The trend continues and bonds sold off this week helping fuel more upside gains in the stock market. As noted in last week’s homework, a weekly trend has developed in bonds as they strengthen one week only to sell off the next week. That would mean if the trend continues, bonds will strengthen once again this week which could limit upside gains or even create a stock market pullback.
Over the weekend, negotiations over Greek debt broke down and this will not be good news for our markets. However, if bonds continue to sell-off breaking the trend, we may still rise in the stock market. When bonds sell-off, that creates additional “ammo” for dip buyers to put into stocks many times fueling a higher move. If the markets were moving on larger volume, the bond market would have less of an impact, but with lighter volume, it can be a significant force to watch for. If bonds sell-off, even bad news may not be able to push the stocks down very much.
As I’ve stated in previous articles, I am waiting for bonds to really start unraveling, not just the small trading range they are currently bouncing in every week. If bonds start truly unraveling, stocks could see a fast move up. However, when that unraveling stops, I’m fearful we could see a rather large correction, so I’ll be quick to move to cash and lock-in my profits fast.
It is at this point in time that I believe we could see QE3 initiated. A fall in stocks would seemingly give Ben Bernanke justification to do so. That means I do not expect to see QE3 announced at the FOMC meeting this week. Some may be disappointed and we may see some weakness in the markets, but if bonds continue to sell-off, I think any weakness in the market will be short-lived. I could see us shaking off most bad news in just half of a trading day. It is the shocking bad news that is completely unexpected which I fear the most and that is what we can’t predict, so we trade what’s in front of us.
We have nothing on Monday or Tuesday this week except President Obama will be having a State of the Union speech on Tuesday night. Depending on what he says and how he plans on tackling the economy/jobs, this could impact the markets early Wednesday. Wednesday is the FOMC rate decision. Some are expecting QE3 to be announced, but as noted above I do not see it happening just yet. This could also create some weakness if we do not get it, but if bonds do not rise, I don’t expect the weakness to last long.
GDP on Friday is the second read. This means it can be volatile from the first read, so be wary going into that data.
|Date||ET||Release||For||Actual||Briefing.com Forecast||Briefing.com Consensus||Prior||Revised From|
|Jan 25||07:00||MBA Mortgage Index||01/21||NA||NA||23.1%|
|Jan 25||10:00||Pending Home Sales||Dec||-3.0%||-3.0%||7.3%|
|Jan 25||10:00||FHFA Housing Price Index||Nov||NA||NA||-0.2%|
|Jan 25||10:30||Crude Inventories||01/21||NA||NA||-3.438M|
|Jan 25||12:30||FOMC Rate Decision||Jan||0.25%||0.25%||0.25%|
|Jan 26||08:30||Initial Claims||01/21||375K||375K||352K|
|Jan 26||08:30||Continuing Claims||01/14||3550K||3550K||3432K|
|Jan 26||08:30||Durable Orders||Dec||3.0%||2.0%||3.7%||3.8%|
|Jan 26||08:30||Durable Orders -ex Auto||Dec||1.0%||0.7%||0.3%|
|Jan 26||10:00||New Home Sales||Dec||310K||322K||315K|
|Jan 26||10:00||Leading Indicators||Dec||0.7%||0.7%||0.5%|
|Jan 27||08:30||Chain Deflator-Adv.||Q4||0.7%||1.5%||2.6%|
|Jan 27||09:55||Michigan Sentiment – Final||Jan||74.5||74.2||74.0|
On Friday, per my StockTalks, I was forced to trim positions as the market had a weak day that grew weaker as it went on. The action was far weaker than you would be lead to believe if just glanced at where the market finished compared to the previous day. Right now, I have plenty of cash allowing me much flexibility come Monday.
Bonds continued to sell-off, which is making me lean bullish towards Monday, but we’ll have to take a look at the pre-market action to determine that. I have no larger than starter positions in my trades outside my two long-term positions in Dejour Energy (DEJ) and Gastar Exploration (GST), which I’ve accumulated on their respective falling prices.
Nanometrics (NANO) had a bullish start to Friday and saw unusually large volume. I suspect we may see more bullishness in this stock, so I may look to aggressively day trade it if I can gain an edge at some point in time during the week.
Two positions disappointed on Friday. Northern Oil and Gas (NOG) and Magnum Hunter Resources (MHR) took punishment on Friday alongside many other oil and gas plays. The charts are still in an uptrend and no technical damage has been done, but I will keep my eye out if either struggles to rebound. With such a large amount of shorts in both of those stocks, we must expect days where the shorts win big scaring out weaker hands. I will look for strength from the bulls before I commit more capital to either significantly reduced position.
Technology did well the past week while biotech started to pullback giving the ability to rest some charts. Metals and junior miners did well to close the week off. I will look to ride technology as long as I can, but I expect them to pullback sooner than later. Applied Micro Circuits (AMCC) has done well and looks to be setting up for another push higher, so I’ll look to add to my position if the markets cooperate this week. However, Rudolph Technologies (RTEC) and AMCC have earnings later this month. Since my strategy is to not hold large, if any, positions into earnings, I will look to reduce/close out these positions before the week is over. Biotech may be a good area to accumulate for the next push higher, so I’ll be looking to add to Cambrex (CBM) and others if I can.
Gaming/Online Casino stocks continue to have a positive buzz around them, so I’ll look to add back to Boyd Gaming (BYD) if the chart settles down as it has a significant amount of shorts to burn which can fuel a surge higher.
Lastly, Flotek Industries (FTK) is setting up for another push higher, so I’ll look to see if the bulls start to run with this one and I’ll quickly add if I can.
If you can’t make it to the live-chat where all the magic begins, you can view my trade updates throughout the day by following me on SeekingAlpha StockTalks.
I am sticking to stocks showing relative strength over the past weeks preferably with more cash than debt and valuations showing reason to believe it is undervalued. I look for these stocks to pullback towards support levels where I start to buy incrementally. I am cautious of buying on breakouts unless I am in a very aggressive mode. This aggressive mode may be just for a day-trade rather than risking the large position overnight where my stop-loss may not protect me from a large gap-down. Market players have been reluctant to buy stocks on breakouts over the past year and I have adjusted my strategy to be more selective and patient. If we can gain some very positive sentiment or a QE-based environment, I’d expect that will change.
The second radar is the short squeeze radar which is compiled of stocks showing relative strength, but having high short interest (you will notice duplicates among both radars because of this). Any bullish spark may set them off in a short squeeze run netting significant profits if you trade correctly. Always trade these short squeeze candidates carefully as stocks with high short interest will have negative rumors swirling around them trying to shakeout investors who have not done their homework. However, some of those rumors may indeed be true, hence the importance of doing homework and being very selective. The risk is higher for these types, so make sure you know what you are getting into before you buy, not after you buy. The key is to be selective and find those stocks which the shorts are wrong about, not to blindly believe every high short position is wrong.
Voyager Oil & Gas (VOG)
WuXi PharmaTech (WX)
Provident Energy (PVX)
Harry Winston Diamond (HWD)
Aruba Networks (ARUN)
Braskem S.A. (BAK)
Short Squeeze Radar
Fushi Copperweld (FSIN)
LodgeNet Interactive (LNET)
Northern Oil and Gas (NOG)
Sonic Automotive (SAH)
Titan International (TWI)
You can follow my trades alongside the 36,000 plus market players who follow me on SeekingAlpha (Shameless promotion). As always, do your own homework to see if you agree. Good luck out there.
At the time of publication, Kudrna was long DEJ, MHR, GST, AMCC, RTEC, NOG, BYD, FTK and NANO, but positions may change at any time.
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Tags: Applied Micro Circuits (AMCC), Bernanke, Biotech, Boyd Gaming (BYD), Cambrex (CBM), Dejour Energy (DEJ), Economic Calendar, Flotek Industries (FTK), FOMC, Game-plan, Gastar Exploration (GST), GDP, iShares Barclays 20+ Year Treasury Bond Fund (TLT), Magnum Hunter Resources (MHR), Michael Kudrna, Nanometrics (NANO), Northern Oil and Gas (NOG), Perficient (PRFT), President Obama, ProShares UltraShort 20+ Year Treasury (TBT), Rudolph Technologies (RTEC), Sonic Automotive (SAH), Stock Radar, Weekly Homework