Our first full week of the new year and even with some red flags, we ended the week slightly higher. The Europe crisis has shown its face once again and Friday saw a list of credit downgrades dominate the headlines all day long. Even as I write this days later, you can find articles galore discussing that topic. The situation is not pretty, but these downgrades should not come as a shock.
In fact, it should not be a shock when the US is downgraded later this year. Last year was the first time in the history of the United States that our credit was downgraded and with no Government plans to cut our deficit and combat our record debt levels, another downgrade this year is fully expected. This would make the second time in the history of the United States that we have ever received a downgrade. To not turn this into a political discussion, I'll leave it there, but the point is most everyone expects the downgrade. When we expect it, we can usually bounce back fast. It is the unexpected that becomes market moving, especially negative news. None of the recent downgrades were unexpected.
Bonds had shown some weakness coming into last week, which would have been bullish for equities if this continued. Many market players, myself included, are looking for the day bonds start to unravel fueling equities higher. Instead, we had a week that bonds were strong and stocks were slightly up on the week. This is not typical, especially over the past year. When bonds are stronger, I tend to move towards cash because I lose trust in the support levels for equities. This past week had some weakness on the days bonds were strong, but we received light-volume buying that kept us afloat all week. Some believe this was manipulation by big funds trying to protect gains. On such light volume, anything is possible. While this is a good sign that we ended the week higher, it's not something I trust so I will not bet aggressive without an edge.
A trend seems to be developing in bonds over the past few weeks and it seems one week bonds are up and the next they are down. If this trend continues, we should see some bond weakness this week, hopefully propelling equities higher. Another positive sign for equities is I've seen many other seasoned traders initiated short positions in bonds via short iShares Barclays 20+ Year Treasury Bond Fund (TLT) or going long ProShares UltraShort 20+ Year Treasury (TBT). This gives me more confidence the next week should at least have modest gains. Also, options expiration is this week which could create some additional emotions and volatility, so keep that in the back of your mind.
Last week, retail sales was a very important indicator that was in focus. To the shock of many, it was a disappointing number. Many were hopeful a strong number would show a strong economic recovery this Holiday season, but it did not. Retail sales, excluding auto's, came in at negative .2% whereas the market expected a positive number of .3% (.5% miss) with some expecting as high as .6% (.8% miss). This was a significant miss, but the market shrugged it off nonetheless. This number means we should not be rushing to embrace the idea of a faster economic recovery, we will need more confirmation of that.
This week, we have some important data that should be in focus for the talking heads on television. Every day this week has an important indicator. I'll personally be focusing on how strong the Fed surveys are as well as what CPI comes in at. The surveys will give us a better idea of how strong manufacturing is and CPI will give us an idea of how the Fed's inflation numbers are. A weaker CPI gives another justification for QE3, which I firmly believe we will see later this year after the bonds unravel.
| Date | ET | Release | For | Actual | Briefing.com Forecast | Briefing.com Consensus | Prior | Revised From |
|---|---|---|---|---|---|---|---|---|
| Jan 17 | 08:30 | Empire Manufacturing | Jan | 10.0 | 10.0 | 9.5 | ||
| Jan 18 | 07:00 | MBA Mortgage Index | 01/14 | NA | NA | +4.5% | ||
| Jan 18 | 08:30 | PPI | Dec | 0.1% | 0.1% | 0.3% | ||
| Jan 18 | 08:30 | Core PPI | Dec | 0.1% | 0.1% | 0.1% | ||
| Jan 18 | 09:00 | Net Long-Term TIC Flows | Nov | NA | NA | $4.8B | ||
| Jan 18 | 09:15 | Industrial Production | Dec | 05.% | 0.5% | -0.2% | ||
| Jan 18 | 09:15 | Capacity Utilization | Dec | 78.2% | 78.1% | 77.8% | ||
| Jan 18 | 10:00 | NAHB Housing Market Index | Jan | 20 | 21 | 21 | ||
| Jan 19 | 08:30 | Initial Claims | 01/14 | 395K | 387K | 399K | ||
| Jan 19 | 08:30 | Continuing Claims | 01/07 | 3600K | 3613K | 3628K | ||
| Jan 19 | 08:30 | CPI | Dec | 0.1% | 0.1% | 0.0% | ||
| Jan 19 | 08:30 | Core CPI | Dec | 0.1% | 0.1% | 0.2% | ||
| Jan 19 | 08:30 | Housing Starts | Dec | 650K | 670K | 685K | ||
| Jan 19 | 08:30 | Building Permits | Dec | 650K | 680K | 681K | ||
| Jan 19 | 10:00 | Philadelphia Fed | Jan | 8.0 | 10.0 | 10.3 | ||
| Jan 19 | 11:00 | Crude Inventories | 01/14 | NA | NA | 4.958M | ||
| Jan 20 | 10:00 | Existing Home Sales | Dec | 4.35M | 4.57M | 4.42M |
Game-Plan
Biotech was a strong sector last week and I will look to see if that continues this week. Many of the charts exploded higher, but now they have put us in a position of overbought conditions. A pullback would be beneficial to reducing risk rather than chasing above support.
Technology had some bright spots, but semiconductors took a hit on Friday that gave back most of their gains for the week. Oil and Gas has been slightly pulling back and I will keep this in focus as some of the charts have consolidated nicely.
Per my StockTalks, I had short bursts of aggressiveness that did not last more than a day trade. With bonds showing so much strength, I did not have much comfort in holding large long bets overnight. Instead, I traded core positions with smaller trades and added some new plays to my portfolio. You can review all of this on my StockTalks, but I still have long swing trades in Applied Micro Circuits (AMCC), Magnum Hunter Resources (MHR), Caribou Coffee (CBOU), Nanometrics (NANO), RTEC)">Rudolph Technologies (RTEC), Northern Oil and Gas (NOG). I initiated swing trades in a risky short-squeeze candidate BYD)">Boyd Gaming (BYD), which is an online gaming/casino play that has run nicely as well as establishing a starter position in FTK)">Flotek Industries (FTK) for another trade in it. None of these positions are bigger than a starter position, but I will look for the ability to be aggressive this week if bonds start to give fuel to equities.
For my long-term positions, I added back to Gastar Exploration (GST) under $3 and Dejour Energy (DEJ) finally broke support, so I was able to start accumulating more shares with room to add more if it continues to fall towards the $.39/.40 area. Even with my long-term positions, I still trade core positions in them and lock-in profits when I can. A long-term position, for me, is not one I buy and ignore.
If you can't make it to the live-chat where all the magic begins, you can view my trade updates throughout the day by following me on SeekingAlpha StockTalks.
Stock Radar
I am sticking to stocks showing relative strength over the past weeks preferably with more cash than debt and valuations showing reason to believe it is undervalued. I look for these stocks to pullback towards support levels where I start to buy incrementally. I am cautious of buying on breakouts unless I am in a very aggressive mode. This aggressive mode may be just for a day-trade rather than risking the large position overnight where my stop-loss may not protect me from a large gap-down. Market players have been reluctant to buy stocks on breakouts over the past year and I have adjusted my strategy to be more selective and patient. If we can gain some very positive sentiment or a QE-based environment, I'd expect that will change.
The second radar is the short squeeze radar which is compiled of stocks showing relative strength, but having high short interest (you will notice duplicates among both radars because of this). Any bullish spark may set them off in a short squeeze run netting significant profits if you trade correctly. Always trade these short squeeze candidates carefully as stocks with high short interest will have negative rumors swirling around them trying to shakeout investors who have not done their homework. However, some of those rumors may indeed be true, hence the importance of doing homework and being very selective. The risk is higher for these types, so make sure you know what you are getting into before you buy, not after you buy. The key is to be selective and find those stocks which the shorts are wrong about, not to blindly believe every high short position is wrong.
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Cambrex (CBM)
CONMED (CNMD)
EBIX)">Ebix (EBIX)
ELX)">Emulex (ELX)
Flow International (FLOW)
Furmanite (FRM)
Fushi Copperweld (FSIN)
Green Plains Renewable Energy (GPRE)
LeCroy (LCRY)
Lattice Semiconductor (LSCC)
MGIC)">Magic Software Enterprises (MGIC)
Mitek Systems (MITK)
Newport (NEWP)
Ruth's Hospitality Group (RUTH)
Santarus (SNTS)
Spectrum Pharma (SPPI)
Uranium Energy (UEC)
VPHM)">ViroPharma (VPHM)
Quiksilver (ZQK)
Arctic Cat (ACAT)
Short Squeeze Radar
Boyd Gaming (BYD)
Constant Contact (CTCT)
Ebix (EBIX)
Fushi Copperweld (FSIN)
InnerWorkings (INWK)
Northern Oil and Gas (NOG)
SAH)">Sonic Automotive (SAH)
LodgeNet Interactive (LNET)
Media General (MEG)
The McClatchy Company (MNI)
You can follow my trades alongside the 36,000 plus market players who follow me on SeekingAlpha (Shameless promotion). As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long CBOU, DEJ, MHR, GST, AMCC, RTEC, NOG, BYD, FTK and NANO, but positions may change at any time.
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Tags: Applied Micro Circuits (AMCC), Biotech, Boyd Gaming (BYD), Cambrex (CBM), Caribou Coffee (CBOU), Debt, Deficit, Dejour Energy (DEJ), Ebix (EBIX), Economic Calendar, Emulex (ELX), Energy, Europe, Flotek Industries (FTK), Game-plan, Gas, Gastar Exploration (GST), Inflation, iShares Barclays 20+ Year Treasury Bond Fund (TLT), Magic Software Enterprises (MGIC), Magnum Hunter Resources (MHR), Michael Kudrna, Nanometrics (NANO), Northern Oil and Gas (NOG), ProShares UltraShort 20+ Year Treasury (TBT), Rudolph Technologies (RTEC), Santarus (SNTS), short squeeze, Sonic Automotive (SAH), Spectrum Pharma (SPPI), Stock Radar, Technology, ViroPharma (VPHM), Weekly Homework
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