This morning futures are pointing modestly lower after yesterday’s break out failure. It was another ‘Mutual Fund Monday’ gap-up and stocks surged higher early before the move petered out. We got a downside drift for most of the day and closed on the lows, weighed down by weak financial stocks, with foreclosure villain Bank of America Corp (BAC) the heaviest rock to drop. The troubled bank is at its lowest level in more than a year.
At these levels the rally is tricky and we are starting to get signs that things are getting exhausted. Yesterday the market put in a bearish doji candlestick, and the little guys started to perk up, evidence that investors are becoming hesitant to put money to work in extended leaders and a sign of a likely pull-in. As long as the market stays strong above 1172, there will not be a status quo change, so we will watch that level closely. We are getting closer to the potential QE2 announcement and the November election, both of which are expected to bring fireworks. It would be feasible to see some rest and consolidation ahead of those landmark events. Apple Inc (AAPL) has been wedging tightly, and after a snap back from the post-earnings sell-off, it could be a candidate for a short down into support around 306. Google (GOOG) has been particularly strong after earnings and was the place to be in the morning yesterday. If the market catches a firm bid, it will be a candidate to look long. Netflix Inc. (NFLX) on the other hand has dipped into its bit earnings gap, but feels like it could get a nice 80-20 reversal type trade if the market can cooperate. Netflix Inc (NFLX) was Marc Sperling’s play of the day. Baidu.com, Inc. (BIDU) actually held up well in the afternoon yesterday, but is getting hit pre-market. Baidu (BIDU) is certainly a stock we would look to buy any substantial dip on the way up our $120 price target.
The only place the bears have been able to gain traction, as mentioned, has been the financials. News about Bank of America Corp (BAC) gets darker each day as new revelations emerge in fraudclosure, and I would give it a lot more room before trying to be cheeky and catch a bottom. I would also stay away from the other names in the sector most exposed to the crisis, JP Morgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and Citigroup Inc. (C).
The rare earth stocks, Rare Earth Resources Ltd (REE) and Molycorp Inc. (MCP) continue to be a boon for momentum traders, and they will ride that horse until its dead. The inverse correlation between the dollar and equities continues to strengthen, so keep your eye on that relationship. Gold still has yet to enter its gap from last week when China raised select interest rates, but we will keep you on alert to buy SPDR Gold Trust (GLD) on the right dip. Research in Motion Limited (RIMM) has moved into the tech dog house since poor Q2 earnings, but was the big winner yesterday in the afternoon as everything else faltered. With buzz about its new Playbook, maybe zombie Research in Motion (RIMM) can come back after all. The meat of earnings season, at least in terms of our ‘go-to’ stocks, is largely over, but there are still some notable reports to watch. Ford Motor Company (F) handily beat estimates and grew profit by 71% this morning, but such a beat was baked into the cake as the stock is trading lower this morning post-announcement. Also this afternoon keep an eye on two cloud names we have been watching F5 Networks, Inc. (FFIV) and Equinix, Inc. (EQIX). The cloud computing stocks have been an area to watch for us since the wash out on October 6th, and strong reports could really strengthen the cloud sector.
