Saturday, June 21, 2008

The Psychology Driving the Upcoming Week's Market

Good day to all our new readers, but especially our loyal supporters in no fewer than 88 countries. The Psychology of the Call team (POTC) hopes you are learning the fascinating dynamics of market mechanics and how psychology affects the ebb and flow of prices/money. POTC remains bearish, and we trust many of you lost less money than the average investor/trader, and hopefully made money on our recommendation of buying Nasdaq E-mini puts two weeks ago in a Sunday night piece titled 'Apple Optimists Need Not Apply'. Don't forget our mention of the Nasdaq gap at 2,300, we reiterate that point. Now, take a deep breath and read on...

POTC finds it very interesting that Canada's pride and joy, Research in Motion Ltd. (RIMM), reports Wednesday after the market. Perhaps this aids in closing that Nasdaq 2,300 gap?
Quick Psychological Financial Fusion: IF crude oil fails to break down into the $120s, we urge our readers to steer clear of RIMM ahead of their report, as the negative macro factors outweigh the positives. We are confident RIMM will not have an upbeat call, even though their numbers can better the estimates. High energy prices crimp discretionary spending, and now we have Midwest flooding and a Treasury market turn, therefore we add another negative to the list. The past sell off (rising yields) in Treasuries has stopped, forcing us to switch Treasuries from the positive to negative column.

Also, we're adding the mounting tensions of geo-political factors surrounding Israel/Iran, as well as the Nigerian turmoil:
The positives remain:
1) Election year;
2) GDP fails to signal recession;
3) Extreme pessimism in the Michigan Consumer sentiment (contrarian indicator eventually).

However we feel the positives are outweighed by the negatives:
1) Rising Unemployment;
2) Crude oil fails to break down;
3) Rising food prices (Midwest flooding);
4) Recent Treasury market strength (lower yields/flight to safety);

5) Israeli/Iranian and Nigerian tensions;
6) Hurricane season of 2008 looms;
7) NASDAQ gap at 2,300;
8) Weak greenback;
9) Uncertainty surrounding the June 25th FOMC decision and future policy.

As you see, the negatives vs. the positives are 9-3, approaching extreme fallout and long/bullish opportunities ahead. Fasten your seat belts, as we already did.(
The bearish thesis cannot change to bullish just yet, and for good reason(s).
In our last weekend psychology piece, we informed you: "it makes more sense to short the bounces than to go long." And we hope many of our return supporters acted on that advice.

POTC will continue to expose CNBC's Jim Cramer as a destructive monolithic bull. We strongly feel he has single handedly ruined many investors and traders alike. He gets a letter grade of D+ for his mantra: "there's always a bull market somewhere". POTC has stated before, and we'll state it again, sometimes the markets invert/sell off so hard and fast, that "the only bull market is called the bond market." Has Jim Cramer ever recommended a single bond or informed viewers how he made money shorting stocks on CNBC? We haven't seen any evidence. Our eighth Commandment says: ‘There are two sides to the market, long and short, take advantage of that leverage.’

POTC is not in business to make enemies, only to educate and inform our supporters of the truth about market mechanics, so if we offended anyone, we apologize. Jim Cramer should be ashamed of his monolithic thesis on the "bull market". Please read our piece on him from two weeks ago, as he stated the market was going through a "small correction". Has he apologized?

The chart below depicts short interest psychology on the NYSE since 1990. Most short interest is hedge fund driven, a normal and efficient market phenomenon. After Friday's close, the NYSE released its mid-month short interest report. Since the end of May, short interest increased by > 7%, marking the third time this year short interest increased by > 5%!

Please note the two sectors the hedge funds have locked their teeth into, regional banks and consumer discretionary goods. They are obviously betting on oil staying above $120/barrel (bad for consumer discretionary). They also see the credit crisis in banking/real estate to continue (bad for financials, especially regional banks with direct credit exposure):

The $64,000 question is whether these shorts will cover in the coming weeks, especially if the FOMC leaves rates unchanged, or will they wait for bankruptcies in hopes the FOMC raises rates and delivers the last crushing blow.

Herein the conundrum/dislocation lies: as the FOMC raises rates, the greenback should be strengthened, therefore potentially bursting the inflation of crude oil and food.
Do any of our readers feel it makes better sense studying long positions in consumer discretionary goods today; we do. But we urge our readers to NOT pick from any on this short list, as there are stronger names that will respond more favorably IF crude breaks down, and we feel it will. Please understand hedge funds also short specific stocks due to the micro economics surrounding that specific company. But, when a sector is so heavily shorted, it weighs on the gems in that sector. Value is to be found in consumer discretionary names in our opinion, especially after the market sells off in climactic fashion. Consider companies like Coca-Cola Co. (KO). Consider a limit buy at $52, with a stop sell of $49, and a potential profit target to $65, or 20%. That type of trade set up will rarely hurt you compared to the buy and hold mentality. The buy and hold days are long gone in today's dynamic global market. Our readers must learn to exhibit greater patience, as setting up entry and exit points is critical to long term success.

The volatility (VIX) is still not signaling the fear we need to begin going long. Please wait as POTC has written before, "until after the July 4th fireworks." Realize "patience" is the key to your success, NOT relying on monolithic/one sided talking heads like Jim Cramer, or forcing trades. Allow market forces to shake out all the long market speculators, and only then the shorts are left to ironically drive the market higher. POTC embraces the freedom of markets, and none is more relevant than the ability to sell short and then be forced to eventually buy back at lower or higher prices. Shorting is a double edged sword, and today’s shorts have the longs squarely in their guillotines. Stay clear until the heavy death spike down occurs; only then will the dust settle and a boring market evolve. POTC did warn our readers in previous articles that market bottoms are formed when a boring/complacent psychology sets in and we’re not there yet. Attempting to time the bottom usually turns out to be ruinous. Allow market mechanics to take their toll and the blood letting to stop.

Nigerian terrorists attack oil pipeline:

Israeli's military test run:

After touching the $131 levels on Thursday, crude may have seen its final run up. IF crude breaks into the $120s June 23-27, the equity market will breathe a sigh of relief, and long positions will be rewarded. Here's a chart; you decide:

Crude oil continues to hold the markets hostage. Never before have so many experts been so confused, afraid, and in denial that bear markets are a normal cyclical phenomenon. Please recall our piece that addressed avoiding the financial sector months ago. The first link is to a post that presages the Bear Stearns disaster:



Many experts were calling a bottom in financials in March and April; now we know they were wrong. POTC felt and continues to feel the banking regulations ahead, especially for Investment Banks, are beginning to be reflected in prices, but it's not over on in many cases. Avoiding all financials today makes sense. The drumbeats surrounding government oversight and regulations, coupled with higher rates, make buying any financial stock today rather foolish in our opinion. Don't be fooled by today's P/Es or any forward-looking P/E estimate, as earnings ahead are too difficult to peg.

Raising the fed funds rate wields the bloodiest hammer to financial sector stocks, as they make and lose money based on the yield curve and expansion of credit. Cheap money (low fed funds rates), in theory, causes loan demand and business development to expand, so when the FOMC raises rates, the financial and business sector will be ball and chained.

In our opinion, the conundrum and market dislocations are 70% to blame on high energy and food prices, and 30% to blame on credit/real estate woes. Quick Psychological Fusion: Some argue the weak greenback is the culprit of both problems: we somewhat agree, although we are more concerned with the psychological fall out of a rate hike and oil prices not backing off as the greenback fails to strengthen. Although that is a doom and gloom type of argument, we want our readers to understand all possible angles.

POTC sees no reason to go long stocks just yet, unless you are a seasoned trader that understands trading volatility. Trading volatility is an inexact science that can make you millions of dollars, but you must be disciplined in taking profits as well as losses, never falling in love with any stock or position. Our fifth Commandment of Trading bears that out in black and white.

We are deeply grateful to all our loyal return supporters, especially the ones who have helped us spread the blog by printing, emailing, copying, pasting, and Facebooking to family and friends. POTC will give timely intraday updates everyday this week, but especially monitoring these three things:
1) Price of Crude;
2) The FOMC decision Wednesday at 2:15pm ET;
3) Canada's pride and joy, RIMM's earnings Wednesday after market close;

Here's to patience and trading volatility, or just waiting for the climactic bottom to occur, the Psychology of the Call team leaves you with this relief/survival video:


Anonymous said...

I like Jim Cramer, but your blog is better than his.

Anonymous said...

If you guy's are going to start taking money for this that makes sense but I don't know if I'll join in. I've been reading since mid-April and the psyhcology of the week is great but I don't know if I can join. How much are you going to charge? How much for the alerts?

Anonymous said...

We respect your opinion. Our fees will be in the range of the blogs that have been bullish since March. We have chosen to take a defensive posture and we trust many of our loyal return readers are satisfied/grateful for our analysis. Please understand the markets are dynamic, and POTC has been bearish since before the Bear Stearns fall out. Comments welcome