Stock Trading: Awaiting Confirmation That The Breakout Move Has Begun

Before the last hour rally (Thursday), the DJIA index (^DJI) had declined more than 200 points, hitting a 3-month low. An unexpected rise in January retail sales failed to have any positive impact on early market action. Without the end of the session reversal, equities were on pace to the largest weekly decline since the week of October 20 due to recession concerns and uncertainty regarding the government’s stimulus and bank bail out plans.

Stocks sold off early in the afternoon, but rallied after the Obama administration reported working on a plan for the government to subsidize mortgage payments for troubled homeowners who have gone through a standardized re-appraisal and affordability test. Also on the macro-economic front, last week’s US unemployment claims fell slightly, but remain at 26-year highs. Interestingly in light of the fact I opined exactly the same in a blog in early April 2008, a Wall Street Journal forecasting survey stated that most economists now see the unemployment rate hitting 8.8% by December.

Economists also now project US GDP growth by the third quarter this year. On the other hand, a survey of CEOs by The Business Council shows that 40% of senior executives see the domestic recession lasting into 2010, though 60% see a recovery by the fourth quarter. A Fed survey yesterday revealed that average US household wealth plunged -22.7% from 2007 to October 2008.

Yesterday, the DJIA (-6.71 -0.09% to 7932.76), S&P 500 (+1.45 +0.17% to 835.19) and NASDAQ Composite (^IXIC) (+11.21 +0.73% to 1541.71) closed the session almost flat. The Canadian equity markets lifted a bit: Toronto Composite (+40.89 +0.47% to 8778.78) and Venture Board (+4.61 +0.51% to 915.87).

The net effect on the equity market was that a bit of capital was shifted out of Financials (XLF -1.3%) and into Basic Materials (XLB +1.7%), and US Treasury Bonds ($USB +0.42% to 129.28). Within the equity market industry groups, there were no remarkable moves.

In the Cara 100, the winners were led by Coca-Cola (KO +7.6% on massive +157% average volume), due largely by reporting of strong results; OptionsXpress (OXPS +5.7%); Cognizant Tech (CTSH +4.7%) and Adobe (ADBE +4.5%). Tech generally was strong, even during the periods where broad market selling was obvious. The losers were led by Manulife Financial (MFC -6.0%); Mobile TeleSystems (MBT -4.1%); and Kohls (KSS -3.7%).

In forex markets, the trade-weighted US Dollar ($USD) gained +0.39% against the Yen (-0.56% to 110.05), Euro (-0.37% to 128.59), Pound (-0.93% to 142.64) and Cdn Loonie (-0.42% to 80.34).

Crude Oil ($WTIC) futures contracts retain the large gap between the March and April for West Texas Intermediate and with the same month European Brent, proving once again that these are no longer commodity markets, but financial prices controlled by speculators and bankers. Regulatory investigation and intervention is required. The West Texas futures for March closed yesterday at 36.07, down -6.40/bbl, and are presently (6:15am ET) at 34.25. The April futures are 42.31!!!

$GOLD futures closed yesterday up +$2.56/oz at 947.06, but have been beaten down overnight. Spot prices this morning at 7:43am ET (compared to two mornings ago) for gold, palladium, platinum and silver are 938.69 (922.22); 212 (207); 1063.5 (1040); and 13.41 (13.32), respectively. The gold April futures are at 939.90. Clearly, it is gold that is being suppressed, while the rest of the precious metals complex is looking stronger.

Overnight, the Asia-Pacific equity markets were all very strong: Australia (+1.10% to 3496.7); Japan (+0.96% to 7779.4); China (+3.23% to 2320.8); Hong Kong (+2.47% to 13554.7); and India (+1.78% to 9634.7).

In equity trading on European bourses, at 7:45AM ET (vs at 6:15am in brackets), the results were: French CAC +2.38% (+2.11%); German DAX +1.56% (1.53%); and, UK FTSE +1.16% (+1.33%). The DJIA futures for March are 7949 (7943), while the S&P’s are at 837.

After Reuters reported the Obama administration is crafting a plan assisting struggling homeowners make monthly payments (subsidize mortgages), the broad markets soared nearly 4% from early afternoon lows finishing fractionally higher on the day (SPX + 0.17%). The subsidies would be contingent on the homeowner meeting “certain tests.” What are those requirements? Cast your vote-
a) homeowner was greedy, purchasing a home he/she knew was unaffordable
b) homeowner was duped by greedy mortgage broker,
c) homeowner was shrewd, knowing he/she had a free call when purchasing the house-the mortgage payment was lower than the rent paid on former residence, home prices always go higher over the long run, and no down payment was made so homeowner could mail the keys in to the bank if property values declined.
d) all honest hardworking people scrimping to make ends meet and make timely mortgage payments are chumps, willing to “subsidize” dead beats who had better things to spend money on.

The market remains mired in an extremely narrow range, prices lurching from headline to headline, whipsawing day traders at either range barrier. Eventually the path of least resistance will be known; until there is a resolution short term risk remains very high.

Technology was strong all day long as Research in Motion (RIMM) ( RIMM + 2.36%), Apple (AAPL) ( AAPL +2.53%), Google (GOOG) ( GOOG + 1.41%), Cognizant Technology (CTSH) ( CTSH + 4.69%), Qualcomm (QCOM) (QCOM +2.69%), Broadcom (BRCM) (BRCM +2.89%) and Garmin (GRMN) (GRMN + 4.13%) were bid higher even as the broad market was down over -3%, emboldening aggressive traders to push the market higher immediately after the Obama mortgage subsidy plan was reported on the wires.

Gold (GLD) (GLD + 1.04%) was higher again today, yet momentum seemed to fizzle in the afternoon as equities began to rally. A pullback would not be all that unexpected given the furious rally over the past few days, and may even be welcomed by Bulls, hoping to climb aboard this train after any pullback.

We did a little buying today, but are reluctant to commit more capital to the market until the market tips its hand. The width of the congestion triangle is approximately 260 S&P points, so the measured move allows for a 30% move in either direction. Traders need to await confirmation (velocity and volume) that the break-out move has begun, and then follow prudent risk management after initial positions are taken.

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