Another frustrating week for the bears. Bears continue to pound their heads against the wall as nothing seems strong enough to take the markets down. Weaker-than-expected GDP did not even phase the markets much on Friday. With the FOMC keeping interest rates low until 2014 and reducing growth expectations in 2012, we not only have have a fragile economic recovery, but we are continuing to pressure the savers/retirees for at least a few more years.
When we keep interest rates this low, we ensure savers/retirees can not make risk-free income off the interest of that money/nest egg they’ve accumulated over the years. This forcefully pressures these responsible savers to invest this cash rather than save and live off the interest risk-free. A retired individual is unlikely to obtain a job while the fact that energy/food and other costs continue to rise with CPI (govt inflation number) showing minimal inflation (while gold and other commodities skyrocket…hmmm?) therefore they are not going to receive higher social security payments to cover those costs. As far as the government is concerned, they are blind to any inflation via energy or food. All of that is simplistically speaking of course as this is a stock market article, not a macro or political one. That being said, this means these individuals must continue to deploy their capital in something riskier just to gain the income to live off of. In time, more and more of these individuals will be forced to enter into the stock market (and bonds, other investment products, etc…), giving more support to stocks. The concern for them (and the economy) is that if the market starts to falter, these individuals are unlikely to manage their money effectively and may rack up large losses. That is the risk we are forcing upon our responsible savers who never planned for the government to force such low interests for this long period of time. If the market does start to fall apart, expect Uncle Big Bernanke to deploy QE3 to try and save them by propping up the markets.
That is the theory of many right now after digesting the Fed data. For a while, I continue to write about the correlation between bonds and stocks. As bonds rise, stocks fall, and vice versa. Due to keeping interest rates low for such a long time (at least 2014), this noted theory could be create a further divergence between bonds/stocks reducing the correlation for brief periods. As bonds rise from retail investors deploying cash into them, stocks may rise as well (usually a sign a top is nearby when retail investors finally buy) as other retail investors deploy cash into them. Not all retail investors will pick just bonds or stocks, but if you splash water near buckets, some is bound to fall in them. For anyone who says the economic recovery is not fragile, all you have to do is point to the Fed’s actions to prove otherwise. If the economic recovery had any strength and faith in it, rates would now be so low with such dovish Fed talk.
This data from the Fed has also introduced more emotions into the market due to market players desire to interpret and predict. This has caused me to close out nearly all my swing trades, per my StockTalks last week, to protect profits rather than gamble on the outcome. Rather than press bets against uncertain forces in the market, it is safer to protect my profits and wait for more clarity for more certain gains/less risk. With the markets still extended, it logically makes sense to see weakness and further portfolio re-positioning over the coming week. Any weakness should see fair support though as this market has shown incredible resiliency with many dip buyers anxious to join in. The dovish Fed will give more confidence in market support as bulls trust Bazooka Ben readies to launch QE3. If bonds do continue to unravel more, that will only fuel more upside, but I will react rather than predict. The easy gains have likely been made the past month, here on out may require more hard work and discipline. Trading isn’t easy, don’t let anyone fool you into thinking it is.
The most important economic indicator for traders this week is Friday’s non-farm payroll report. This report will likely be widely discussed by the talking heads before and after the data is released, which is for January’s employment situation. December’s data, reported in January, was showing signs of stronger job growth. Many will look for this report to confirm or deny the previous report as a one-off or a new trend.
|Date||ET||Release||For||Actual||Briefing.com Forecast||Briefing.com Consensus||Prior||Revised From|
|Jan 30||08:30||Personal Income||Dec||0.4%||0.4||0.1%|
|Jan 30||08:30||Personal Spending||Dec||0.2%||0.1||0.1%|
|Jan 30||08:30||PCE Prices – Core||Dec||0.1%||0.2||0.1%|
|Jan 31||08:30||Employment Cost Index||Q4||NA||0.4||0.3%|
|Jan 31||09:00||Case-Shiller 20-city Index||Nov||-2.0%||-2.6||-3.4%|
|Jan 31||09:45||Chicago PMI||Jan||61.0||62||62.5|
|Jan 31||10:00||Consumer Confidence||Jan||67.0||67||64.5|
|Feb 01||07:00||MBA Mortgage Index||01/28||NA||NA||NA|
|Feb 01||08:15||ADP Employment Change||Jan||250K||175K||325K|
|Feb 01||10:00||ISM Index||Jan||55.0||54.7||53.9|
|Feb 01||10:00||Construction Spending||Dec||0.5%||0.4%||1.2%|
|Feb 01||10:30||Crude Inventories||01/28||NA||NA||NA|
|Feb 01||14:00||Auto Sales||Jan||NA||13.5M||4.20M|
|Feb 01||14:00||Truck Sales||Jan||NA||NA||6.04M|
|Feb 02||07:30||Challenger Job Cuts||Jan||NA||NA||30.6%|
|Feb 02||08:30||Initial Claims||01/28||375K||375K||NA|
|Feb 02||08:30||Continuing Claims||01/21||3550K||3525K||NA|
|Feb 02||08:30||Unit Labor Costs||Q4||-1.0%||0.8%||-2.5%|
|Feb 03||08:30||Nonfarm Payrolls||Jan||225K||170K||200K|
|Feb 03||08:30||Nonfarm Private Payrolls||Jan||250K||145K||212K|
|Feb 03||08:30||Unemployment Rate||Jan||8.4%||8.5%||8.5%|
|Feb 03||08:30||Hourly Earnings||Jan||0.2%||0.2%||0.2%|
|Feb 03||08:30||Average Workweek||Jan||34.4||34.4||34.4|
|Feb 03||10:00||Factory Orders||Dec||1.5%||1.6%||1.8%|
|Feb 03||10:00||ISM Services||Jan||53.0||53.1||52.6|
This week will be a feel-out process for my own portfolio. After closing out my swing trades as noted in the introduction, I ended the week by adding swing-trade positions on Friday in Harry Winston Diamond (HWD) and Oncothyreon (ONTY). Overall, I’m still mostly all cash and ready to deploy it. You can read my StockTalks on those recent moves.
Commodities and related stocks continue to make an interesting play with interest rates continuing to be low and cheap money flowing more freely. That is not a reason to be confident in the dollar, so commodities should continue to appreciate in price over a long-term trend. I will look for continued strength, especially in miners.
Biotechnology has taken a breather and set up nicely this last week. If the markets hold up, I am looking for continued strength to develop in them so I may have an extra focus on biotech stocks this week.
Technology has had a great run, but many charts are very extended. This is making safe entries harder to come by. I’m looking for a pullback here before I enter with more confidence.
I still have my long-term positions in Dejour Energy (DEJ) and Gastar Exploration (GST). GST starting recovering last week, so I’ve been reducing the position and profits. I’ll be looking for a pullback towards $2.80 or lower to add back. The volume in DEJ is picking up and I’m looking for some more volatility over the coming days/weeks to use to trade my position and reduce my cost average. Both will continue to be a long-term staple in my portfolio.
If you can’t make it to the live-chat where all the magic begins, you can view my real-time trade updates throughout the day by following me on SeekingAlpha StockTalks.
You’ll notice the recent lists seems a little lighter than past weeks. Many times, this is a sign we are in a bad market. However, I don’t consider that the case here. I see many of the big-runners pulling back and new chart setups developing. This means we have to do more homework and be more selective than previous weeks as I believe the easy money has been made. Now, those who work harder can obtain the tougher performance.
I am sticking to stocks showing relative strength. Preferably, these companies have 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 first list is my normal weekly radar using my proprietary settings on my stock screener. For all my radars, I tend to keep four weeks worth before deleting them allowing me to rotate through a greater number of recently bullish stocks.
Auziron Mines (AZK)
DUSA Pharma (DUSA)
Emergent BioSolutions (EBS)
Flamel Technologies (FLML)
Golden Star Resoures (GSS)
Hillenbrand (HI) (Note: Earnings on February 1st)
Iridium Communications (IRDM)
Knight Transportation (KNX)
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.
Iridium Communications (IRDM)
Paramount Gold and Silver (PZG)
Abraxas Petro (AXAS)
Biolase Technology (BLTI)
Endeavour International (END)
Entropic Communications (ENTR)
Fushi Copperweld (FSIN)
Jaguar Mining (JAG)
Northern Oil and Gas (NOG)
OCZ Technology Group (OCZ)
Uranium Energy (UEC)
Zoltek Companies (ZOLT) (NOTE: Earnings on Feb
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, GST, ONTY and HWD, but positions may change at any time.
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Tags: Dejour Energy (DEJ), Economic Calendar, Entropic Communications (ENTR), Game-plan, Gastar Exploration (GST), Gold, Harry Winston Diamond (HWD), Jaguar Mining (JAG), Michael Kudrna, Northern Oil and Gas (NOG), Oncothyreon (ONTY), Paramount Gold and Silver (PZG), Stock Radar, Weekly Homework