Don't Worry, Be Happy
Stock market crater in the Earth Why'd you have to wreck my mirth?
The simple answer is (as Gordon Gecko told Bud Fox in the '80's Wall Street classic movie, "Wall Street"), "because it's wreckable!" (if you are a bull)
So what is mirth, anyway? The dictionary defines it as "joyfulness or gaiety, especially with laughter". And as traders, we don't care from which direction our mirth comes - bullish or bearish. We're joyful when we are making money based on successful trades, up or down. It's "buy and hold" INVESTORS that are no longer experiencing their mirth since March of 2000.
Contrary to popular belief still held by an unimaginable number of fund managers and investors, stock values can and do go down or trades sideways, which is a big mirth-wrecker for bovine investors. They have learned that "buy and hold" is way to get rich and that stocks "always come back". Well, it just isn't so.
As traders, if we can divorce that Pavlovian idea from our head and learn to synaptically link "movement up or down equals profits", then we will be on our way to profitable trading in the equity markets, and restoring our mirth. We should learn to be HAPPY when markets fall. It means potential to make money just as it did when markets went up!
Leaving psychology for now, where are markets headed? Wish I knew. But a whole bunch of hedge fund managers have set record short positions on NYSE traded stocks over the last month. LU, NT, HWP, PFE, GE, KO, CA, CNC, XOM, GPS, MO, LOR, HD, and PEP top the percentage increases. Keep in mind, these are the pros at work and they are usually correct. They've been shorting out some pretty big names including some overpriced defensive issues. I find that interesting. Aside from a short squeeze in these issues, which I doubt will be all that dramatic given the huge floats of most, KO, MO, and GE are getting the "thumbs down".
But more to the point for the traders among us, the futures were looking pretty weak this morning in the wake of weekend disappointments from WCOM and ERICY. WCOM announced it would come in at the low end of revenues at $21-$21.5 bln vs. estimates of $22 bln, and that it would be 15% light in the earnings department - oh, and that's EBITDA at that. So earnings after all the bad stuff might even amount to a loss. The geniuses at Solly downgraded the stock today as the price fell 30% to $4.02. Goldman Sachs still has a "market perform" rating on WCOM. Three others chimed in with downgrades too, including S&P who cut WCOM's debt rating to BBB. Nice work, analysts. I have some livestock that has escaped the barn. Could you lock the doors behind them, please? CSFB issued the first "sell" rating I've ever seen outside of Prudential - truth in advertising award for them!
Ericsson also did its part to help squash the futures by announcing it sees a full year loss and expects no second half turnaround. It will cut 20% of its work force and raise $2 bln through stock sales. Let's see, at a current $2.73 per share, quick math tells us that ERICY will need to sell about three quarters of a billion shares, which ought to dilute the outstanding shares by 9% and increase the shares in float by 40%. If the earnings don't get you, management will. It just shows how desperate management is to raise money and shareholders don't matter. Telecom, as Austin pointed out perhaps 4-5 mos. ago is going to see a lot of pain, and it isn't over yet.
Speaking of not over yet, brokers too are about to get their comeuppance. As I noted two weeks ago, the NY attorney general slapped MER with a lawsuit claiming they misled investors with Buy recommendations when they, themselves, were selling. I opined then others would get slapped too by perhaps multiple states and their brothers joining in. In fact, courtesy of briefing.com, "Deutsche Bank said in a pre-open note that they believe there could be more negative catalysts in the next 30-60 days for MER and the brokerage group; during their Friday conference call, firm says that the emails published by the NY Attorney General were damaging and could lead to stricter oversight of several firms; expects significant private litigation and believes that other firms under investigation may seek an industry-wide settlement." My take is that other states will join the fight to milk that cash cow for all it's worth. If you own any brokerage stocks, it might be interesting to entertain selling calls against it to buy protective puts - just a thought.
OK, on to the charts - all down, all nearing critical levels of support and due for a quick bounce over the 60/30/ time frames, but weak overall.
Dow Industrial chart - INDU (weekly/daily/60):
Quickly, the daily chart 50-dma and 20-dma in addtion to the descending trend line are squashing the Down to support at roughly 10,075. The wobbly stochastic with very little bullishness in it has turned slightly bearish. In conjunction with the weekly chart, the trend still looks down. But with the 60-min stochastics bottomed, there may be a slightly tradable DJX bounce for a point or so.
NASDAQ chart - COMPX (weekly/daily/60):
Same story here, but even more pronounced - descending trend line is intact, daily stochastic has rolled over, but the 60-min has poked up from oversold. Call-buying opportunity? Not for my money, as I suspect any late day buying was merely short covering by those not wanting overnight exposure to any earnings "good news".
S&P 500 chart - SPX (weekly/daily/60):
Yep, same here. Looking mostly at the daily chart, 20, 50, 200 dma along with declining resistance is squashing the SPX down to support at 1100 +/-. From there, who knows thanks to the deep oversold 60-min chart that might yield a bullish trading gain. But the rolled daily stochastic will keep that in check.
And for tomorrow? The big picture remains rangebound and down with the possibility of bullish swing and daytrades on the Dow and SPX. The buried stochastic on the 60-min has to be good for something, right? A bigger temptation for me is wait for what might be a morning pop up, then short the bounce. Earnings are not enough to impress anyone and Fed comments this week will likely fall on deaf ears since the Fed isn't likely to shed any new light on the economy or raise rates anytime soon.
The only caveat for the bears is that the semiconductor book/bill ratio increased to 1.04, much greater on the order side than expected, which could provide some temporary strength in the tech sector. OK, I changed my mind. Maybe I might take a bullish swing trade on the NASDAQ. Still as with last week, rent 'em, trade 'em, don't own 'em at the end of the day.
See you at the bell.