It’s Groundhog Day!
While the movie "Groundhog Day" is one of my all-time favorite films our foreign readers would do well to remember that we live in a country where thousands of people actually do gather each February 2nd in a small town in Pennsylvania where a dozen men in tuxedos pull a rodent out of a box to see how much longer winter will last based on whether or not it sees it’s shadow.
Perhaps the little ritual itself isn’t that strange but how seriously people in this country take it is downright weird!
In the movie, Bill Murray is forced to live the same day over and over, much like the trading range the markets have been stuck in. There’s nothing wrong with being in a trade channel if you learn to recognize the tops and bottoms – that’s why it’s so important we watch our breakout levels and don’t overcommit as we near the tops of the range. As I often say, "if there’s a real market rally, we have all the time in the world to participate."
Asia is back at the top of their trading range with the Hang Seng back at 20,563 and the Nikkei is retesting 17,600, both indices a good 50% ahead of the Dow over the past 3 years. In a true global economy, either they are very overvalued or we are very undervalued and I think that if you accept the fact that the economy IS truly global, then it would follow that the US markets are a global bargain.
The Japanese consumers saw their shadow and are spending 2% less as they like to (gasp!) save their money! I’m not actually quite sure what this "saving" thing is, but we’ll get some researchers on it and get back to you… This is not bothering the Japanese markets as they see themselves as part of the global economy and the growth of their neighbors is seen as a good thing. Asian growth is portrayed as some kind of threat to America and traders and analysts alike are stuck in Groundhog day 1946 (world war) or 1966 (cold war) or 1986 (Japan was kicking our ass) as the shadow of a global competitor sends us running back into our holes.
As long as we continue to see Europe and Asia as competitors and not partners, we will be forced to relive the same trading ranges over and over again as we ride the famous market roller coaster:
Let’s just be sure to remember that yesterday was "Thrilling Thursday" and no, it was not the first time I used that title! In the true Groundhog Day (the film) tradition, I pointed out several times last week that we are simply reliving the same markets over and over and over again!
Can we break the cycle today? Frankly we haven’t even made it to Euphoria yet as our markets have quickly gone from thrilling to chilling this year. Each new Dow high has been followed, within 3 days by a 50% retracement of the gain that got us there. That means a protective DIA put would be in order against positions you intend to hold long into the weekend, regardless of our levels. I like the March $125 puts for .90 or less, hopefully .75 if we have a good run during the day.
Europe’s markets have also left ours in the dust but our pals at BAB had, as expected by us, an earnings miss and lowered forecasts which makes me glad I held the March $100 puts, we’ll see what kind of drop we get. Hopefully not too many investors will be fooled by the WSJ typo that shows them earning $202Bn for the quarter! Nissan is another automaker with problems but why else did you think they were talking to GM?
Global semiconductor sales were up 8.9% last year and maybe all our hand clapping is actually helping – if we can get the SOX moving it may be that extra thrust we need to push the markets into a permanent, higher orbit. Forecasts for 2007 are for 10% growth, coming off Q4’s 9% increase from last year.
We’ll keep a close eye on the SOX and the Nasdaq today because this is the kind of news that NEEDS to get them in gear:
- Dow needs to stay positive – failing 12,650 would be bad!
- Transports below need to hold 2,850.
- S&P needs to hold 1,445, 1,450 would be amazing!
- NYSE has the burden of leadership and needs to break out over 9,350
- Nasdaq must get back over 2,480!
- SOX 465 is where we need to get today – anything less sets a very poor trend…
- Russell 805 needs to hold – 810 would be fantastic.
That’s not too much to ask for is it? When you break orbit it is easier to move forward, not harder! Any resistance we get at these levels means we are still in the clutches of market gravity. When we really break free we will know it as the markets will drift up and up with almost no additional thrust (news, earnings…). Something very true was said to me when I took flying lessons: "when you’re weightless, you’ll know it!"
Oil got a strong dose of gravity in the afternoon yesterday but we’re coming into the weekend (Superbowl) so traders are more worried about their $500 bets on that game than the $500M bets they are placing on oil – I know that’s crazy but it happens every year! This is actually great for us as the longer they put off a correction, the harsher it will be!
I’m going to ask him if he has charts that compare supply and price charts during the last couple of oil shocks, maybe we can get an idea of how much lag to expect but you can see a very similar pattern forming to the one in 2001, when oil prices held a 25% drop for almost a year before plunging another 30%.
The only thing that halted that decline was a move by an extremist regime to take 200M barrels of oil off the market, but the SPR is now full and, unless Bush gets approval from Congress to dig a hole to put another 750M barrels of crude into, Chinese demand growth just isn’t going to sop up what Saudi Oil Minister Ali Naimi said was a 100M barrel surplus.
With 367M barrels rushing to Cushing and only 10 trading days to go, we can expect some real fireworks next week as traders have to do SOMETHING with those contracts! As with the markets in general, we’re not going to try to force it but we have our bets lined up and ready to be placed.
We’ll see if gold can hold $650, of the dollar can retake 85 and punch through that annoying 50 dma and we’ll see if the Euro is really worth $1.30.
I’m excited as the jobs numbers are coming in nicely, not too hot, not too cold – the Goldilocks Economy lives!
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There’s a great article on the Journal about how some funds have taken up my summer advice and specifically bought up companies that have been hammered by option scandals: Gartmore Small Cap Fund had nearly a 30% return last year partly because it purchased stocks when they fell on backdating news, says Charles Purcell, senior virtual portfolio manager of the $937 million fund. "The underlying businesses were the same, and we were going to get past this eventually," he says. "It’s taking advantage of the ‘groupthink."
Back on September 11th I said:
"I mentioned BRCM several times as having some trouble with options, most recently on Friday. It now turns out the number they “miscalculated” was more like “over $1.5Bn” rather than the $500M they estimated it at just a month ago. I love to say “I told you so” and I did, but now I’m going to confuse you by telling you that the sell-off may be overdone.
They didn’t steal money, they stole shares of stock. In fact, the shareholders aren’t even any more dilluted than they would have been if the options had been priced higher. Yes they may get sued but there’s not much merit on the majority of shareholders forcing the company to pay them cash, which will devalue their shares. Ideally, existing officers and directors who benefited should be forced to give the shares back but it will be very surprising if a Bush balanced Court will force corporate criminals to give anything back to the victims.
The IRS may take issue with what is looking like, on a wide scale, a $100Bn plus fraud that has been perpetrated on the US public as the companies manipulated books to create long-term capital gains but the benefit should have been realized at the time. Worry much more about that than class action suits!
Still, once the dust settles you still have a company like Broadcom that is growing 15-20% a year with $3.6Bn in revenues and $700M in profits trading at around 18 times earnings.
I am using http://online.wsj.com/page/perfectpayday.html to track these guys and will hopefully find a time to make a “best of list”. BRCM is a very extreme case (I hope) while many companies caught in the SEC’s net will be thrown back with little real damage."
We’ve made many good plays on that group since then and we need to watch Apple and see if we may be bottoming out there as well.
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No picks into the weekend (really, I mean it this time!). Just watch for the opportunity for the DIA puts, even if we finish at the day’s high and don’t even think about getting excited until we hold all of our greedy levels.
I have 3 or 4 articles titled "Monday Moon Shot?" and all of them are followed by a "Terrible Tuesday Wrap-Up." Is the 4th time going to be a charm or are we still in the endless loop of Groundhog Day? Well the little guy didn’t see his shadow and that means we are going to have an early spring – bad news for the oil traders who are, so far, very discontent with the winter, made glorious summer by the global warming they spent so much time and effort denying.
