Monday, July 12, 2010

Fish Losing Its Smell

Today made me a little more comfortable with the bear case. Alot of underpinnings in the market looked like it was starting to reverse. How big this potential reversal is I don't know, but all in all today was a bearish day.

I'll start off with copper since I named it as one of my top concerns in the last post. Copper lagged the markets badly all day. Overnight it is selling off again. A top risk appetite metric.

I also mentioned the Euro. I mentioned over a month ago I was expecting a rally. People had just gotten to bearish on it. I mentioned in the previous post I thought it might have more to run. Reading some over of the weekend and thinking about it I am starting to doubt that proposition. I am longer term bearish on the Euro so just a question of timing. Today looked weak and there is more and more chatter (especially in European newspapers)about provisions for sovereign default and problems with the stress test. We could see a serious move down in the Euro soon. If it is for the wrong reasons (Euro viability concerns), the correlation will return strongly of Euro down / stocks down.

There were problems on the periphery today with Spain taking a hit. Bond offerings didn't go so well in Europe and there are alot more the next couple of days.

The Russell 2000 got slaughtered today (at least relatively). I did a double take at the end of the day. Dow, S&P, and Nasdaq were up but the Russell 2000 was down over 1.1%. That is a huge relative move also showing risk off.

Though even the major indexes were up volume was lighter again today. Friday was the slowest full day of the year and today was even slower. Than if you look at market internals, there were more stocks down than up today.

Finally, on a short term basis the stock market is very overbought.

I think the odds have shifted that there is a very good chance at least for a short term sell off if not something bigger. Something bigger is dependent on Europe. I was shorting a little today. Should be interesting.

It will be interesting if the market does turn down hard and earnings are coming out looking good if investors will finally get that individual corporate performance is a small part of the equation right now. Alcoa came out with "good" earnings but it was a slide of hand again. This is getting old. Below is a compilation of thought on Alcoa earnings from me and a friend.

"My thing about Alcoa is it comes in at $.13 EPS versus consensus of $.11. We got a whopping 18% beat!! A month ago (just 30 days) the consensus was $.16 EPS. So the headline could have been Alcoa misses estimates by 19%. Now we can all cheer and marvel at how Alcoa beat EPS estimates by 18%. I am glad 30 days and a little slide of hand can make everyone feel better about everything."

"You got to love Alcoa claiming demand is picking up with prices down over 10% YTD. Hope springs eternal."

"Another interesting Alcoa tidbit - look at their capex - 213 million. 2nd lowest quarter (4th quarter of 2009 was 208 million) since like 2000. Back in 2007 and 2008 cap ex never dropped below 700 million and a couple of quarters was over a billion. Management obviously has alot of confidence."

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