Reverse Rotation

It seems like every day moves in the other direction. One day the market falls, yet tech lags, and then tech rockets up, with the market falling - and who knows what other sectors are doing...



We do see to be at some type of rotation again, with all of the secondary issues being put onto the market. Overall, these make many of the companies actually more stable by de-leveraging their balance sheets. In many cases, it takes bankruptcy off the table which is good for individual stocks. However, now that the flock of issues are underway, and the stocks have risen, these new issues do indeed dilute future earnings and increase the supply of stock. All things being equal, this is bearish. In the very short term (next few weeks) this should keep a lid on the rally as supply gets mopped up. Not only that, I actually expect weakness from new issues at this point in the face of recent news were secondaries cause rallies. If that's the case, where does money rotate into? Clearly, we are not in the mid to late cycle stocks, and merely exiting a depression. If that's the case, I suspect we will get a reverse rotation out of early cycle names back into defensive names.

Here's PNRA - casual dining has been leading the market since Jan, and this is one of the leaders. Until recently, anyways.


LVS is another consumer spending name and was one of the latter to take leadership. It has yet to breakdown, but appears ready to do so, if this reverse rotation thesis plays out.


On the flip side, some defensive names have been holding up in the past week and are doing rather well.


KO is another. Just look at the slew of names from early cycle and defensive, and you'll get a pretty good picture.

Treasury and High Yield bonds

An interesting day today. The high yield bonds broke the uptrend which suggests to me a deeper correction. Treasury yields also spiked which I believe is returning to its normal pattern as an inflationary (and not risk aversion) indicator.

A slow roll-over

The market seems to be slowly rolling over. Overall, this is somewhat constructive, giving the market some time to digest its gains. 820 and 780 remain my pull back targets but we'll see what happens this week.


A lot depends on the financials this week. Regardless of what happens, once that's done with, it will likely be time to buy the winners and sell the losers; however it plays out. I started small positions in FMER and OCN; both of which are holding up well. The BKX has formed into a tight pattern, so a break from this should be telling.


I'll also note that the high yield bonds still have not broken their uptrend. I suspect that for the market to top out, we will have to see a break of this uptrend.


We also got a nice break in the Ag commodities which should give some lift to the sector.

Still going

Wow, this market just doesn't stop moving up. Today, we got a break of that 875 area, but failed to close over it. What started 2 months ago, with the financials, has spread over into multiple rallies in various sectors. There was a lot of interesting moves today; some intuitive; some not.

WMT was up nicely, stating that discretionary item spending was up for their stores.

SQNM - in after hours.... WOW!

Coal names - I can't quite figure out what the rally was for.

I also started a stake in OCN in a "can't beat em - join em trade" Despite this, I remain bearish on the market in the short term but I'll concede that I don't know when this run is going to end.


Some of the infrastructure stocks are also looking interesting to me as part of a second derivative/thesis play. Specifically, FLR for me. The rally has broadened enough that money can just rotate around giving time for individual sectors to base (like the financials are doing now) and for others to move higher, before swapping roles again. Sooner or later, the music stops, but until then, let's just enjoy the party with a foot out the door.

Grinding

Another volatile day. This market is really starting to grind up and down. For most of the month, the S&P500 has been skipping rope around the 845 price level. To me, this does appear to be the latter stages of froth in a bull run where the most speculative of names make their moves.


My targets for this pull back are 820 and 780, but if we make new highs, I think it could potentially trap a pile of bears.

Really? Seven Weeks?

Seven weeks. That's pretty much how long its been going for. No sense in looking and fundamentals, technicals - just the animal spirits.

The SPX is right off its highs and pushing against major resistance in the 870 area. I had incorrectly thought that the market began to roll over on Thursday, but Friday's push above a corrective channel drawn out has to make me reconsider the pattern. However, as I type this, the SPX futures are down a whopping 16 points. I can't see exactly why, but I can see that considerable commodities futures are off. (something about China's stimulus not getting through to earnings?) We'll see if this is just another shallow dip that is snapped up soon enough. I'll say overbought again, but every time I say that, I get gored by the bull.


Here's a perfect example of treading, yet taking on water. Each rally I short, and take a partial position off, only to have the remaining position run me over - each time FASTER than the previous! Rinse and repeat. I'll concede that the credit market is loosening up which will help this sector, and that creditors MUST be more flexible on existing covenants/terms. But this sector has excessive capacity in a new world where personal savings/balance sheets have been torn to shreds.


To add frustration to it all, some of my long positions (MCD and WMT) - consistent growers with stable earnings and cash flows lag the index. Clearly, the defensive names are out of style and money is fleeing quality for the casino's as quickly as possible.



See what I mean? I don't know about you, but when one's life savings is destroyed, a trip to Vegas only mentally helps for the weekend.


Perhaps all those winnings can be spent on new Harley's!



Sector rotation? Okay - noted. But really.. Seven weeks? Something doesn't add up. Net short, and feeling every bit of the Bull's horns.

Stocks and Bonds

It's interesting to see how the stock market has moved with the bond market; particularly the high yield, corporate bonds given the credit crisis we've just been through. One of the reasons I think we will not re-test the lows is that the credit conditions are actually much better. Corporate bond have rallied substantially giving companies a chance to re-capitalize.


We can see that both bottomed at the same time, and the high yield corporate bonds have been off to the races along with the market since. Only in the past few days has it shown any weakness, but is still within the uptrend.


If a correction plays out in the market and the SPX pulls back, then we should also see a confirming move in the HYG. This hasn't happened yet, but something to look for.