Tuesday, January 27, 2009

Strong Reaction to the Bad Bank Concept After Hours

Top Line: Yes, we are still bullish nearterm...

The stock market tried to go up on Tuesday and it did manage to squeak out a 50 point gain in the Dow. This is not the kind of rally we are looking for...

Tonight the futures are up on the back of a couple of news items. The first is some "bad" news from YHOO but the market decided it actually wanted to give their new CEO a chance to make a difference. The other is the progress being made on the stimulus package. Oh, well, the market finally thinks there will be a stimulus package.

The rally we expected near the inauguration is now going to kick into gear with the expectation of a grand stimulus package. Sure, the market may not jump on Wednesday but the delayed rally is coming. Looking at the areas of strength, we think those are energy related and we do like the GDX. Today, Peabody Energy (we like their symbol, BTU) announced earnings that were $1.10 versus the 74 cents expected. The coal industry was the best performing on Tuesday at over 8%. Peabody (BTU) was up 12% by itself.

Part of the stimulus package seems to be directed at the Bad Bank concept. The bad bank idea is gaining momentum and has been around for a while. It will probably be the latest effort to "get the lending going again'. The article discusses a couple of issues and we recommend a quick read to get the highlights of the situation...this includes nationalization and the Fed meeting going on right now.

The rally in the after hours has to be looking specifically at the stimulus package progress. Banks were acting pretty well in the afterhours but so were many other groups. Whether you agree with what the government is doing or not doesn't matter. What matters is what the market is thinking. We expect that the news could rally the market at least as far as the "buy the rumor and sell the news" saying goes.

Last week we recommended SSO saying it "is a good buy near 21 with a good upside potential". With the Dow dropping below 8000 last week, the SSO traded below 21 a couple of times and was a great buy there. We think it has good potential in this rally. The target is 30 plus in the next several weeks.

Late last year, we warned you that we would be trading more than we had over the past several years. We have liked the GDX and have recommended it on many occasions. Right now, if you are buying something, we would probably not recommend GDX because there are better deals out there. We said we were buying (and adding to our positions) energy names last few weeks and those included natural gas and coal.

The stock market is about to go on a good run and the economy seems to be going no where but down. It is important to fade the news on the economy and focus on the opportunities in the market.

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