Traders Edge 8/1/12

Today is Fed announcement day. The market has opened up, but I would expect mainly flat performance until the Fed announces the outcome of their July/August meeting. I maintain the belief that the market run is failing and that we will retest the June swing point, closing the gap at or below $130 price level on the SPY.

I continue to believe that Fed WILL pursue further quantitative easing programs in the future. However, it is unlikely that the future is today. Monetary supply continues to show growth while market performance remains in the positive territory on a year-over-year basis, suggesting no to little change in monetary stimulus actions. Employment, which has been a key flash point to investors, as it is a part of the Fed's dual mandate, continues to gain. Albeit painfully slow. We find it unlikely that the Fed will move until slowing growth becomes outright declines in monetary supply, the market and employment. Add to this is the uncertainty created with rising food and energy prices, which are likely to add to inflation later in the year.the prospect of higher inflation may force the Fed into a wait-and-see attitude.

One last note on gauging the likelihood of an expansion of monetary stimulus, the precious metals and precious metal stocks- investments sensitive to changes in monetary supply and interest rates- are getting hammered in A.M. trading. The Phily Gold/Silver Index (ticker XAU) is down more than 2% while the market Vectors Gold Miner ETF (ticker GDX) is down about 3%. See the charts below.

The GDX's decline is on particularly heavy volume. Either the operators are acting to get in ahead of a monetary action by the Fed or investors are getting out ahead of no action. I think you know what I think.

Dropping the "we" veneer

It feels a little strange, but I am dropping the "we" veneer. For most of my career, I have written in the plural "we" versus the singular "I", having worked on both the buy side and sell side in the investment management industry and tasked with presenting the company's ideas before my own. Hence, the we veneer. It felt easy and free to write in the plural, as an extension of the way I have typically operated.

However, one cannot grow without change. I wanted to liberate myself from that shackle and present my ideas, opinions, and recommendations without any pretense. Hopefully, positive change will follow. 

With that said, I do have some plans (grandiose and small) for this blog and you will see many things tried. I hope you find my opinions compelling and thought provoking.

Have a Great Trading Day,

M.Christy.

Drought leading to higher energy prices as well higher food prices

Interesting, in a world where fracking is leading incremental energy growth, a lack of water is resulting in to reduced production or oil and gas. Not only will this drought lead to higher food prices world wide, it may also boost our energy bills.

Traders Edge 7/31/12- Revenge of Risk Off.

The "Risk On" trade that began with Draghi stating that the ECB will do whatever it takes to save the Euro is likely to fail. The SPY just could not get things going following Friday's rally and it closed essentially flat in yesterday's trading. The ETF is trading up into the May 4 swing point on volume of only 106.8 million versus 193.3 million shares on the May downdraft. This is not enough and suggests that the rally will fail.

The rally that began off the June 1 low has not been confirmed by the stochastics, RSI, or MACD. All these measures suggests that momentum and upside strength is weakening. Couple this technical outlook with the fundamental backdrop of a weak economic environment, slowing earnings growth, revenue results that are missing forecasts, and a market rallying on the hope of a Fed easing event (which we do not see) leads us to conclude that the market is near a short-term top and that the high volume low on May 18 (a $129 price point) may be tested.

We also see confirmation of this view in the currency markets. The pullback in the UUP has occurred on lighter volume while the MACD remains positive, suggesting that the recent pullback is just a pause. As for the Euro, the CurrencyShares Euro Trust ETF (ticker FXE) rally attempt appears to have failed. The MACD remains in a negative range and the July 27th rally attempt broke down as it retested the May 30 resistance level, which is plainly seen in the Intraday chart below.

To us, this suggests the "risk on" trade will end shortly. Our shorts are still on, are yours?

Maybe time to take another run at ACI

Just a quick note on the ACI (disclosure- we own shares of ACI in our portfolios.), we thought we would highlight the shares as not only offering a great long-term entry point, but possibly a short-term opportunity as well. Shares gained 29% in Friday's trading on both better-than-expected earnings and short covering. Today, the shares caught on upgrade from Sterne Agee and are trading up in the pre-open market.

ACI's share price appears to be stabilizing and have closed at the trend line established since February. A close above this level on volume could suggest the shares move into the swing point around $10 per share. A nearly 40% gain from current trading levels. 

Traders Edge 7/30/12-Let the good times coal

It appears the good-time feelings in coal investors is set to roll again, following through on Friday's extraordinary gains. On Friday, shares of Arch coal (ticker ACI) led the charge, gaining more than 29%, a result of better-than-expected earnings and short-covering. Other companies in the space saw their shares rise in response to the euphoria, as the stock of Alpha Natural Resources (ticker ANR) gained 20%, Peabody Energy (ticker BTU) up 6%, shares of Walter Energy improved 5.6%, and the Market Vectors Coal ETF (ticker KOL) increased 4%. Today, ACI caught an upgrade from Sterne Agee on cost cutting, better thermal coal competitiveness, and valuation. The rest of coal industry looks to be reacting positively to the upgrade in the pre-open trading.

Look ahead, we continue to think that coal stocks offer an attractive long-term buying opportunity. We see the improving thermal coal economics as providing a catalyst to shares short-term and helping shares stabilize in or around current levels. Coal companies with a higher percentage of thermal coal will likely outperform their metallurgical coal heavy brethren- as the economics in steel production shows signs of waning for now. Just look at the chart of the relative price of Cloud Peak Energy (ticker CLD), the producer of thermal coal from the Powder River basis versus WLT, the coal company with the largest percentage of metallurgical coal in its product portfolio.

CLD has far out-paced shares in WLT, on, in our opinion, the improving outlook for thermal coal versus metallurgical coal.

Another important factor for coal stocks is cost cutting. We believe that those companies that are better able to manage costs will be better performers. Coal mining is a capital intensive business and the industry operates under high fixed costs. For the most part, declining production and sales volumes will lead to higher production costs per ton and lower per ton margins. We are impressed and found surprising that companies such as ACI and Consol Energy (ticker CNX) were able to reduce their per ton operating costs, be it company wide or on a regional basis. With the high level of fixed costs, these cost cutting initiatives are setting up substantial earnings gains once pricing rebounds.

As for the charts, we are seeing a bifurcation for the coal industry share prices. The charts for CLD, CNX, and ACI appear to forming bases while the charts for BTU, ANR, WLT show little signs that the selling is complete.

The above two charts are examples of this dynamic (disclosure we own both ACI and ANR). Shares of ACI closed at the trend line established since February, and if today's optimism holds we could see $10 in a heartbeat. The chart for ANR suggests that more work needs to be done for before the all clear signal is given.

As for the market, futures are mixed this morning despite gains overseas. Although we think the gains experienced last week are fleeting, we also think that market will try another run towards recent highs before failing. We detailed our thoughts more on Sunday post.

Traders Edge 7/29/12 Sunday Edition.

Friday was a very interesting day. The SPY traded up significantly and the price/volume characteristics suggest that the ETF (and the market itself) will trade up into or close to recent highs.

The spy has broken the trend line that had been established at the beginning of April on volume that is higher than relevant swing points This suggests that the SPY is going to test the next swing point, or around $140 price level. That said, it is our conjecture that the optimism reflected in share prices is built on fumes, namely the anticipation of some monetary action by the Federal Reserve. This is occurring amongst a lackluster economic environment, as revenue and earnings growth slow considerably. Unless the next monetary stimulus action actually propels the economy forward, then this optimism is likely misplaced. In contract, QE1, QE2, Operation Twist, and the other monetary actions by the Fed and other central banks have failed to accelerate economic growth. We think that a QE3 will be no different.

We also note the strength in the SPY is not being reflected in the small cap stocks. Above we present the IWN, the IShares Russell 2000 small cap stock index ETF. The upward swing in Friday was not confirmed by volume, and the downward trend that began in April remains.