The Oxen Report: Alcoa Disappointment, Declining Trade Balance Challenging 11,000

April 13, 2010

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Welcome to 11,000. Thanks for coming. It looks like we are headed back below 11,000 at least to begin the day. Yesterday, I opened up a position in Advanced Micro Devices (AMD) with our Play of the Week. We liked this stock to grow throughout the week on Intel buzz and some good market conditions. We opened a position at 9.42. Today, we are looking at a strong ETF play to take advantage of the declining market and a solid retail short sale.

Let’s get to it…

Buy Pick of the Day: Direxion Daily Real Estate Bear ETF (DRV)

Analysis: Our decline from 11,000 will open up an opportunity for a single day trade in Direxion Daily Real Estate Bear ETF (DRV). This ETF follows a group of REITs that are retail and diversified. Yet, it often is strongly impacted by the residential construction industry and other financial information. Today, the market is looking to pull back. To start, last night we kicked off the earnings season with a miss by Alcoa Inc. (AA). That brought down futures in the market before 8:30 AM to around 20 points. At 8:30 AM, the poor news continued with the trade balance declining to a $39.7 billion deficit in imports over exports for the month of March, which was a $2.5 billion increase from February. The Import Price Index also came in below estimates, which is more fuel to the fire.

The market is definitely looking prepared to pull back, and it has the capability to extend throughout the day. Aloca really did not help the market by reporting disappointing earnings because it means that analysts, at least for one day, will be expecting weak earnings across the board. I think the DRV play is more the market is falling, and we have an inverse ETF that is 3x that should benefit from it.

On the REIT and real estate sector, there was not really any exciting news that would move DRV, so this is basically a play on the market direction. Futures have continued to rise throughout the morning, which is not what we like to see if we are playing an inverse ETF. Yet, I am going to stick behind my reasoning that DRV should fall. Asia and Europe were both down for the day. It is hard to hold such a benchmark like 11,000. Even looking at upgrades and downgrades, there are way more downgrades today in a number of key financial institutions, while the upgrades are limited to mid-cap.

Technically, DRV has basically been a decaying thrown away chemical that no one would want to touch with a ten foot pole. The ETF has declined 50% over the past two months, but as of recent, the fast stochastics show some life. The ETF has a lot of room to the upside after being oversold and it is heavily undervalued on RSI. If it could get any momentum going today, it would be very good for us.

Entry: We are looking for an entry of 7.85 – 7.95.

Exit: We are looking to gain 2-3%.

Stop Loss: 3% on bottom.

Short Sale of the Day: The Talbots Inc. (TLB)

Analysis: Talbots should be getting a nice pat on the back for a great Q4 of its FY 2009. The company reported its earnings this morning, moving to a profit over a loss one year ago. The company reported an EPS of 0.13 vs. the expected 0.02. The company beat revenue estimates as well for the quarter. It appeared to be a great quarter for Talbots, and overall, it was.

Yet, the stock has jumped up 6% in pre-market trading, and with a downward day facing the market, I think TLB is setting itself up to be a nice intraday short sale. The company was already overvalued and pricing earnings going into the day. The stock has rocketed up 20% in the past two weeks, and it is definitely presenting a place for investors to gain another 6-7% on the day. With the market declining, it will create natural short interest.

I am expecting TLB to pop to start the day, but the stock cannot hold that sort of momentum. Its beta is only 0.6, which is less than market average. Talbots is a slow mover, and a 6-7% gain for the day is a pretty large feat for this retailer. A pullback is in store as investors take their fat gains off the table.

Technically, TLB is heavily overvalued as has been discussed. The stock is heavily overbought on stochastics, and it was already right at its upper bollinger band at yesterday’s close. I cannot expect that the stock can be making too many more gains especially with such a low beta rating. We should be safe to expect a pullback from a morning pop.