Last week, we were expecting more of the same from the Christmas week, and in a way we got what we were expecting... and more.
The volume levels remained subdued, making it possible for the few market participants still playing to move things around quite easily. But a funny thing happened on the way to 2009. Some players decided a rally was in order, and over the course of four sessions they were able to lift the DOW by over 6%. That's a pretty nice return for a week's worth of work. Once again, the market was able to surprise by actually finding the 9000 level... but doing it in a way we originally hadn't expected. We were looking for the mark-up move to start a little sooner (and end a little sooner) but once it didn't begin on cue, we began to become concerned as the market danced precariously near our first key support level.
Our thoughts now are the low volume levels made it possible to prevent the natural wave of selling that seemed to be shaping up. Once participants were able to see the DOW magically holding (repeatedly) above 8455, they became more confident and emboldened... and the party began in earnest. We must always remember the mice will play if given the chance. They were able to dance the entire way back to 9000ish to end 2008 on a better note... as they also technically welcomed 2009.
Today, however, will represent the first "real" trading day of 2009... and we will quickly see if our friends were just having some fun... or if they were just jumping the gun a little. That is, it can't be ruled out that the clever little maneuvers of last week were only that. There could be a reason behind it. Perhaps some of the fabled and ballyhooed "tons of cash on the sidelines" is about to be deployed to get things rockin' to the upside in 2009. Perhaps they were jumping in front of the pre-swearing-in jubilation rally players?
It's really tough to tell... because holiday sessions distort the technicals we normally rely on. How much weight should we assign to thin markets clearly more easily manipulated by smaller players? It's not an easy answer... as we've personally witnessed many "bogus" rallies able to defy gravity for much longer than a rational observer would expect. Additionally, we all know if key technical levels are reached, that can also lead to additional technical buying. We don't object to what our holiday session friends do. They do what they do. However, it does leave us guessing more than we'd like.
Looking forward, it's likely that the news (economic and earnings reports) will continue to be ugly. But that's the expectation now. If that's the case, then it will take really ugly reports to send the markets and stocks lower. It is finally sinking in for most that things are simply awful... but that fact has to be a silver lining for the bulls from the contrarian side of things. It will take worsening conditions to bring higher levels of fear... and thus to ignite selling.
Our thoughts are nearly all sellers should be out at this point... given the tax implications. This could pave the way for more buying, and thus more rallying. We believe another catalyst would need to appear to send the markets careening lower in a violent way over the short run. Perhaps that would be another unexpected failure, a geopolitical crisis or something more systemic.
Something systemic could also come from increased layoffs (and thus more foreclosures), as that scenario would add more pressure to the situation we're currently experiencing. It could also come from commercial real estate failures... or the failure of things to shape up politically as expediently as most expect. One "under-looked" possibility at the moment may be guidance. If some of the big, early names not only announce poor earnings results but also guide lower for 2009 than is currently expected by the Wall St. default-bullish analyst crowd, well then... THAT would certainly qualify as a catalyst.
The point is... the market is still much closer to the lows than the highs of a little over a year ago... and our guess would be most sellers have sold based on the information almost everyone has discounted to this point. That leaves bulls with the ball in their court - with a chance to run with it. Mind you, we're not predicting anything at the moment, we're simply sharing some of our thought processes... and "NO" we're not trying to have it both ways. We simply won't force a strong view on things when we don't have one.
The market reacted and traded well last week, but that (at least to us) is somewhat dubious for the reasons we cited above. Yet, the markets do have a tendency to "work with" bogus rallies at times. Most sellers should be "out of the way" at this point, and the selling void could be filled by optimistic bulls pulling their funds from the so-called sidelines and putting them into the game. We should know over the next few days if "trading bears", not sellers, want to answer last week's shenanigans. If they do not take the bait, then that will likely embolden our bullish fun-seekers... and they will try to build off of the shaky foundations they erected last week.
The DOW Technical Picture:
We’ve highlighted the questionable volume levels that accompanied the “defense” of the 8455 level in the DOW. With “nothing” going on, it wasn’t difficult to levitate the DOW. Thus emboldened, “they ran with it” as 2008 ended and 2009 technically began.
“Is it real? Can it become real?” Trading bears will need to answer these questions early this week, and if they step aside… that will leave the ball in the court of the bulls as we noted above. They only have to move beyond 9150ish resistance to probably “beget” 9600ish.
Our “nutshell” is we won’t know until more action unfolds to see if last week was just nonsense that will quickly unravel… or smart bulls jumping the gun in front of slightly more patient bulls ready to run in 2009.
This Weeks Earnings Reports
Jan 6 - FINL - The Finish Line, Inc., together with its subsidiaries, operates as a mall-based specialty retailer in the United States. FINL has a nice consolidation pattern forming. It is only a $6 stock, but depending on what you think about the stock, the retailers, the strangle is only $0.60. Recent low was $3.42 and the recent high was $7.06. The Jan 5 put is only $0.35.
Jan 7 - MON - Monsanto Company provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. Currently trading at $74.28, the recent low of $65.60 and high of $84.39. This points to another consolidation triangle, with the earnings possibly forcing it to either side of the spectrum of support or resistance. Implied volatilities are off significantly from the highs, but still high compared to one year of history.
Jan 8 - CVX - Chevron Corporation operates as an integrated energy company worldwide. The company’s Petroleum operations include the exploration, development, production, and marketing of crude oil and natural gas; refining, marketing, and transportation operations include refining crude oil into finished petroleum products; marketing crude oil and products derived from petroleum; and transporting crude oil, natural gas, and petroleum products by pipeline, marine vessel, motor equipment, and rail car. It has made a nice run from the lows $68.38, now trading at $77.61. OPEC has reduced inventory so that is driving the price of oil up slightly. This should help out the oil stocks.
Jan 9 - KBH - KB Home constructs and sells homes in the United States. The company builds various types of homes, including attached and detached single-family homes, townhomes, and condominiums, designed primarily for first-time, first move-up adult buyers. KBH is forming a consolidating head and shoulders. Housing will continue to be weak until prices start to firm up.