The Cockroach Theory

My
prediction for yesterday’s trading action
unfortunately came true.
As indicated, intraday trend traders probably cleaned up nicely, while us
hyperactive daytraders were left planning for today.
To give you an idea of how lame I thought yesterday’s session was, I
did only four trades all day. 

The S&P futures were not
able to close above key resistance at 1221-22, while the Nasdaq futures did
close above resistance at 1761. But
enough of yesterday. The retail sales report showed a slowdown in consumer
spending, the only ray of hope that has been keeping things slightly positive.
Giving back most, if not all, of yesterday’s gains is highly probable.
Support on the futures is seen at 1209 and 1205, while the Nasdaq has
support at 1748 and 1736.   

Taking a slightly different
approach, I would like to point out some potentially interesting longer-term
trades based on the whole Argentina crisis. Additionally, this situation can
also assist you in your daytrading as well. While
some may argue that this news is already discounted into the market, my
experience tells me that when the media comes out, as they did yesterday, to
report that the situation has been “solved," you have to believe that
there is more bad news to come. The infamous “Cockroach Theory," which
states that if you see one cockroach, there are hundreds more invisible to the
naked eye is applicable here. Currency
and debt crises’ have ripple effects and are not “solved” magically
overnight.www.ft.com)
has been putting out some great pieces on this whole situation, without the
unrealistic general media slant. Bottom
line — this situation deserves
attention, and I feel it will offer the informed trader some good trading
opportunities.

Depending on your views of this
situation there are a couple of ways you can play it from a longer-term time
frame (swing trade or position):  One is the Argentina Fund
(
AF |
Quote |
Chart |
News |
PowerRating)

and Telecom Argentina
(
TEO |
Quote |
Chart |
News |
PowerRating)
, both traded on the NYSE.
Intraday, the major bank stocks will remain volatile as news continues to
come out of Latin America and will determine how much exposure these banks
actually have to the crisis. Stocks like Bank
of America

(
BAC |
Quote |
Chart |
News |
PowerRating)
and Citigroup
(
C |
Quote |
Chart |
News |
PowerRating)
are liquid enough to
“scalp” and may have negative exposure to this situation.

I will wrap up my column today
with a quote from Bill Fleckenstein’s daily column.
The quotes are from two of his readers who spin quite a different story
as it relates to our economy. I, for one,
put more faith in what the “man on the street” has to say about overall
economic activity than what the media and economists do.

"I recently purchased
four pieces of equipment made by APC for my computers. All of the items are
mainstream, business-oriented UPSs and power conditioners. Should be pretty
high-volume stuff, right? Every single piece of equipment had a quality control
slip inserted in the plastic wrap to verify that it had been tested. Guess what
the handwritten date was on each piece. May 2000 or earlier. Even a pretty solid
tech company with not-horrendous fundamentals and great demand (can you say
‘California blackouts’?) is up to its eyeballs in inventory. I bought the
equipment from a high-volume supplier (NECX Direct, part of Gateway), so I doubt
that they have been holding it in inventory for the past year. Inventory
correction my ass!"

"I work for a Fortune
500 company and do some recruiting and hiring. One thing that strikes me as
rather odd is the steady stream of layoffs combined with claims of a second-half
pick-up in business. As you might imagine, letting people go is expensive, and
hiring people is also very expensive. Some of the costs include severance,
occasional lawsuits, and loss of investment in that worker (training). When you
hire someone, you have a number of costs:  relocation, administrative,
benefits and training. I estimate that it costs at least a year’s salary to hire
someone (on top of the actual salary). Firing someone might cost as much (if you
count your lost investment). So, conservatively, if you expect demand to pick up
in the second half, and you go and fire someone now — expecting to add back
someone later this year — it makes no sense. I’d keep them on, washing dishes
or something for six months. This all seems to smell badly. I don’t think any
sound business expects to need people for quite a while. The second-half demand
story is just that."

With all this in mind…have a
great trading day and a great weekend.  As
always, feel free to drop me your questions and comments, davef@tradingmarkets.com

Dave