DJ US Reinsurance Index 5.11%
  • DJ US Specialty Finance Index 4.85%
  • DJ US Airlines Index 4.55%
  • DJ US Property & Casualty Insurance... 4.50%
  • DJ US Personal Goods Index 4.37%
Paper - IP, UFS look like potential reversals to me.

Personal products: There were a lot of big moves in this group last week. REV, AVP, ACV, CL. Most of the charts still look like mush to me. REV looks dangerous, but I won't mess with a 1.20 stock.

AVP looks like a nice gap up and starting a pennant. CL gapped on a nice quarter. One clear thing is that KMB is trying to fill a gap, 59.50 looks like a good short entry here with a stop up around 63.

All the financial groups - banks, reinsurance, P&C insurers - look like dead cat bounces to me. Long or short them, you could look silly in an instant. Why try to pick up nickels on a battlefield?

3. Now we drive it down to specific stocks. I'm not seeing anything that compels action this instant, so all these are for the watch list.

a) On the short side, we have these candidates:
  1. KMB - We want to let this guy try to fill the gap. 59.50 would be a good entry. Stop around 63. That risks a little more than the 5% I like, so we'll have to keep the position size really small. Maybe something like the September 60 puts. I'll look at it when/if it gets there.
  2. BBH - Looking at the hourly for 10 days, which spans this island top, it looks like it wants to try to fill that gap. I'd want to short this guy about the 199 level, stop at 206, risking about 3.5%. 7 up/20 down.
  3. IP, but I'm not really interested in playing for 2 up/4 down.

b) On the long side:
  1. EWJ, EWC could be nice long setups.
  2. Also, in the pharma group, I like how PFE took out the 18.50 resistance area and seems to be wedging back to it on decreasng volume. I'd try to steal some in the 18.30s, 18.40s.
  3. AVP... want to see him try to fill that gap, but he's not that compelling to me.

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