US Stock Market: A Small Pullback Early Monday Morning?

Although the US January unemployment report was nothing to write home about, containing few positive surprises, the equity market powered ahead from the opening bell, marching higher into the close finishing with a gain of +2.69% in the S&P on impressive volume.

After starting very strongly bullish, equity traders decided to take prices broadly higher. All the major US indexes closed with solid gains for a second day in a row. The S&P 500 (^GSPC) (+22.75 +2.69% to 868.60), the DJIA (^DJI) (+217.52 +2.70% to 8280.59), and the NASDAQ Composite (^IXIC) (+45.47 +2.94% to 1591.71) denied the negative corporate and economic news of the day, again, and seized on the few positives, which was the promise of a TARP problem resolution on Monday and a Congressional approval over the weekend of the US economic stimulus plan.

The Toronto Composite (+147.04 +1.66% to 9008.02) and the Venture Board (+11.12 +1.24% to 909.34) also had solid gains for a third consecutive day. The Venture Board, an index of mostly high-risk stocks, is, as I have been reporting, particularly strong (+7.0% in the past eleven sessions). The Sao Paulo Brazil Bovespa closed Friday up +4.0% to 42755.5.

Earlier Friday, the Asia-Pacific equity markets were solidly in the green: Nikkei 225 (+1.60% to 8076.6); Hong Kong (+3.61% to 13655.0); Shanghai (+3.97% to 2181.2); Australia (+1.03% to 3407.5), and India’s Sensex BSE 30 (+2.31% to 9300.9). Australia was subdued in the light of a soaring Aussie Dollar (+3.64% against the USD on Friday).

Also on Friday, the French CAC (+1.84% to 3122.8), German DAX (+2.97% to 4644.6), and UK FTSE 100 (+1.49% to 4291.9), which had been modestly higher ahead of the US Jobs Report, also rocketed ahead to close the week on a strong note.

In NY, the leading sector were the Financials (XLF +7.5%) and Technology (XLK +3.4%), so clearly it was the Financials pulling the market higher, and the leaders in that sector were the Banks ($BKS +11.9%) and REITs ($DJR +7.3%). The laggards among the winners were the Utilities (XLU +0.6%) and Healthcare (XLV +0.8%). All sectors were winners, and the Utilities were only held back because of the energy component on Friday was a laggard.

The Big Oils ($XOI +1.8%) were held back as money flows were directed out of bonds and into depressed Financials, with traders still concerned about weak economic data that would not be kind to the energy and utility sectors.

Crude Oil ($WTIC) lost -$1.00/bbl to 40.17. There was a large gap between the March futures contracts of West Texas Intermediate and European Brent (46.21) at the close, however. This spread must be closed one way or the other.

The Goldminers ($XAU +2.3%) were also laggards on Friday as $GOLD gained ten cents only (to close the week at 914.30/oz). It’s remarkable to say that an industry that was up +2.3% on the day was a market laggard. That will likely not be the case for long, but that’s supposition on my part.

In the Cara 100, there were 96 winners, led by Brunswick Corp (BC +11.7% following Thurs’ gain of 13.2%); SanDisk (SNDK +10.4% following the previous two day’s gains of +7.8% and +7.3%); and several up over +8.0%. There was a single notable loser, which was First Solar (FSLR -2.3%).

The long Treasury Bond ($USB -0.84% to 125.84) were very weak as capital was moved into equities. Yields on the 30-, 10-, and 5-year Treasuries ended the session at 3.683, 2.979, and 1.945 percent, respectively.

The US Dollar (-0.69% to 85.34) sank against the Euro (+1.17% to 129.38), the Pound (+1.21% to 148.03) and Cdn Loonie (+1.04% to 81.98). The Yen (-0.77% to 108.85) was extremely weak against a weak USD as traders decided it was time to put capital to work in the equity market. The very weak Yen on Thursday and Friday was confirmation traders have decided to buy more risk than previously.

At the close of the week, the spot prices of gold, palladium, platinum and silver were: 909.90, 210, 998, and 13.10, respectively. Only gold is being held down at this point, but not for long. As I opined Friday morning, “But precious metal prices appear to be decoupling from the $USD trade”.

Cara 100 stocks Billiton (BHP +7.17%), Petrobras (PBR +6.05%), Potash (POT +6.15%), Deutsche Bank (DB +6.24%), Companhia Vale do Doce (RIO +8.39%), and Teck Cominco (TCK +7.14%) advanced on very heavy turnover. We would have preferred to see these moves accompanied by higher commodity prices. Crude oil (USO -2.13% on extremely heavy volume) and gold (GLD -.60%) failed to join the upside party but all in all it was a very constructive session with the S&P recapturing the 50-day moving average, closing comfortably above the 855 resistance level.

With the large sums of capital earning a zero rate of return, seeking only safety, parked in money market accounts, and monetary authorities flooding the system with cash, a torrent of buying by under-invested money managers may now be unleashed as performance anxiety demands purchases be made quickly before the market gets away from them.

We have been steadily upping our long-side exposure for the past couple days, today adding APA, XLF, HES, USO, and GG to our positions, cashing in profits on short puts in CAT and SU, while scaling back a bit in RIO after the stock had galloped ahead over +26% this week.

There are several simple ways that traders can establish long positions in stocks; the easiest being to buy the stock outright, sell puts or put spreads, buy calls or vertical call spreads, or sell puts and use the proceeds to purchase calls. Although many factors need to be considered it really boils down to (i) how risk averse are you, (ii) how generally bullish of the overall market are you at the present time, and (iii) when do you think the advance, if it’s to happen, will begin?

When stocks are declining or going sideways the best course of action usually involves the sale of out-of-the-money puts, going deeper out of the money the more risk averse or generally less relatively bullish you are. You expect an advance to occur, but the market action is telling you to wait for confirmation before becoming more aggressive. We sold a lot of puts recently because we believed stocks had entered value areas, but, since we are risk managers ahead of all else, we held back more aggressive trading until stocks cleared resistance. Now that this has occurred we have closed out our put positions at a profit, and are shifting to a more a aggressive stance by purchasing stock and calls. You have observed this process by following the write-up here.

We have been painstakingly transparent in these commentaries to help readers learn about the art of trading and the day-to-day management of risk. Eventually, these types of detailed reports will be available mainly for our clients, and we will provide a more general commentary for the Cara Community in order to help you establish markers for important decisions.

Because of gap openings and imperfect markets, as well as our own human deficiencies, none of us will be gaining the maximum upside in moves like Friday’s +2.7% lift in the US equity market, while eliminating all of the losses on losing days. None of us would have captured the full extent of Friday’s +11.9% gain in the Banks, while avoiding the losses or under-performers elsewhere in the market. None of us are perfect. But, perfection is not expected and not necessary. A net net gain (ie, exclusive of fees and commissions) of one-tenth of one percent each day, on average, will produce remarkable annual returns on capital. The ability to do that is the mark of a successful trader.

For next week, we think that ideally there would be a small pullback early Monday morning to be the pause that refreshes. Then the Bulls might press their bets, targeting the 913 area on the S&P. Gold was curiously quiet Friday and is perhaps awaiting details from the Geithner speech at noon ET on Monday before testing upside resistance around 930. Overcoming this level could see some real fireworks on the upside, and we will consider multiple call purchases, and much more cash invested, if this scenario unfolds.

Yes, as a blogger, I am aggressive and usually early; as a professional trader, I am risk-averse and often late. It’s horses for courses as they say. In any case, I try to be professional.

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