THE WORLD CAPITAL MARKETS ARE LITTLE CHANGED THIS MORNING:
This after Friday’s sharp intraday sell-off related to rumors of North Korea’s plans to test a nuclear device in the very near future. These rumors – they are still rumors to us given they have yet to be substantiated – further noted that the US briefed China on N. Korea’s plan and said that it could come at anytime…so don’t be surprised. However, by the end of Friday’s stock trading session…a larger rally developed that took back a majority of the intraday losses as those rumors remained unsubstantiated. The question before us is whether this is a larger test of the lows formed on Thursday or whether Thursday’s sharp rally was nothing more than a ‘one-day wonder’ much in the same manner as the sharp one-day rally two weeks prior that gave way to new lows. We honestly don’t know; we do know however that from a sentiment perspective – bearish sentiment is increasing. We do know that our shorter-term models are at levels consistent with rallies over the past several years.
Thus, we are inclined to be tentative buyers here in lieu of a countertrend rally that will take prices back to ‘neutral levels’ which would make aggressive short positions more tenable on an overall basis. This is about ‘defined risk’ and ‘riskreward’… and each remain skewed towards buying with tightly defined stop loss points.
WE HAVE RECEIVED MYRIAD OF QUESTIONS RELATED TO HOW WE INTERPRET INTRADAY MOVEMENTS:
If one is looking to time positions intraday for better fills; by far the most useful constructs are the ‘advance-decline’ figures, and how they act upon advances or declines.
If the ratio is 2:1 negative…and a rally develops without the ratio really changing at all – then this would be a prime rally to sell or sell short into. If the ratio improved markedly – then the rally is likely the start of something larger. This works in reverse as well – and has been the single most important determinate of whether recent rallies are expected to hold or not. Also, the financial sector is also an important contributor – stocks generally can’t rally in a sustained manner without the financials; and also the semiconductor sector. If it can’t rally – then we don’t have all of our ‘ducks in a row’ that would give us the warm and fuzzies about putting on positions. These are the factors we look at when we put on positions throughout the day and attempt to ‘manage’ our entry points. This is very difficult if you can’t watch it as closely as we do at times; but it is valid information nonetheless that will improve entry points rather than putting positions on at the open or close.
CHINA FEELS WORLD PRESSURE ON US DOLLAR PEG:
The Shenzhen Daily is reporting comments from China’s central bank head Zhou on loosening or removing the USD peg currently in place – this after pressure from both the US and Europe to end it. This pressure is becoming more public and acrimonious than we would have expected; but China will move at their own pace according to their central bank leader; he did note that reforms were taking place that would accelerate their current time table…but not before the end of 2005 as many have hoped…or even feared.
Domestic considerations are paramount to changing the peg…not international pressures; but remember we must be careful about what we ask – if interest rates rise further and faster than anyone anticipates due to a change in US asset allocation from the Chinese – then the medicine will have ‘killed’ the patient in terms of the US economy given its current reliance on low interest rates.
Good luck and good trading,
Richard Rhodes
MODEL MONDAY...INTERMEDIATE-TERM STILL LOWER; HOWEVER, THE PROBABILITIES FAVOR A TRADABLE RALLY DEVELOPING FROM NEAR CURRENT LEVELS:
From a purely technical perspective; our short-term models remain increasingly constructive. This suggests that ‘bottom fishing’ should be considered at current levels given the riskreward dynamic has moved into the ‘buying range’. But the question is timing; on Friday we bought during the sharp decline given our sources indicated it was precipitated by a rumor that N. Korea was planning a nuclear weapon test in the very near future. Generally, these rumors can be bought as they are nothing more than a ‘shake out’ of weak long positions...we were very fortunate
CONCLUSION: We are inclined to accumulate shares at current levels for a 1-3 week rally that will bring the indices back to healthy technical levels worthy of putting on aggressive short positions once again. Keep it simple; define your time horizon.
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