The rally has been extremely resilient since the now-infamous Jackson Hole summit, with the only decent pull-back (~5%) coming in mid-November. Since then, each time the market has touched support at the lower trendline, it has turned up. However, as the market began to break out above the upper trendline (i.e. the uptrend accelerated) late last week, I began to grow cautious.
Friday’s extension got me thinking “here we go again”, but over the last two days, we are finally seeing what happens when an already extended market attempts to go parabolic. Although the indices have reversed and held the uptrend for now, I feel there is more damage under the hood than meets the eye.
While some traders and investors often find it hard to dump positions after a harsh down days like yesterday, the intensity, volume, and breadth of selling was a sign of worse things to come. It was a “day to take notice” as I like to say, as the stocks and sectors that had led the most recent leg of the rally broke down the hardest.
The 1275 area in the S&P was an extremely important pivot, and the market came back above it for now. We crossed below it, but didn’t get the daily close that would have really gotten me more bearish. The first spot to look at for macro support is 1255-1258, and the second spot is the 50-day around 1237. Major support is around 1224-1226. I will begin to nibble on very select longs again cautiously, but I will not be aggressively buying unless we get a pull-back into that 1255-1258 support level.
If you were holding some of the leading sectors of the rally like cloud stocks, agricultural stocks and commodities, it certainly doesn’t feel like a near flat day in the market. The cloud stocks got whacked after FFIV’s earnings report after the close yesterday, and have struggled to bounce into the now massive gaps.
Agricultural stocks have continued to get crushed after privately-held Cargill announced it would be selling its 64% stake in The Mosaic Company (MOS). Many investors have perceived this action as Cargill’s opinion that this is a top in the fertilizers, but I’m not sure that is an accurate interpretation of their action. MOS is held in a charitable trust for the Cargill heir, so it was going to be sold one day. Perhaps they were simply using the recent run-up to take profits. Potash Corp. of Saskatchewan (POT), CF Industries Holdings, Inc. (CF), Agrium Inc. (AGU), and Intrepid Potash, Inc. (IPI) have been three of the hardest hit in the sector due to the Mosaic situation. We are still bullish on fertilizer (especially Potash Corp.) and other agricultural stocks, so this could be a buying opportunity.
As for other tech leaders, Apple Inc. (AAPL) had monster earnings earlier this week but no stock split. Today, the stock is getting hit as investor’s still seem wary of a post-Steve Jobs Apple. I sold longs yesterday and even dabbled short after it didn’t hold the old high of $248.50. Now the major area to watch, from the Jobs announcement, is around $326. On a macro level, this stock will need time to repair chart before it gets going again.
Google, Inc. (GOOG) has earnings, and last time we played an options strategy into the close and got rewarded. I will look to take a small options position into the close. I do think we see $700 + this year, so If you want to be long stock with a long term objective, you can own stock into earnings but be prepared to buy more to average down if you have to.
The banks have also been getting hit over the last several trading days after a slew of poor earnings reports. Goldman Sachs Group Inc. (GS), Wells Fargo Company (WFC) and Citigroup Inc. (C) all disappointed with their reports, but Morgan Stanley (MS) this morning had a more impressive quarter and was perhaps the catalyst for a bounce.
GS earnings didn’t have the Goldman touch, thus the stock has temporarily become a sector laggard. The stock got hit early but has recovered and is down only slightly. I don’t worry about Goldman long-term, they run the game.
JP Morgan Chase & Co. (JPM) had a strong report too last week and has been one the strongest in the group. The stock has pulled slightly off highs for the day. This will be one of the banks I look to buy this year, on dips ideally.
Bank of America Corp. (BAC) was also weak early but has made a startling recovery to go green for the day. I bottom picked this one pretty well around $11 but am flat now.
Rare earth stocks went negative to positive today for a nice reversal trade.
I’ve been short term bearish on Gold and Silver as I see the same pattern, or similar, to one from last June before it had a correction. Gold has been unable to penetrate into this morning’s gap down, and for now I think we are seeing profit taking in the precious metals. There will problems this year, from Portugal and Spain to possible state defaults, so I think gold will have its day again at some point.
When uptrend’s break and complexion changes, it’s much more fun to be in cash looking at the market with opportunistic eyes, rather than experiencing emotional pain and trying to salvage losing positions. Today the market did reverse, but I still feel the action we have seen over the last several days is a warnings of a possible correction to come. If we do resume the uptrend and leading stocks start acting better, can always get back in.
*DISCLOSURE: Long GOOG
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