Tuesday, October 23, 2007

Whip Saw Rules Stock Trading

This evening as the world got the AMZN news, there was a great expectation for something but AMZN didn't seem to deliver. During the day, the stock rose about 10% in anticipation of the great news and then after the news it fell those same 10%. Such is the life of the great ones, they don't last forever. Even these seemingly never tiring bulls have limits and those limits might have been reached.

Yesterday, when AAPL gave us their news, the world was abuzz with the speculation. Even AAPL didn't fare too well after AMZN's news. Apparently when one Horseman falls, another has to stop to help the other one up.

We have been stuck on this narrow market breadth for a while and now it seems that the real market will overwhelm the brave few leaders which Cramer dubbed the Four Horsemen. There are so many reasons for the market to stop right here. The NASDAQ 100 has benefited from the move in the horsemen but the less fortunate indexes have not. Let's take a look at a couple of them.

Let's start with the RUT (Russell 2000). In July, the RUT set a price level of 856+ and last week it tried mightily to get back there. After the August swoon to 736, the RUT has moved back to just over 850 about ten days ago, failing to get back to that 856 mark from July.

One of our favorite sectors, the semiconductors, has had a horrible run of it over the past couple of months. After a moonshot in July up to 550, the SOX index traded down to 465 in mid-August. After trading in the 480 to 510 range it has recently tried to find that 465 level, trading below 472 today. The SMH index, the American exchange equivalent of the SOX, actually did trade below its August low today.

The small cap stocks have had the most difficulty in this period of time after the Fed's rate cut. The higher cap stocks that seem to be able to withstand a downturn are being sought after. This strategy will ultimately fail.

For other indexes, check out the True Contrarian's new post. Kaplan thinks the global markets will have difficulty in November and December due to tax selling. More importantly, he is calling for a hefty loss in the precious metals stating that the gold mining index has significantly lagged the recent price surge in the metal.

At any rate, the past few days of trading have been wild at a minimum. The trading on Tuesday had the SP500 up 10 points at the opening bell (yes, due to AAPL) but soon it was red but then it rallied the rest of the day (yes, due to AMZN expectations). After the close, when AMZN sort of disappointed, the futures are again down. This is after the important break down from last Friday.

We noted that the NDX has benefited from the horsemen's moves, witness the cruise to a new high for the move today. This move puts the NDX, NASDAQ 100, in a class of its own and has the rest of the world begging to do the same. It's just that the four horsemen can't be in all the indexes around the world. From our way of thinking, that fact will produce outsized losses in the NDX over the next couple of months.

Our position continues bearish especially after last Friday's break. Let's see how we trade post AMZN results and then make an assessment on the Fed's move for next week...when we meet again tomorrow.

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