Consolidation Week Indicates Bulls in Control

Stock consolidated for the week following jump off lows at 1,040

The S&P 500 posted a marginal 0.46% gain for the light volume Labor Day week following the solid 3.75% jump in the prior week. Stocks started the week lower after the Wall Street Journal published an article Tuesday morning arguing that "Europe's recent 'stress tests' of the strength of major banks understated some lenders' holdings of potentially risky government debt". Markets soon shrugged off the doubts and were greeted with a drop of 27,000 in initial jobless claims on Thursday providing most of the upside price action for the week.

Futures closed near highs of the week indicating nothing but the probable continuation of the short-term bullish trend. I added back some long exposure later this week after selling about half on Tuesday's weakness. I was looking for a bit deeper retracement but alas it did not come so I was forced to pay up a bit in some names as I shifted out of my SPY holding and bulked up the individual companies I already hold. I also added some small exposure in IMAX and WFMI, two companies I have liked for a long time. They both dominate their respective niches and have substantial room to grow as they steal market share from entrenched, less innovative competitors. These initial positions are very small and will grow if my belief that last Tuesday was the buy of 2010 continues to prove itself and eventually I shift out of leaders into smaller companies. The point is far from here though, leaders have a long way to run, especially a company like AAPL which upon clearing the high end of the range at $270 should be off to the races.

The market also has a lot to prove but you never get paid waiting for full confirmation. I see a lot of technicians out there highlighting the downtrend the S&P is at but I am ignoring it. I am also ignoring the top end of this 4-month range around 1,120 because I think it will play no role now that it has been recognized by too many. Typically once it's proclaimed that stocks are in a range they break out of it.

Doctor Copper and T-bonds took some needed rest

Copper fell for the week dropping 2.8% but created no real worry of a breakdown at this point. Copper and equities have moved in tandem since the March 2009 bottom with copper leading the charge higher off every significant bottom. In this last push higher off the July lows in equities and June bottom in copper, equities have lagged. It's only an indicator and the correlation is far from 1-to-1; I believe equities can continue rallying to "catch up" even if copper sees some more downside.

30-year Treasury bond futures fell 0.8% for the week after a 1.6% drop the week prior. The flow of capital out of equity mutual funds into bond funds has been months in the running starting in May, much of the exacerbation of this trend blamed on the flash crash. The month of July saw a total outflow from equity fund over $10 billion. For the week ended September 1st, equity funds lost $9.5 billion nearly reaching the total outflows from July. Bonds funds received inflows of $6.7 billion for the week. Perhaps this large uptick in outflows is coupled with rampant pessimism and marks the final exhaustion of selling as the last of retail throws in the towel on equities. (Data from ICI)

Yellow line is regression from low to high, and extended.

Agriculture commodity rally is getting frothy

The huge moves of late in many commodity markets are becoming quite extended. Particularly, oats, corn, wheat and sugar have been in rally mode for a few months now. I highly recommend against playing any ETFs to capitalize on this trend because of contango risks. There's a bunch of agriculture ETFs (DBA, AGF, JJG, GRU) but I think investors are much better served by finding companies that will tend to benefit from higher commodity prices rather than trying to trade the underlying through ETFs. Often the returns from the underlying commodity will be much greater than businesses in the short-term but trading futures markets requires a great deal of education and management of the same contango risks ETFs face. I expect these commodities to begin dominating headlines sooner or later and "biflation" or "agflation" may become the new words of the day.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Long SPY, AAPL, IMAX, WFMI.

30-Year Breaking Down

The 10-year Treasury yield ticked over 4% today for the first time since June 2009. Bonds are seeing some selling all across the curve. The long bond broke through support after the positive jobs data on Friday gave fuel to the economic recovery camp. The TLT is seemingly quite a bit weaker than the underlying assets would indicate working well for my trade.

Disclosure: Short TLT.

Last Day of the Quarter, Bulls Still Driving

Last day of the month, last day of the quarter. What a month for shares of Apple, up 12.6% in March alone. Apple is now the third-largest company in America eclipsing Wal-Mart yesterday. The indexes are fairing well this year with the Dow up 4% YTD, S&P 4.75% and the Nasdaq 5.8%. Chinese rockstar Baidu (BIDU) is up an astounding 44.7% YTD.

The Federal Reserve ends its mortgage-backed securities purchases today. The Fed bought $1.25 trillion in junk from Fannie Mae and Freddie Mac helping to keep interest rates low. What does this spell for bonds? 30-year Treasury futures are bouncing this morning after a poor jobs report from ADP but we'll see if there's a substantial impact in the coming weeks. I don't see Armageddon but removing a major buyer from the bid probably allows rates to drift higher. I am still short a small position in TLT to feel out the market. Bonds have yet to breakdown to trigger a full size trade.

I'm still sitting in my longs of WFMI, LVS and NKE. Wish I would have sold some WFMI pre-market yesterday when it was printing $37 but oh well. I'll give a small position down to $35 just to give it time to play out. LVS is acting a bit weak but I'm giving it some extra room based on how it trades, seems to act weak and then rip out of nowhere. I'll probably give my initial position to $20. NKE is holding up, still drifting along in its flag. The out on NKE is around $72.50. All these positions are just initial feelers and are not of make-or-break sizes. I just want to be early and feel out the stocks and learn how they trade before committing real capital through breakout levels. To review the breakout levels: WFMI, $37.00; LVS, $22.50; NKE, $75.00.


Disclosure: Short TLT, Long WFMI, NKE, LVS.

30-Year Treasuries Consolidating at Support

Last week saw a strong sell-off in 30-year bonds. Lower demand at the Treasury auctions caused a relatively large spike in yields last Wednesday and further follow-through selling on Thursday. The selling brought bond futures into support at $114.24. Friday and today were lower volatility consolidation days at the low end of the range. This marks the 4th test of support and given the macroeconomic fundamentals, it seems likely that bonds could break down. I am short a small position in TLT but will consider adding upon a break of this support level.