I’ve written and discussed shorting treasuries for some time now and I was a little early but now it’s paying off big time.  It could just be a technical trade or the real fear of future inflation.  Whatever it is, investors are running for the exits from treasuries.  Even though the Federal Reserve announced yesterday they would continue to aggressively buy long-dated securities (they mean treasuries), that hasn’t been enough to stop the selling and causing interest rates to continue to rise.  Are foreign governments concerned they won’t get their money back?  Is China not purchasing as many treasuries because of Timothy’s Geithner’s comments over the weekend?  Or, is it that governments can’t afford to keep buying as many as they have in the past?  Whatever the reason, the TBT trade is working.  I own DXKSX which is a fund that does the same thing.  I show a picture of TBT below because many of you trade TBT and have asked me about TBT.

TBT is at a level now it could struggle in the short-term as the $45 level is roughly the place it was in early December.  We could see a run to $50 before real profit taking.  But, the bubble may have finally burst in the treasury market.  It’s about time.

Amazon after hours

Amazon (AMZN) is rocking after hours, up 13.5%.  If this can hold for the morning, Amazon will be breaking out of a long down trend.  I’ve been wanting to do a pairs trade with Amazon & Best Buy where I go long Amazon and go short Best Buy.  I believe Amazon’s model is better and it’s pretty simple.  Amazon doesn’t have stores to maintain.  Best Buy does.  During a recession, people don’t drive as much or go out as much to save gas and money on eating out, etc.  But, they are still surfing the web and when they do need to buy something, it doesn’t get any easier than buying it in the convenience of your home using Amazon.  That pairs trade hasn’t worked in the past but over the long run I think it will. 

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Technology stocks have had a nice run lately but is it about to end?  One of my holdings is Apple, Inc. (AAPL) which I’ve written about lately.  They’ve had the Steve Jobs drama and then the excellent quarterly report with record sales & profits.  But, looking at it technically brings up the question, is this the time to buy?  I’d say wait for a breakout.  You can see below that it has been making lower highs since October and is right now at the top of the channel.  I would expect a breakout and a pullback.  That would be a safe entry point.  RIMM & AAPL both look good but I’d wait on both of them, especially Apple.

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This morning, the consumer confidence number was released with a reading of 37.7.  The estimates were at 39.  This was an index created in 1985 at a level of 100.  It’s gone back and forth through the years and as recently as the fall of 2007 was over 100.  Needless to say, it’s fallen off of a cliff.  I’ve brought this up before because I care about correlations.  I care about how these types of numbers relate to your stock prices.  Unfortunately, this number is very correlated with equity prices.  Granted, it is a lagging indicator.  It’s also a self-fulfilling prophecy to some degree.  If stock prices are falling, of course people will feel lousy.  So, I expect this number to keep falling even after the stock market eventually bottoms.  Hower, I’m still going to show below two confidence indexes compared with the S&P 500 so you can get a gauge on where we were and where we are right now. 

The S&P 500 is the orange line and the yellow and green lines are the two confidence indicators. 

A day that started off with bad news from Caterpillar ended pretty weakly.  Nothing exciting.  I haven’t done a trade since covering some shorts a couple of weeks ago.  Since then, I’ve been waiting for the oversold rally.  It hasn’t happened.  For those wanting a rally, the main concern is that all the oscillators are going back up to the top without the prices of going up.  That’s a negative divergence.  I still believe we’re one good catalyst away from a rally.  But, I’m not holding my breath.  The only exciting thing going on these days is the income I get from bonds.  Other than that, unless you’re a day trader, you’re waiting for the next guy to make a move.  Not very exciting.

Metals

Gold continues to push higher after it broke out Friday from the lower highs it had been making since the summer time.  If you look at a weekly picture, the rally could fizzle out pretty soon.  But, I believe too many people are becoming concerned about potential future inflation and gold may make a run at its old highs some time real soon.  I own some gold mining shares which give you a little more juice than the underlying commodity.  I also own silver in the form of the ETF SLV.  I think this trade could continue to work because we’re also seeing a move out of treasuries.  Perhaps I’m not the only one that thinks treasuries are a bubble and inflation might be a problem.  So, the metals trade and the short treasuries trade should continue to work.

A New Treasury Secretary

Well folks, the Paulson put trade is over.  We have ourselves a new Treasury Secretary in Timothy Geithner who was confirmed today by the Senate.  Let’s see how aggressive he is.  He has a lot of work to do.

Copycats

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AIG this morning is selling off its prized business, their Asian life insurance unit for $20 billion.  This money supposedly will be used to pay off its government loans.  The buyers could bee HSBC, Prudential, or China Life Insurance Co.  This is beginning to be a pattern.  Citigroup had to sell off part of their brokerage business last week to Morgan Stanley.  This is what we’ve been talking about for weeks on here and on my radio show.  This type of action could continue to put pressure on stocks.  These struggling businesses only have a few options when they need capital.  They can issue bonds at 20% because of the risk to investors which the companies really can’t afford to do.  They can issue more stock and dilute the other stock holders.  Or, the pattern we’re seeing right now, which is selling off their best pieces of the business.  They are stripping down the companies and basically cannibalizing themselves.  It’s the equivalent if you were struggling with your income and you had debt obligations to meet.  What would you do?  It’s called de-leveraging.  You are shrinking your balance sheet.  You’d maybe sell that expensive house for cheaper than it’s really worth.  You’d pay off the debt so you don’t have the monthly expenditure.  Then, you’d have this skinny balance sheet but your net worth wouldn’t grow as fast because when housing prices recover, you don’t own a house to profit from.  Remember, the only reason companies lever up is because they either have to or they want to buy a fast growing asset with cheap money (low interest debt).  If you did sell off your house and pay off the house, you’d basically be starting over building wealth and trying to find alternative ways to build that wealth.  That’s what these companies are going through right now.  I think perhaps the thing we should focus on are the people buying these good assets are cheaper prices.  Now, you do have to be careful.  Remember, Bank of America bought Merrill Lynch.  At the time, it looked like they were getting a steal.  But, they are still having big problems.  But, the potential bidders of Prudential, HSBC, or China Life Insurance may need to be checked out.  Any time there’s a distressed seller, there’s a smart buyer taking advantage of them.

We got the oversold bounce I was looking for today.  As the Timothy Geithner hearings went along today and it appeared he would be appointed Treasury Secretary, the markets calmed down and strengthened.  I don’t think there is any chance he won’t get in.  I think the Republicans wanted to use this opportunity to beat him up a little as the Democrats have been getting some good press the past few days, weeks, & months.  The fact that he’ll be our next Treasury Secretary didn’t hurt the markets.  I mentioned yesterday covering some of my short positions expecting an oversold bounce.  I said we’d have to monitor the rally to see if it had any staying power.  It’s too early to tell.  The internals weren’t bad today but the volume wasn’t exactly strong.  So, I made no moves today.  If we get some follow through on low volume and the internals diminish, I’ll add my short positions back on very soon.  For today, we’ll enjoy the rally.

Just a reminder that I’ll be in the Dallas/Fort Worth area tomorrow evening with Daniel Frishberg doing our strategy session.  It’s a free event but you do have to register.  You can go to www.bizradio.com to register.  I look forward to seeing you there.

By the way, after hours, Apple Inc. (AAPL) is up over 10% with excellent earnings.  What happened to all those people selling last week because Steve Jobs was taking some time off?

The day started out with a negative tone on Wall Street and a positive tone in Washington as the transfer of power was completed.  But, as President Obama was giving his inaugural speech, the Dow was down 120 points.  As soon as Obama spoke his last word, the market immediately sold off and went down 200 points.  Then, of course, it got worse as the day went on.  It was strange.  It was almost as if investors were waiting to hear if Obama said something that would encourage them.  When he didn’t, the selling intensified.  Or, could it be that the selling had exhausted the last couple of months simple because everyone wanted to see how the market would react to a new president?When it didn’t rally, then in came the heavy selling. There’s no question that the selling has intensified.  But, I covered more of my short positions today because even if the medium term picture is up in the air, we’re still oversold. We’ve fallen about 15% in a straight line.  Since none of us know where a rally will start from, I’m choosing to cover my shorts a little at a time on the way down.  When we get that rally, if it’s a weak rally, then I’ll add the shorts back on at higher prices.  The only way to participate in this market is with income and/or trading.  Investing isn’t working right now as we’ve stated before.  Keep playing small and you can take advantage of days like today.

I’ve talked about an upside down head and shoulders before on this blog.  The classic head and shoulders is when the market (or any investment vehicle) makes a high falls, then later makes a new high, falls, and the 3rd and final peak is lower than the second and about in line with the first, hence the head and shoulders name.  Well, you also have upside down head and shoulders.  This is a positive formation that technicians watch.  We had a low on the Dow in early October around 8000 (left shoulder).  Then we rallied but failed and ultimately went to new lows until November 21st (head).  Then, we rallied until the new year around 9000 on the Dow.  We’ve since fallen back to 8000 yesterday and that may hold (right shoulder). 

Now, this may or may not happen.  We don’t really know until after the fact but it appears to be setting up that way.  One problem which I outlined yesterday is the fact that we weren’t fully oversold.  We didn’t get completely washed out where we could have a real long rally.  Secondly, the reversal we saw yesterday should have lead to some really nice follow through today and several times the market was in danger of finishing down.  Thirdly, the stock market is closed Monday for the Martin Luther King, Jr. holiday.  Typically, you see some locking in of gains before a 3-day weekend.  Since we had a negative week, those that were short locked in gains today before the long weekend which is why we finished up 70.  That leaves me with my current position which is lighter on the shorts than I was at the beginning of the week but I still have most of my position because we didn’t get fully oversold and the rally was very mediocre today to say the least.

Have a nice weekend.

I thought we were close to a trading bottom yesterday and today we got that big intraday reversal.  Just after lunch, the markets all turned around and after being down most of the day pretty hard.  They began to rally and the Dow was up about 75 points before pulling back.  Now, we didn’t get so oversold that I covered all of my short positions, but I did cover some of them when the late day rally faded to lock in some really nice gains from just last week when I put more short on.  

I don’t think we’re oversold quite enough for a real long sustainable rally.  So, it’s possible we get just a couple of days of up and then the pullback continues.  But, we were oversold enough to cover some shorts.  After all, we had fallen 6 days in a row, and about 11%.  This would have been the 7th down day in a row.  You don’t typically see that. As with any rally, we have to monitor the quality of it.  I’m not holding my breath.  If we’re range bound, the Dow bottomed roughly right where it should have and perhaps it makes a run up to the 9000 level once again.  You do have to love an intraday reversal though.  Those are the best kind, especially when the volume picks up as the market is running up like it did today.

Apple

I never got a chance to buy more Apple today as rational investors came in this morning and pushed the price back up after that ridiculous 10% sell off after the bell last night when Steve Jobs announced his leave of absence.  After my radio show this morning when I mentioned it would be a buy if it opened 10% lower, it was upgraded by some firm. What influence I have (yeah, right).  But seriously, I think Apple at these levels is very attractive not only for a trade but for an investment.  Earnings are due out later this month and we’ll see if they can surprise us all.  If the stock falls because of temporary weak Christmas sales, I’d buy it on that dip as well.