THE BIG PICTURE AND THE GOVERNMENT'S AD CAMPAIGN
Last week, was the biggest rally of the year thus far. In terms of news, the big move seemed to be caused by a discussion of a change to the mark-to-market accounting rule. This could be big news because it could cause banks to become well capitalized overnight. As I have mentioned previously, I do believe this is a short term game changer and it has been part of the reason I have so many financials in my junk long portfolio.
Additionally, Citigroup leaked out a memo that "but for" all of the toxic assets, it was a very profitable quarter. Bank of America and JPMorgan released similar press releases. Obama also spoke out that the economy is really not doing that bad.
There seems to be a decision in the administration that they have been too negative. The government has been blamed and perhaps they now believe it has caused people to lose confidence and add to the decline in the market and the economy.
Put another way, it is kind of like the government went to an advertising agency and said "we need an ad campaign to restore confidence." I think the Obama administration has commenced a short term ad campaign to sell the public that the economy will be ok. Bernanke will be on 60 minutes as part of the kick off of this ad campaign tonight.
In the face of this ad campaign, we must keep the big picture in mind:
On the 20 year $SPX chart, the long term double top is in play. On the long side, I expect 785 and 805 to put up very powerful resistance. I will be shorting $SPX if we get to these levels. I will certainly shift from a long bias if the market hits these levels and will likely shift to a short bias at these levels. The easy path would be if the market does a classic retest up to or near an area that was formerly major support.
I expect this week to be tougher than last week. The 750 level is kind of in the middle of nowhere. Still a bit far from 785-805 to get heavy with the shorts, but a long way from the 715 FL and the low at the 671 FL.
VIX
Watching to see if the VIX breaks 40. Friday was interesting because the VIX was up even though the market was up. This kind of divergence can sometimes be a sign of a reversal in the market and is worth watching.
GOLD
Gold continues to look like a good short. This is looking like a head and shoulders top. There could be a nice drop down to $78 or so on GLD if support is broken at $88.
SEMICONDUCTORS
SMH is looking like a pretty good short opportunity at $19. I plan on setting a relatively tight stop at $19.75 or so.
TRANSPORTATION
If the market moves higher, IYT could be a classic retracement and shorting opportunity in the $47-$48 range.
UTILITIES
If the market moves higher, XLU could be a classic retracement and shorting opportunity at $25 or so.
REITS
I'm already in IYR short with an average price of $25.5. I don't love that it breached $25 so easily, but I am optimistic that it is hitting resistance at $27.50 (my stop is at $28) and that it is perhaps starting to roll over.
GASOLINE
I'm still very skeptical (even as an owner of DXO) that oil is bottoming. I'm keeping my focus on gasoline as the tell. Waiting to see if UGA can breakout above $24 before I get interested.
OIL
In terms of the big picture, I'm a believer in the big double top and a multi-year bear market. If I turn out to be right, I believe XLE will be one of the bear market leaders. As I have mentioned previously, if this one goes to 2003 prices it means a 50% haircut. I'm currently short XLE with a stop at $45.75.
INDIVIDUAL STOCKS
PEGA
PEGA was one that I was looking at a few weeks ago. I got stopped out but a flag pattern developed after good earnings. I would be interested again in this one at $16.30 and a stop of $15.5.
BIG
Regarding some of my individual picks from last week, I am still in BIG although I did trim it back to its original position size after the runup. I moved my stop up to $19.45.
I never did get into FCX. I have enough long exposure right now and I won't be chasing it.
Good skill to everyone this week.
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