Thursday, July 23, 2009

Stampede

The bulls are stampeding higher on "strong" earnings. Most companies have nicely beat earnings on the back of cost cutting (ie layoffs, drop in spending). This game can continue for a little while, but for the rally and the recovery to be real, either consumer or business spending is going to have to recover.

I have mentioned that often there are key turning points in the stock market around July 17-22 (look up charts on 1981, 1982, 1987, 1990, 1998, 2001, 2002, 2007 & 2008). As I write this on July 23, the S&P is stampeding higher to 968, breaking the January & June highs. Assuming that 2009 did not have a key turning point around July 17-22, this gives the market the opportunity to ramp into the first week of August. There are a number of cycle turning points that point to a significant inflection point around that time.

I would imagine that this time window of another 2 weeks would give the market time to get to 1000, which would equate to a 50% rally from the 666 low.

I have yet to hear from any major company (especially those that beat on their earnings) that there is anything more than a minor recovery in underlying end demand. In the past 2-3 quarters, companies have been hit a double whammy of by slowing end demand by customers AND a slashing of inventory levels by these customers. In the past quarter, the slashing of the inventory has mostly ended (and even reversed in some cases due to optimism about Q3 & Q4) and the drop in end demand has stopped and stabilized.

The hope is that inventory rebuilding is indicative of a coming recovery and the stabilization of end demand (or marginal pickup due to pent-up demand) will lead to some type of recovery in final end demand in Q3 & Q4. So far, IMHO, there is no proof of this recovery in final end demand beyond a possible blip due to demand that was suppressed during the Crash of 2008.

The other interesting thing is that companies are saying that they see little or no impact from the Obama stimulus. If you are bullish, you could interpret this as a positive since that impact may be coming, but if you are bearish, you could use this point as proof that this rebound is simply part of the ebb & flow of a super bear market. Also, much of the confidence in this rally has been supposedly caused by confidence that the government has saved the economy from the abyss, as President Obama took credit for doing yesterday.

What am I doing? As I mentioned, I called an audible and sold most of my ultrashorts around S&P 890ish. Unfortunately, I have bought them all back from roughly S&P 930 to 950, meaning I am underwater on them. Presently, I am planning to hold these and put aside discipline, as I have a strong conviction that August and September are going to be very, very ugly. I have room to add to my ultrashorts (and put options) but I will wait for some clear signs that the stampede is ending (think Wile E. Coyote off a cliff) before doing so.

I suspect that a slew of discoveries in the banking sector worldwide are imminent and when the "green shoots" talk is put to rest, there will be a very quick and deep drop in confidence.

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities & puts, long gold.

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