SEC Rule Expires, Financials Decline, and Energy Rallies
From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.
The most significant market action yesterday was the anticipated reversal in the financial, and energy/commodity sectors. The $BKX had advanced +45% since the 7/15/08 low, primarily because of a short squeeze which resulted from the SEC enforcement of a strict “pre-borrow” short rule on 19 major financial stocks. It expired yesterday and was not renewed, but my guess is that they will now use it as another tool to manipulate the market. But it will meet stiff opposition if they try it again, and are not consistent across the board in all sectors, as they should be.
The BKX is -10.5% the past two days, while the HUI is +8.8, despite the $US Dollar advance. The XLE is +4.1, OIH +3.6. XLB +3.0, and XME +7.8 The commodity based sectors were extremely O/S, and the financials O/B for the wrong reasons, so the reversal was anticipated (8/12/08 commentary). Daytraders made it both ways yesterday as the IYF, IYR, and BKX made new intraday lows on the 10:30AM bar, at the same time as the XLE gave you a strategy 123 close long entry above 71.03 on the 10:10AM bar, which accelerated on the 10:30AM bar (energy report). The XLE traded up to 73.50, and the IYF down to 69.13, from the 70.17 short entry, before reversing. Trading service members anticipated, and they were ready to capitalize on the financial/energy reversal.
NYSE volume was light yesterday at 1.21 billion shares, with the volume ratio 43, and breadth -423. The SPX first defined strategy setup yesterday was the reversal from the -1.0 VB 1275.61 zone, following the 1274.86 intraday low on the 12:10PM bar, which ran to 1294 before selling off in the market-on-close (MOC) session from 3:40PM-4:00PM, which might have included some option expiration activity in front of Friday. The AG Chemical, and Coal stocks also had big days yesterday, with the KOL (coal ETF) gaining +5.5, both from deeply O/S territory. In addition to being extremely O/B, the financials have been downgraded the last two as analysts are trying to time the move in front of the SEC dropping the “rule”, because they all know that it wasn’t the fundamentals that accelerated the O/B condition.
Despite the contrary hype by the CNBC empty suits, the credit crisis is not much better, as banks are just not lending, housing deflation is getting worse not better, inflation caused by rising food and crude oil has not gone away, the recession is spreading globally and the consumer debt burden has increased significantly, so it is all a bit much for the equity markets to look beyond without some more pain.
In this current rally off the SPX 1200.44 low, The XRT (rRetail), XLY (Consumer Discretionary) and IYR (DJ Real Estate Index) all pulled back to their declining long term EMAs, so they have been a short focus the last few days, in addition to the financials, which were extremely extended on a % basis, but have quite a bit to go before they reach their declining 200-233 DEMAs and that is not soon.
Both the SPX and INDU have fallen back below the 1292, and 11709 .38RT levels to the 1440.24, and 13137, last significant swing point highs, prior to the decline down to the 7/15/08 lows. The current rally highs are 1313.15, and 11867, so nothing good can happen trend wise on the upside until they can take out those .382RT levels again.
The next commentary is Tues 8/19/08
Have a good trading day!
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