Thinking the Unthinkable: Could 2011 Be Like 1998

History never repeats, but it often rhymes, at least from psychological perspective. One cannot help but ponder the similarities between 1998 and 2011. In the Summer of 1998, stock markets across the world sold off because of the Asian credit crisis. In the summer of 2011, the sell-off was caused by European credit crisis. Of course, the magnitude of the problem today is much bigger and complicated, but the governmental bodies across the world are willing to take desperate measures and do anything to somehow solve the problem or at least postpone it for as long as possible.

2011 and 1998 have similarities from technical perspective too: major low in August that was penetrated intraday in October, only for the market to snap back and rally 20% in 4 weeks after that.

I am not suggesting in any way that 2011 will be exactly like 1998, but I remain open minded for the possibility. As a matter of fact, I think the markets are overextended here and a consolidation of some sort next week is very high probability. $TZA seems like a good hedge/pick for the next few days. Other than that, the market looks higher for the rest of the year, baring any unforeseen event.

Of course, I will trade what I see, not what I think and I will change my mind if the market tells me to.

154 Liquid Stocks Closed At All-Time High

A bunch of stocks from various industries are gracing the all-time high list. I guess this should not be surprising, given that $SPY is having its second best month in the recorded history. All major indexes are positive for the year, so performance anxiety might be a major decision making factor for many institutions for the rest of the year.

One of the main characteristics of market uptrends is that they provide more long setups that any human being is physically able to watch or take. Filtering and focusing on the ideas with the highest potential for growth is of utmost importance.

Chasing extended names is never smart from an opportunity cost perspective. Therefore I like to filter new breakouts based on 3 month performance and float. The existence of an immediate catalyst is also a big plus. Here is a list of today’s breakouts to new all-time high that make me the most impression technically:

Mortgage Investment

Business Software

Oil and Gas

Generic Drugs

Application Software

Biotech

Gold and Silver Rally in a Grim Tape

Precious metals are outperforming handily today, foreshadowing the market expectations for the widely anticipated New resolution of the European Credit crisis. There will be currency dilution involved and capital is slowly moving back to gold and silver as alternative assets that cannot be monetized. The U.S. will also participate in the bailout via IMF, so the U.S. dollar will also be affected.

The forced liquidation in gold is behind our back and there is a good chance it might move higher from here. Just last week, $GLD was on a precipice of breaking down, but as it has often been the case with gold lately, it rallied when everyone was turning bearish.

From my perspective:

– If the market likes the deal, precious metals should rally;

– If the market does not like the deal, capital is likely to flow into both Treasuries and precious metals;

The Fly also offers his perspective on the metals, naming them “the only long trade here” based on seasonality, among other reasons.

As always, I focus my attention on liquid names with the highest relative strength and the smallest float: $RIC

Long from 11.30 with a stop at 10.50 – discipline should always trump conviction.

Powerful Short Squeeze in the Stocks You Least Expect

Expect the unexpected. Just when it seemed that the news from the financial sector could not get any worse as it became clear that a substantial portion of banks earnings over the past 2 quarters were imaginary derivative of creative accounting practices, finnies rallied and in my mind contributed to a technical short squeeze in industries you would not believe:

Residential construction: $TOL $LEN $BZH $SPF $DHI $MDC

Industrial equipment: $GWW $SWK  $STRL

General building materials: $USG $AWI $GFF $NX

Waiting for the Market to Show Her Next Hand

We all know that after the excessive 9-day move, a consolidation of some form is natural and even needed, either through time or price. For the rally to continues, we’ll need to see new breakouts sticking and new leadership to emerge. Currently leadership is still thin and represented by old, well-known stocks.

Sentiment continues to be very volatile and driven by short-term price moves. Sitting and waiting a few days until the picture becomes clearer is a sound approach here.

Arguments could be made for both the bullish and the bearish market scenario

Bearish:

– technically extended, which limits risk appetite;

– recently heightened volatility has created a renter’s mindset. No one is willing to commit to big holdings for a prolonged period of time due to the elevated macro uncertainty;

– breakouts are failing across the board;

– defensive groups are still leading – utilities, tobacco, discount stores;

– Market reaction to earnings has been terrible so far.

 

Bullish:

– The worst case scenario for Europe might have been already priced in, at least for now. (to be honest, it’s still unclear what would be the consequences of a credit event related to Greece aka will the bond holders get scared and require much higher yield for Italian bonds?);

– We are in the 3rd year of the presidential cycle, which historically is very strong in terms of performance;

– With Nasdaq and SPX almost positive for the year, performance anxiety could drive institutional investors’ decision making for the rest of the year;

– the expectations for this earnings season are excessively low, meaning that companies have a low hurdle to meet and surprises could be plentiful.