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First, if anyone bought FRX, SNPS, TRAD, or OXPS based on My September article, take the probable 10% gain you have and prepare for a pullback.
I was prepared for a weak September, but the result was exactly the opposite. Depending on how the market settles, this article was written a week before the end of the month, this September may be the best September on record. Historically, September has been a weak month, but it was surprisingly strong this time. Does this mean the Economy is better?
The answer is NO. The Economy is actually no different in September – October than it was in months prior. Some fears have subsided, that is all. This initially brought relief from the ‘double dip’ concerns, but the problems are not over. The low volume bearish environment in August built a wall of worry that seemed hard to argue with then, and many of those concerns still exist. The second half of 2010 will be weaker than the first, the easy money has been made, and the economy still faces serious challenges. Aside from perception, nothing has really changed. We knew all of this before.
In fact, although the gut reaction to a lessened immediate fear proved exceptional for the market, it also has presented an opportunity to short again. If the Economy has hit a brick wall, if GDP is flat, and real growth is hard to produce, we can only expect earnings growth to decay soon as well. In fact, Adobe (ADBE) has already issued a warning to that regard, and AMD and INTC have too. I expect warnings or bad results from financial institutions like BAC, WFC, and C this quarter as well. The financials hold a deteriorating asset in real estate; they also are faced with substantially reduced revenue streams as fee opportunities become limited.
The theme this earnings season is likely to be the lack of real growth. If cost cutting still adds to the bottom line, I will be surprised, but it will not matter to the Street anyway. Wall Street wants to see real growth from here, or at least opportunities for the same. If GDP is basically flat, and expected to stay that way for some time, future earnings growth expectations will come down. This can be true even without a double dip, but a double dip will make it much worse.
Therefore, as initially appealing as this September was, it was only a relief rally. The concerns are not over, but instead the concerns are likely to mount again soon. Therefore, it is time to go to cash, and consider the short side of this market.
Technically, at the time this article was written, resistance lines were being tested (see chart). As always, we need to remain in control of our risk, so executing based on this test of resistance, near the resistance line, provides us both with the greatest potential reward if a decline to support occurs, and a tight risk control in case resistance breaks higher too. Assuming resistance holds, I have recommended TWM, SRS, SKF, and SDS to my clients at this resistance level. I am not recommending these short-based ETFs in the middle of this channel, but only near the resistance line. Otherwise, risk spreads widen. If resistance holds, I am expecting close to 1060 in the S&P. Upside targets after 1060, or if resistance breaks higher now, have been provided and will be updated in the next article.
The recommendations made in this article may have already been provided to clients of Stock Traders Daily and acted upon by Thomas H. Kee Jr. on behalf of the professionally managed accounts he controls. Consult your financial advisor before making any trades. You can lose money trading stocks.
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