Stocks Rally Again

MARKET SUMMARY
         > >From "The Daily" at InvestmentHouse.comStress test, jobs report no obstacle to a further rally.

- Stress test medicine is painless, jobs report within tolerance, 2010 stocks rally again.
- NASDAQ gains ground but techs are struggling. After the stress test and jobs report the financials need to find more near term buyers.
- Massive liquidity, 'chase money' fueling the stocks market of 2010 rally, but a poor bond auction and bond rates forecast the problems ahead.
- A lot of enthusiasm over poor economic data versus a lot of pessimism over truly improving economic data.
- Liquidity means more stock market gains but near term techs have to prove themselves again and financials have to continue to lead.

Market Summary (continued)

Financial institutions that did not 'pass' the stress test, 9 of the 19, are engaged in the next rush, the rush to raise their own capital, non-government assisted, so they can cast off the TARP. The Treasury surprised us all this week when it announced that any institution could repay the TARP and throw down the government yoke when it can raise needed capital without the government backing. Thus a lot of bond issuances were announced Friday. Banks that were basically forced at gunpoint to take the funds are showing how much they detest the governmental interference.

The jobs report was also quite palatable at -539K versus the 610K officially expected, though the whisper was in the -550K range. March was revised to -699K, however, so the April number was really at expectations. That was not worse than expected, however, so that was enough to keep things going. Of course the unemployment rate hit 8.9%, already topping the Administration's estimates on the peak for this downturn. Moreover, the improvement in the overall number was due to growth in the federal government with the hiring of census workers. Now THAT is real improvement in the jobs picture. The real story is in the temp workers. Temp workers are the first to get hired in a recovery as companies gingerly get back into hiring. If things work out they make those temps permanent offers. At +68K temp hiring is still very anemic, indicating no improvement in hiring. That is nothing unusual. The economic numbers, as discussed below, are still pathetic and you would expect hiring, a lagging indicator, to remain muted at this point. It is.

Nothing was stopping the move higher, however. There are reasons for that as discussed the past week and later in this report, but it was not all upside. Best tocks of 2010 again gapped higher but that move did not hold and NASDAQ was negative by midmorning. At that point, however, the buyers moved back in and it was upside for the rest of the session with best stocks for 2010 rising back to the morning highs and beyond, at least on SP500 (+2.41%). SOX closed down almost 2%. NASDAQ 100 scratched out a 0.3% gain. Gains again but there are some cracks. Of course thus far cracks have been filled by liquidity.

Chart by StockCharts.com

APC (Anadarko Petroleum)
Company Profile
The Fed's massive liquidity injection the past 9 months is finally having its impact in the best stock market of 2010.  When that much money is put into an economy, indeed the world economies, it eventually starts impacting best stocks for 2010.  Not necessarily because the economy is taking off; despite what the financial stations are saying the data says it is not taking off, just slowing the plummet toward a second Great Depression.  No, a big part of what is happening now is that all of that money is moving into financial markets just to put it somewhere as there is not enough economic activity or stimulus to absorb it.  That is what ultimately ignites inflation.

Thus you see best stocks for 2010 related to potential inflation starting to take off.  Energy stocks are some of those best stocks 2010.  After moving laterally for a month they set up good patterns and started to breakout.  One we were watching was APC in the natural gas area as natural gas prices will rise with the inflation as well.  So when we saw it break higher we put it on the report, looking to catch a test of this initial move as we did not get it on the break from the pattern or while it was in the last stage of the base.  A test is one of our favorite entry points because it gives us a good entry point after a stock makes its break and it shows us that the buyers still want it, i.e. it is not just going to crash back down on us in a false breakout. 

APC surged higher another session but then on Tuesday it tested the move, tapping the 10 day EMA on the low and starting to bounce. The 10 day often acts as a near support level on a breakout, and when we saw that move we entered the best stock at $45.64 and bought some August $45 strike call options at $5.10.  We wanted some time as these 'reflation' moves can last for a significant period, and moreover the only other option was a June option and that is not enough time to counteract the effects of time decay. 

We caught it right because APC started to rally anew the next session, gapping higher and adding $2.78 to $48.26.  Gapped again the next session but struggled some, closing off the high for a modest gain.  Given the best stock had already tested the break higher we were not too worried about that gap to nowhere.  Then Friday APC was at it again rallying $3.24 to $51.96, hitting $52.38 on the session high.  That put APC at one of its former upper channel lines from the October to January move, and it was our initial target for the move.  We banked half of the best stock at $52.28, locking in a 14.5% gain.  We sold half our option position for $9.50, banking $4.40 per option or 86%. 

Strong move in less than a week and APC may retrench some after that move, but with the market in a liquidity mode you can expect more money to come into these areas and best stocks for 2010 such as APC to continue their move higher for now even if the economic recovery theory proves to be wrong given that the inflation seeds being sown are serious.

STOCK SPLIT PLAY

Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:

1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual best stock split where the best stock of 2010 is showing continued or renewed strength).

For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the best stocks for 2010 from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.

Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.

SPIL (Siliconware Precision--$7.28; -0.02; no options): Chip equipment
Company Profile
After Hours: $7.28
EARNINGS: 04/29/2009
STATUS: Test 18 day EMA. SPIL is on its second test of a blast higher that started in early March. Tested in mid-April then took off late in the month. Last week it tested that strong move, coming back to the 18 day EMA (6.98) on the Friday low, then rebounding sharply to close right at the 10 day EMA. That left a nice tight doji with a long tail on the candlestick chart. That indicates a rebound is coming and we are ready to move into SPIL as it continues higher from here.
Volume: 1.371M Avg Volume: 2.405M
BUY POINT: $7.42 Volume=2.6M Target=$8.96 Stop=$6.91
POSITION: - Stock (illiquid option chain)

CHT (Chunghwa Telecom--$18.48; +0.04; optionable): Chinese telecom
Company Profile
After Hours: $18.48
STATUS: CHT is testing a break higher off of its bear market low. It gapped higher in March and surged, then formed something of a double bottom with handle the past 7 weeks, forming the handle near the 200 day SMA (18.57) the past week. Nice higher low in the current pattern, tightening up to end the week. Just waiting for the next break higher through the 200 day with some more good volume as seen the past two weeks.
Volume: 2.015M Avg Volume: 1.126M
BUY POINT: $18.77 Volume=1.8M Target=$21.95 Stop=$17.86
POSITION: CHT IW - Sept. $17.50c (69 delta) &/or Stock

Economic Correction Disease; Byron King on the Risks that Come Along With Peak Oil

But every emergency is an opportunity. The feds don't want to waste it. Instead, they swing into operation with a rescue plan. It will end up costing billions...hundreds of billions...or maybe even trillions. We don't know what they've got in mind. But we know what will come of it. It will end up extending the power and influence of the government. So far, the feds are the only real winners from any of these crises. Federal outlays, as a percentage of GDP have shot up from less than 20% of GDP in 2000 to more than 26% in 2009.

Will it do any good? Public health is not central banking. And it's not economic planning. Force everyone to wear a surgical mask and maybe lives would be spared. Or, maybe not. Without the immunity of occasional bouts of flu, who knows? Maybe people would be more susceptible to the next disease. The American Indians were almost wiped out...because they had no immunity to European diseases.

Interesting...

Ain't nature amazing? Disease works like an economic correction. It winnows out the weak...and it toughens up survivors. Allowing people to get sick is a little like allowing them to go broke. It keeps the whole system from softening up...from becoming more vulnerable. It protects people from moral and biological hazard. In other words, it's the correction that really provides protection...the disease itself, not the cure. Or, to put it another way, it's the crash that is beneficial, not the rescue.

David Einhorn, one of the few people to make money in the crash of sub- prime debt:

"The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone's shampoo. It gives the appearance of 'doing something' and adds to our bureaucracy without really making anything safer."

The Wall Street Journal reports that even bankruptcy can be a good thing. "Household Debt Can Hasten Recovery...when it goes unpaid," says a headline.

The whole idea of a correction is to wash out mistakes. If people can pay their debts down, the mistakes are corrected. The system is strengthened. If they can't, the process of correction can happen faster. Bad debts are written off quickly. Then, a real recovery can begin. Either way, the system comes back in better shape.

Too bad the feds are getting in the way!

A decent correction should carry off those who made the biggest mistakes - in the present case, the firms on Wall Street that wagered billions on a bigger and bigger bubble. But instead of letting them go broke, the feds rewarded them.

Wall Street profits are a 'gift' from the state, says George Soros.

But wait, what kind of gift is this? If you give $100 to your neighbor, that's a gift. But what if you tax your neighbor on the left $100 in order to give the money to your neighbor on the right? That's a gift too...but of a special kind. You're 'redistributing the wealth,' you might say.

And what if you do a quantitative easing? You know, you print up a $100 bill and give it to your neighbor? That's a gift too.

Yeah, thanks a lot.

Meanwhile, the recession is said to have come to an end in the US. GDP growth is positive, say the papers. But if this is a recovery, let's hope it comes to an end soon.

Existing house prices continued to fall in September.

Unemployment continued to worsen. "Signs of recovery don't extend to jobs," says the WSJ.