US stock futures rose overnight as oil retreated slightly. The dip in oil prices, which have seen their greatest two-week rise ever, could be attributed to reports that deranged Libyan leader Moammar Gadhafi could be looking for a peaceful end to the country’s civil unrest. Mounting pressure from around the world, including from former allies in the US, seems to have caused Gadhafi to do an about-face about ramping up violent crackdowns on rebel groups.
The market closed sharply lower Monday after oil remained on the highs, but the S&P and other indices stayed within the multi-week wedge pattern that has been developing. The technology sector was also a drag yesterday after a notable downgrade of the entire semiconductor sector by Wells Fargo. While the market has been extremely strong over the past 6 months–and 2 years, for that matter–the current indecision is clearly caused by the growing political instability around the world. Investors are so far unwilling to take undue risk with protests and violence threatening oil supplies in the Middle East and North Africa. The latest country to be in focus will be Saudi Arabia, which has a “Day of Rage” scheduled Friday.
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This market is in a very tricky spot here, says Marc Sperling of T3Live.com. We are forming a symmetrical triangle that has to resolve itself before any continuation can happen in either direction. Sperling has been bullish for the better half of 6 months, saying to buy dips, and although that thesis has not changed, the headline risk at this stage forces traders to exercise more caution. The other aspect of yesterday’s sell-off that is worth taking note of is the fact that leading stocks and sectors, like the ags and Apple Inc. (AAPL), are often getting hit that hardest. Stay light and respect the big intraday travel ranges that will resolve itself in next few weeks. When we get some resolution to this pattern, that is when the easier money will be in play and we will get some multi-week continuation in either direction.
Banks
The banks have also shown relative weakness over the past couple of weeks. With tighter regulations the future has remained hazy for the big banks, and two headlines last week were another hit to the reputation, and likely the balance sheet, of Wall Street’s top firms. JP Morgan Chase % Co. (JPM) said, mainly due to foreclosure proceedings, its legal liabilities could exceed reserves by as much as $4.5 billion, and a former board member at Goldman Sachs Group Inc. (GS) was accused of insider trading in relation to the Galleon case.
The weakness in the banks culminated in a breakdown yesterday for Goldman Sachs. The former bank leader had put in a very bearish looking head and shoulder pattern, and yesterday it broke down through the neckline of that pattern. During a wedge pattern formation, it is good to have a basket of long and short ideas in your back pocket, and if the market continues to get pressured we expect the banks and specifically Goldman to be some of the weaker stocks out there. The ultimate measured move would take Goldman down to the $145 area, but we would take most of the trade at around $155 and not get greedy in this type of market.
Also within the banking sector, there have been reports that a foreclosure settlement of sorts is being floated, and resolution to that crisis would remove a massive cloud from over the head of a few of the banks. What that settlement would entail remains unclear. Also, Bank of America Corp. (BAC) analyst day is on the docket today, its first since 2007. The stock has been consolidating over the past month or so, and the analyst day may be a catalyst for a move. Continue to watch the banks, as Sperling says a market can’t go very far without its financial stocks on board.
Unstoppable Silver
During its run over the past two years gold has gotten most of the headlines, but with its latest month-and-a-half run higher, silver is clearly the undisputed champion of the precious metals. The iShares Silver Trust ETF (SLV) has jumped 56% since late January, and each time it has seemed toppy it has responded with a strong snap back. On February 24, SLV shed nearly 5%, but took back all of those losses the next session before making new highs again in the following one. Yesterday silver gapped up big again, but came off slightly intraday. The further acceleration had some thinking silver may have capitulated to the upside in the short term, but it is once again gapping up this morning. Silver miners have also performed well with varying patterns, with two names to watch in that group being Silver Wheaton Corp. (SLW) and Coeur D Alene Mines Corp. (CDE).
Watch VXX as Volatility Increases
Evan Lazarus of T3Live.com sees signs that the resolution of this pattern will most likely be to the downside. After seeing a nice upside move in the iPath S&P 500 VIX Short-Term Futures ETN (VXX), showing a spike in volatility and generally a market sell-off, the VXX gave put in a controlled 3 day pullback and looks to be basing again for another potential upside move, says Lazarus. With yesterday’s market selloff and very little defined leadership for this market, traders can either use the VXX as a hedge against long positions or for a trade to the upside to capture any gains should we see the market continues to slide and volatility expands. Laz is long the VXX at current levels with a stop at $29.80 with a quick trade target to $34.50 and target 2 at $37.50.
*DISCLOSURE: Scott is long AAPL, GLD, MGM, INVE, NFLX; Short SLV, GS, SPY. Marc is long TA, TGA, GLD, ALU. Evan is short AGQ, VALE.
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