For trading, not eating!

“If I had to characterize the market in 2015, I would call it a ‘trading sardine market’ not an ‘eating sardine market’.”

... Doug Kass, captain of Seabreeze Partners

My friend, pal, buddy, Dougie Kass issued the above quip from his perch in Palm Beach over a week ago that reminded me of something I wrote about years ago. I like this story:

“While gold was first discovered in Alaska during the 1870s, the 1890s have come to be known as the Yukon-Klondike Gold Rush days, as thousands of rugged individuals swarmed to the northern climes to find fortune and glory. Unsurprisingly, during the winter of 1896-97 the Alaskan ports were frozen solid and therefore closed to all shipping traffic. Food became very scarce and very expensive since new supplies had to be brought in over land at great hardship. Reportedly, a can of sardines that had cost $0.10 in New York could be priced at 10 times that amount by the time it reached the gold miners in Alaska. Still, there was great demand even at such inflated prices. For instance, in one remote mining town the price of a can of sardines was sold at rapidly escalating prices from $10.00, to $30.00, then $50.00. Finally, one desperately hungry miner paid $100.00 for a can of the highly sought after sardines. He took it back to his room to eat. He opened it. To his amazement he discovered the sardines were rotten. Angered, he found the person who sold him the tin and confronted him with the rotten evidence. The seller was amazed and shouted, ‘You mean you actually opened that can of sardines? You fool; those were trading sardines, NOT eating sardines!

... Anonymous

Trading sardines indeed, except I have seen a lot of folks attempting to trade this market over the past few months all to no avail. What has typically happened is that one day they are able to make some money, but the next day they give that profit back. Dougie even tweeted on this by noting, “The market has no memory day to day!” I have not gone back and counted, but my sense is that over 50% of this year’s sessions have seen 100 point daily swings in the D-J Industrials (INDU/18024.06) with one day being up and the next day being down. If you can trade that successfully, you are a better trader than I am, which is why I have not attempted to trade this market all year. Clearly, sometimes me sits and thinks, and sometimes me just sits! As my friends at the sagacious Bespoke organization wrote Friday morning:

“As of yesterday’s close, the S&P 500 has essentially not changed since the closes on: 4/17, 3/30, 2/12, and 12/24. What’s more, 19 of the 88 trading days since 12/23 have seen a tick that included yesterday’s closing price. US equities are on a treadmill thus far in 2015, with year-to-date gains of 1.3% for the S&P 500 hiding a very persistent sideways move that looks to be resolving into an ascending wedge (chart 1). While this is classically a bearish formation, we are less certain that it must resolve to the downside. However, do expect a relatively large move in either direction when the wedge does break, with a break of the 200-DMA entirely possible should the bears take control.”

Speaking to the rising wedge chart formation, writes:

“The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs, and higher lows, keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out and lower prices are likely. There are no measuring techniques to estimate the decline – other aspects of technical analysis should be employed to forecast price targets.”

While I continue to think there will be a decisive breakout to the upside, participants should continue to wait for that event to occur before becoming too aggressive on the long side. One place where I have been pretty aggressive is crude oil, having stated months ago, “I think crude oil has bottomed.” At the time I mentioned that Columbia Management’s David King, portfolio manager for a number of funds, told me, “You are getting a once in a lifetime opportunity to buy the ‘busted debt’ of some of these small energy companies at fifty cents on the dollar, and if said debt is money good, you are going to get equity like returns.” In lieu of buying the debt I also mentioned you could buy one of his funds. Obviously crude oil prices are up substantially since that “bottoming call,” which has left the largest S&P energy stocks all overbought by my work. Accordingly, I would currently tread softly in the energy space. As a sidebar, I did see that U.S. crude oil output FELL in March for the first time since January.

With the energy space overbought, I have to put together my potential “shopping list” using other strategies. One such strategy is to look at favorably rated stocks from our fundamental research analysts that also screen positively on select algorithms and are near their 52-week lows. That hopefully takes some of the downside price risk out of the equation. A few names fitting these criteria include: GATX (GMT/$55.42/Outperform), Johnson & Johnson (JNJ/$100.13/Outperform), Kansas City Southern (KSU/$103.70/Strong Buy), and Praxair (PX/$122.75/Strong Buy). Another strategy is to look at the D-J Industrials stocks that are oversold. While there are 11 of the 30 Dow components that are near-term oversold, only two of those have a rating from our analysts. They are: UnitedHealth (UNH/$113.20/Strong Buy) and Walmart (WMT/$78.60/ Outperform).

Finally, and since it is earnings season where companies beating their respective estimates fell by 4 points week-over-week to 62.5% from 66.5%, it is still worth considering “triple plays” (companies beating earnings and revenue estimates and guiding forward earnings estimates higher). In addition to the “triple plays” mentioned in last Monday’s report are these from last week’s earnings reports: BioMed Realty (BMR/$20.65/Outperform) and GoPro (GPRO/$49.98/Outperform). I suggest making your potential “buy lists” accordingly.

The call for this week: On Thursday the S&P 500 (SPX/2108.29) closed below the 2090 – 2100 zone that I had thought would contain the downside. In Friday’sMorning Tack I wrote, “As for the here and now, I think yesterday (last Thursday) was a false breakdown.” There is a full charge of internal energy in the equity markets and if they can finally achieve a decisive upside breakout above 2120, there should be a rally that will surprise everyone.

© Raymond James

© Raymond James

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