Monday, April 18, 2011

OOPS China Did It Again

That's the 4th Reserve Requirement Ratio hike for the PboC for 2011, as predicted they keep coming hot and heavy as China's Real Estate market is looking like ours circa 2007-another reason I'm not a fan of China-inflation there is running high and the Chinese tend to put out what they want as far as economic reports so it could be a lot worse then what we're being told. Dow futures are off 24 points in screen trade the last I looked, most likely digesting the PBoC rate hike, but as always, a lot can happen overnight and especially in the a.m. as we have a pretty heavy load of companies reporting pre-market.

I've picked 5 companies this earnings season and have hit them all, several seasons ago I decided to show readers how often earnings were leaked. I picked 22 stocks, 20 were correct. The thing though is I looked at probably well over 100 companies, and only decided on 22, that's because I'm looking for overwhelming evidence of a leak, I have no interest in trying to guess or seeing what I think "might" be good enough to call earnings. However, with the companies reporting pre-market, I had to take a look. I'll preface this by saying, I wouldn't pick any as earnings plays, but I will give you the general bias I feel is most likely on them as they do have the capability to influence the market, or at least the open.

AMTD-negative bias
C- surprisingly positive bias
GWW-negative bias
HAL-very little clarity, but leaning positive
LLY surprisingly negative bias
MMR-no opinion

So we have a mixed bag here. I'd guess C would be the fulcrum, unless the theme becomes “inflationary margin squeezes”, then a bad report from GWW that talks about rising costs could be a problem.

As for the market, going into Friday it looked like a distribution cycle had begun in the DIA/SPY. Understand however, distribution occurs into rising prices and we've only had 2 days up, that's a pretty short cycle. The other consideration is that it seems to me that reversals (in this case a downside reversal) is preceded by a false breakout about 85% of the time. An argument could be made that the SPY/DIA both filled the April 12th gap and then some, but in my opinion it's not a very strong argument as the market typically has these over-reactive moves. The IWM, unlike the others does have an identifiable accumulation cycle that kicked off the move up on Thursday/Friday. If anything, the IWM is the one I think looks the strongest right now, which is interesting because I mentioned last week the beating large caps were taking in after hours.

I need to think about as many scenarios as possible, there are a lot. Another one worth mentioning is the earnings season thus far has kind of been a bomb. Since we've been able to call 5 of the major earnings, it would seem that the market would be aware of this, except possibly in the case of GOOG which had a very strong and late day round of distribution just an hour before they missed, so that one I still wonder if it was a media embargoed report that was leaked late in the day. I think I've mentioned this before, but what's been interesting is the market's lack of reaction to these bad earnings, after all, it was up Thursday and Friday. I have also stated (a very good example was oil's lack of reaction during the escalating problems in Egypt) that I believe once the market puts a cycle into play, they are not going to let that cycle fail, they may choose to rethink the next cycle to reflect events, but I believe they intend to see them through. When they've started a cycle, I'd think billions of dollars go into accumulating, so it's no small thing to let one fail and that may very well be the reason that we aren't seeing the reaction we used to see on bad earnings. With the lack of volume and market participants, the market HAS CHANGED and they play the game differently. I can remember not so long ago when a bad report from the likes of a GOOG would send the market plummeting, now it just kind of keeps tip-toeing past these events.

Oh, one last thing I've mentioned, there's also the possibility (especially in the market where bad is good and good is bad) that they could be taking the market up a bit precisely because of the bad earnings. Because the market liquidity and structure is so different then say 3 years ago, the game is played differently as the income is coming from different sources now with less retail in the market. So the point would be this, to set up a short on the market, they'd need some strength to short into. They don't make their money going short a falling market, they short strength and make their money in the falling market. The question becomes, how long can you keep a market up with bad news coming in from every corner of the globe? In any case the cycle of distribution looks like it's underway already, it started pretty quickly, but we are not yet to the 15 min chart where the reversals become very likely, however, with the speed seen in the market on Friday and more impressively, how quickly this occurred in a huge stock like GOOG, suggests the possibility for a shortened cycle. It use to take a week to hit a 15 min chart, now it can happen in a day.

Friday I mentioned the very real possibility of the EU imploding over the lack of consensus toward expanding their bailout facility, which Portugal should eat up whatever is left "IF" they get a bailout. The German people aren't electing anyone who supports an expanded bailout facility and a nasty message was sent to the Greeks and the other PIIGS when no one showed up to save the day on a badly failed auction in Greece. The EU has either decided to let Greece fail or is letting Greece sweat it out to send a message.

The Euro on opening FX trade, has continued the slide started on Friday and why? It seems it's not just the Germans who have had enough of bailing out other countries in the EU, Finland's parliamentary elections gave the True Finns party a huge boost and they may have enough pull to veto the Portuguese bailout. Remember why I was talking about the importance of all of this, the EU's structure has made it exceptionally vulnerable to the “domino effect”, just think about it, it wasn't even a year ago that Greece got their bailout, since then the Irish who were quite adamant that they didn't need a bailout had to seek one and now we are at Portugal with Greece already in default of their bailout terms. The big problem becomes Spain and Italy. So what we end up with is a very nasty recession in Europe and then you have that whole “Butterfly flaps it's wings in...” and you get a world outlook that is exceptionally bleak. And we haven't even covered the 3rd largest economy in the world, Japan or one of the most politically, geographically, religious, makeovers of an entire region in the trouble in the Middle East and North Africa which is making its way down the coast and further south in Africa and further north and east in the Middle East. I don't know how I went from Monday morning to “World Outlook”, but it's all relevant.

See you in the a.m.




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