Trading Thoughts

Coming into last week short term overbought readings were approaching fairly extreme levels and the market pulled back a bit early in the week. The rally resumed on Wednesday and Thursday was a climax day after WFC guided earnings substantially higher.

On the week the Dow gained +65 points and the Naz gained +30. The market has now posted gains in 5 consecutive weeks with pretty impressive cumulative gains since the lows on March 6. Since the low on March 6 the Dow has now rallied +25%, the Naz +30.6% and the SP500 +28.5%. Yet amazingly, year to date the Dow is still -7.9% and the SP500 is -5.2%, although the outperforming Naz is now green in 2009 with gains of +4.8%.

WFC was a huge catalyst behind Thursday’s broad surge higher as financials led the charge. WFC guidance was very impressive and very surprising, but several critical pieces of information were missing, including asset quality and security exposure. WFC will report earnings on April 22 and it will be very interesting to see what the full picture looks like. This upcoming week other key financials will report earnings (GS, JPM and C) and they better confirm WFC enthusiasm or this recent rally could run into a brick wall very quickly.

Everybody is slowly forgetting about the bear market and this could lead to a very surprising reversal mid May. The five week rally off the bottom has been fast and furious and is getting fairly extended now. Many have missed the rally completely and now feel like a deer in headlights. Chasing the long side now after the market has bounced so much seems very scary, while the short side isn’t any easier and has been getting squeezed hard the past 5 weeks.

Have we truly seen the bottom or has this been just a huge bear market head fake rally? That’s the dilemma right now. There has been a very noticeable change in market behavior over the past 5 weeks. During the prior year every rally, every bounce was an opportunity to sell or short stocks. The past month though, every dip and every pullback has brought in buyers. This is a major change in trader psyche and certainly requires a trading adjustment. I guess at the moment its ok to give the market the benefit of the doubt, but after huge gains the past 5 weeks it sure is hard to be bullish now, at least for me.

I really expected to see many warnings recently, but warnings season has surprisingly been a non-event. Perhaps expectations are so low that further revisions are not necessary or perhaps Armageddon was greatly overstated. Earnings season kicks off this upcoming week and will be an eye opener. With so much near term uncertainty, this is not the type of environment where you want to build and hold positions (long or short) and roll the dice on immediate market direction.

Here are the headliners scheduled to report earnings this upcoming week, but it’s only a prelude to an avalanche of earnings the following week: GS, JNJ, INC, NOK, JPM, GOOG, ISRG, SNDK, C, and GE The trend of late has brought in buyers on every pullback and this might continue throughout earnings season most of April and early May. Poor earnings and lower guidance are well expected and very much priced in, so perhaps the market holds up for now and maybe even builds on recent gains in coming weeks. I continue to believe the next turn time frame for the market will occur mid May. Sell in May and go Away has been a huge trend for decades and I feel will once again be revisited in 2009.