Market Update ~ market folly

Thursday, September 18, 2008

Market Update

Wanted to take a second to post up a few things I'm seeing in the market and around the financial blogosphere. Firstly, Apple (AAPL) has reached its second major level of $120. Earlier, I wrote about AAPL at a critical juncture when it was trading $150. If you caught the break to the downside, you made a quick and easy 30 points. Now, I want to put it on your radar screens again as it has reached an even more important support level of $120. You can buy the dip and stop out below the lows of $115, or whatever your rules say about placing stops. The market is extremely oversold and the fear indicators are starting to head higher. But, that's not to say we can't go even lower. I'd say try to play AAPL from the long side here. But, if it takes out your stop, swing it to the shortside because AAPL will have violated a major support level. The technicals are really your only guide to the market right now as fundamentals and logic have been thrown out the window a long time ago.

(click to enlarge)

Secondly, I want to again highlight the great work my man Stewie is doing over on his site. In addition to the fear indicators I wrote about yesterday, he's got an update posted today, comparing fear levels to the last bear market we saw in 2002. As you can see from the chart, tradeable bottoms have been put in when the VXO has hit 50 or so. And, as he effectively points out, the VXO can get as high as 50 on numerous occassions. So, don't necessarily expect this to be our only trip to levels this high as the credit crisis and lagging economy continue to play out. Addditionally, he points out that the 52 week low list is now extreeeemely long. Check it out.
(click to enlarge)

Thirdly, I want to point out an opportunity in Natural Gas (UNG). Commodities have been hit hard, we all know that. But, with the chart sitting where it is, I think its worth a play here because it offers some solid risk/reward and a very clearly defined stop. Plus, I still think natural gas is poised to benefit in the future as I wrote about in my piece about how to play energy for the intermediate and longer term. The Pickens Plan has been gaining ground and even if it does not succeed, it certainly has helped at least raise awareness about natural gas as an alternative. Turning to the chart (brought to my attention by Steve Puri), we see a very clear level of support at $33 in the United States Natural Gas fund (UNG). Now, in the past, I've stated that there is no such thing as a triple bottom. So, we'll see if that statement holds true as this will be the 3rd time UNG has tested support in the $33 region. The horizontal line drawn below represents your line in the sand. If it stays above the line, you get long. If it breaks the line to the downside, its time to get short. The market is crazy right now so make sure you use a tight stop whichever way you decide to play it.
(click to enlarge)

Lastly, I want to point out an excellent study by Rob Hanna over at Quantifiable Edges. Basically, he's looked at huge market selloffs/tradeable bottoms in order to identify which names typically benefit the most from the rally that results from the tradeable bottom. And, since I feel we're getting closer to that event, I thought it was relative to point out. Rob has noted that basically, the stocks/sectors that held up the most in the downturn typically do not benefit the most in the ensuing rally. His study from the January selloff/bounce indicates that names which survived the selloff such as Walmart (WMT) or Johnson and Johnson (JNJ) only rallied modestly in the ensuing bounce. But, as he points out, names/sectors that were beaten down hard such as Home Depot (HD) and General Motors (GM) rallied substantially when the time came. Now, that's not to say that the consumer staples like WMT and JNJ didn't rally as well, because they did. But, in the context of the rally, they underperformed. So, simply put, think of it as a role reversal. Once the market capitulates and then rallies, the past underperformers become the outperformers and the previous outperformers now become the laggards. Make sense? I highly recommend checking out Rob's January study here and follow up here.

Sources: Stewie, Steve Puri, & Quantifiable Edges

blog comments powered by Disqus