The market got all shook up this week, but Friday brought a return to normalcy for the rally. It was an abbreviated week in the US markets after President’s day Monday, however the action was anything but quiet. Last Friday, although the market made new highs, we noted that its behavior foreshadowed an imminent correction.
Escalating unrest in Libya, where embattled dictator Moammar Gadhafi is making Hosni Mubarak look like patron saint, led to a sizable drop in the futures over the weekend. The main catalyst right now for the market is oil. Libya produces 2% of the world oil supply–and some its highest quality oil, at that–thus the massive infighting and threat of mass supply disruption sent oil prices soaring. As WTI April crude contracts hit $100 per barrel over the course of the week, the market had until today been unable to sustain any sort of bounce.
The market got a feeble bounce during the early part of the session Tuesday, but this time bulls were overwhelmed by bears looking to take risk off the table. The rest of week saw the morning trade be unkind to the market. Both Wednesday and Thursday stocks got hit in the morning, while in the afternoon bulls reminded us that they were still there. After two straight midday reversals, the market today has finally been able to pare the week’s losses.
Agricultural Stocks Reverse (Again)
Wednesday the agricultural group, which had been among the hardest hit in the pull back, reversed off lows with authority. Fertilizer stocks like The Mosaic Company (MOS), CF Industries Holdings, Inc. (CF), Agrium, Inc. (AGU) and PotashCorp./Saskatchewan (POT) all went from being down 3-5% to rallying positive. If you remember, we have been long-term bullish on the sector and were looking to time a buy-the-dip scenario in the ags. It’s not the first time we have looked to buy the dip in the ags.
POT, our favored group leader, was the one we were watching most closely for a potential scoop. The buy area was around the 50-day moving average (pre-split about $165, post split $55), and the stock pierced below it before rallying back above. Marc Sperling, John Darsie and others in the T3Live community entered POT long on that reversal through the 50-day, and since the stock has recovered 9%. POT was boosted this morning by a 3-for-1 stock split that was announced last month after earnings. Traders may look to take profits at this level, but the fertilizers should make new highs throughout the rest of this year.
Tech Also Recovers
Big cap tech was another group that was beaten down disproportionately in Monday’s elevator drop, and like the ags many stocks in the group have reversed nicely. Apple Inc. (AAPL) teetered on the brink of its 50-day moving average all week, before gapping up and continuing higher today back up hear its 21-day. The stock has been plagued by persistent worries about the health of iconic CEO Steve Jobs, despite carrying still a low valuation. Baidu.com, Inc. (BIDU) is another notable tech stock that recovered nicely over the last two days, taking back 4% after a nearly 9% drop since Friday.
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On the surface, the market had a tough week that will bring fear back into the equation. There is a great deal of uncertainty in the world right now. Political uncertainty in the Middle East. Uncertainty about what that political upheaval will mean for oil prices, and thus the economic recovery. There is uncertainty over the eventual implications of unprecedented intervention by our Federal Reserve bank. The amount of uncertainty got me thinking about what I believe to be an important concept in the stock market.
Market pundits often say, in some form, “the markets hate uncertainty.” In a basic sense, they are correct. Investors like to trim risk and take profits when the political environment becomes volatile or shocking events happen around the world. But, if you look at it in a different way, uncertainty is really the central source of opportunity for investors. When fear comes into the picture, it provides chances to benefit from the chimp-like nature of the herd. Without uncertainty, the market would never do anything except grind higher.
While some traders may have been aggressively shorting the market this week, the most prudent ones stuck to their fundamental guns, hedged positions and waited patiently, ready to strike. The market is built to go higher, especially this market, buoyed by a seemingly never-ending promise of cash support from the Fed’s presses. While it is human nature to get fearful when you see a government firing on its own people in Libya, or alarming to see your portfolio decrease in value for once, it is most detrimental to have a knee-jerk reaction to it all.
It is fitting that the best trade in the market this week was not an all-in short, but rather a calculated buy in the agricultural stocks. If you had done your homework you would have known the ags have a bullish long-term story, something that would have given you the confidence to step in. If you were prepared you would know that POT, after a blowout quarter that included unusually bullish comments from its typically conservative management team, was splitting its stock 3-for-1 overnight. Only a day and a half ago, POT was in a free fall, down more than 15% off the highs, and now has taken back more than half of those losses.
Was this week a poor week for stocks? Yes. Is the political situation in North Africa/Middle East worrying? Of course. Is it possible the world could end in 2012? Sure. Ultimately, though, doomsday scenarios are overblown and a dose of fear is good for the market. It increases trading ranges and shakes the tree a little bit. Investors had gotten complacent, and this week’s action will increase the jitters. With a somewhat artificially inflated stock market, there will one day likely be a big short. But that day does not appear nigh. Look to continue buying dips, using big support levels and moving averages to measure complexion of stocks and to time entries.
Just as the market showed signs of weakness despite making new highs last week, it showed signs of strength with afternoon bounces Wednesday and Thursday this week despite negative closes. Today’s grind higher reinforces the idea that stocks don’t want to stay down for long. For now, we will continue to buy dips and take incremental profits into market strength.
*DISCLOSURE: Scott Redler is long MCP, REE, SHZ, GLD. John Darsie is long POT, MOS, AAPL.
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