Stocks To Look Out For In The Week Ahead

After Friday’s low volume rally, we find ourselves with a rather unclear technical picture. The DIA (DIA) chart gives us a good representation, and demonstrates the decreasing volume on Friday. While a continuation rally seems likely on Monday, the overall picture looks bearish to me. But I am not leaning too far in either direction right now.

In the absence of clear signals, I am working under the assumption that we are in a broad trading range. If we do not break the lows, there will be some good buying opportunities in the energy and commodity sectors in particular, but we need to see some volume come into the market. Bespoke Investments posted a useful list of Friday of the S&P Stocks furthest above consensus price targets. The list is based on analyst recommendations, so some skepticism is justified. However, we can see that energy and materials are well-represented, which seems logical.

Looking forward to Monday, I do not have any particular prediction as to market direction. I do have a watchlist of long and short picks. First the long side:

- (FXI) was up almost 13% on increasing volume on Friday, and will be high on my list if we see some more conviction from the buyers.

- (RTP) rallied with volume on Friday.

- (LXU) gained 13% on heavy volume after Thursday’s earnings report, and has formed a nice base.

- (ATHR) broke out on high volume after earnings on 10/27, and has pulled back on low volume to its prior breakout point.

Some ideas for possible short sales:

- (VMC) sold off after earnings last week, and retraced on low volume on Friday. Price faces resistance around 60.00.

- (MLM) has significant resistance near 99.00.

- (RPM) had a huge increase in volume without a break higher during the last two weeks, and looks unable to break through resistance.

- (MATW) faces considerable resistance around 45.75.

- (MLI) on Friday rose on low volume to just below the declining 50 day moving average. Price faces another layer of resistance around 25.00.

The Big Picture has some good content up over the weekend. First is a link to this article in the New York Times, How the Thundering Herd Faltered and Fell:

While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives - like those that Merrill used - transformed a financial brush fire into a conflagration.

As subprime lenders began toppling after record waves of homeowners defaulted on their mortgages, Merrill was left with $71 billion of eroding mortgage exotica on its books and billions in losses.

Also, the AIG saga continues:

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

…The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

Some good reporting on credit default swaps by NPR. Includes transcript and audio.

“I think Mae West said it very, very well when she said, ‘I used to be Snow White, but I drifted,’ ” says Satyajit Das, a risk consultant who was around when credit default swaps first appeared.

For 30 years, he has worked with hedge funds and bankers all over the world as a sort of a financial hired gun. He saw first hand how what started as insurance morphed into something else entirely. In the 1990s, he says, he was a fan of credit default swaps.

“But by about 2003-2004, I was starting to get nervous,” Das says. “I could see the market had gone from a very legitimate purpose to something which was much more racy and interesting but also much more dangerous.”

He says along the way, it stopped being insurance.

Brad Setser discusses Federal Reserve and IMF moves to support emerging markets:

…it has been fashionable to argue that the crisis would increase China’s financial influence - as China sits on a ton of foreign exchange and potentially offered an alternative source of foreign currency liquidity. Indeed, China seems keen on doing a deal with Russia that would help Russian state-owned energy firms raise foreign exchange to help cover their maturing external debts - and the in the process, help reduce the drain on the government of Russia’s foreign exchange reserves.

But so far the crisis hasn’t had that effect - in part because the US and Europe have moved quickly (by the standards of governments) to help a broad range of countries meet their foreign currency needs. That was driven first and foremost by the needs of the emerging economies - and the ripple effect their deepening trouble would have on the US and Europe. But I wonder if the possibility that institutions like the IMF could be bypassed if they didn’t respond more quickly and creatively than in the past didn’t help to spur the recent set of policy changes. Those in the IMF’s Executive Board who normally would object to unconditional lending didn’t block the new short-term lending facility - perhaps at least in part because of recognition that the IMF potentially isn’t the only game in town (or in the world).

The Wall Street Journal reports today on China’s estimated $586 billion stimulus plan. See FXI chart above. Also note that China’s stimulus will likely have long-term benefits for their economy in terms of additional infrastructure. Contrast the US government’s planned $100 billion stimulus under consideration, and hundreds of billions handed out to Wall Street and companies like AIG. Certainly the circumstances in each country are very different, but it will nonetheless be interesting to see the future results of these differing policy approaches.

Mr. Wang said that based on recent trends and without a policy response, China could have seen 5% to 6% growth next year. With the stimulus measures — including previous moves to cut interest rates and end caps on bank lending — he said China now has good odds of achieving the 8% to 9% growth in 2009 that officials still say they expect.

Foreign suppliers of metals and machinery for infrastructure construction and companies that target Chinese consumers will be closely watching the effects of the stimulus program.

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