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Monday, January 24, 2005
Market Recap
The markets have suffered another big negative reversal day. Since the start of the new year, there have been numerous negative reversal days in the market. A negative reversal is when the market opens higher, then reverses course and closes lower than the open. The market continued this streak of negative reversal days again today with the Dow dropping 24 points, the S&P lost 4 points, and the NASDAQ suffered another big blow, down another 25 points. All these Indices closed at the lows of the day once again. The NASDAQ is just 8 points shy of that big psychological level of 2000. If this level does not hold, the next support level is the 200 SMA, where I believe we should see a massive bounce. If we do not get the bounce and we close below the 200 SMA, than it will be back to a longer term bear mode for us where “Cash is king and the shorts sing”.
Shorts Are Back In Play
As you may have noticed, we added many short plays to our watch list last night. Tonight I have added to that list. This list is a watch list and, by no means, are we going to go out and short them all. The 200 SMA is just 33 points below on the NASDAQ and this is where I expect a bounce now. We will short some of these stocks into this upcoming bounce to hedge our long positions. These are stocks that I believe will continue down over the long haul, and, if we take short positions in any of them, we will try and hold for a longer term play and not just for the 3 day swing trade. If the market is truly turning bearish, the only way to make money is to be short for the duration of the bear market. This will constitute holding our shorts much longer than we would normally hold our long side momentum swing trades.
Earnings, So Far So Good
Earnings season has been good so far and, if the markets are going to recover, earnings will be a key factor going forward. About 15% of the S&P 500 companies reported earnings last week. So far, earnings have been very positive with only a few disappointments. Earnings drive the stock market so if this is true, why are stocks not rising after the great earnings that have been reported so far? Good question and here is the answer, in my opinion. Rising oil prices, rising interest rates, and a weak dollar are three key reasons preventing a stock market rally. Crude oil prices have recently run up to a seven week high. Part of this run has been the speculation that the winter storm that has pounded the eastern states may lead to higher demand for heating fuel. With this run up in oil, the markets have struggled, and they should. Anytime oil prices are moving higher, it is generally never good for the stock market.
We all want the market to go up, of course, but we have to look at the factors that are preventing any market advance. Right now, oil prices, the falling dollar (although it is showing signs of recovery) and rising interest rates are all negative factors that halt stock market progression. However, there may be some light at the end of the tunnel. Last week, the Treasury Department reported that International investors accumulated more US assets in November. This was the highest amount of accumulation in 5 months according to the report. They also reported that International investors added to their stock holdings by the most in over three years. This report should tell us that a weaker dollar is not driving the international investor away from US equities, as some have predicted it would. These numbers are from the government, hopefully they are true. Government numbers should be the most reliable source but they are subject to manipulation just like any other process. Could it be that they are releasing only the information they want us to believe? I would like to believe the numbers but you just never know what to believe anymore.
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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