Tug Of War Continues

• January 22, 2002
• Dave Floyd

Earnings week
continues in earnest this week, as well as a handful of economic
numbers that may shed some light as to whether or not the economy is improving,
or still a bit soft. At this stage, where historically most recessions begin to
show signs of abating, these numbers are even more critical. There is such a tug
of war currently between those who believe the recovery is imminent and those
who believe it will be a very sluggish climb back towards positive GDP, that the
battle will likely yield some nice trading and good investment opportunities. So
stay on top of the economic numbers for the next few weeks.

It appears as though Tyco Int’l
(
TYC |
Quote |
Chart |
News |
PowerRating) plans to split the company into four distinct parts, with a planned
IPO slated for the second quarter of this year. Tyco has been a great intraday
trader as of late and that should remain true going into today’s session.
However, if one looks at the last hour of trading closely in Tyco on Friday, it
would be easy to draw the conclusion that someone knew about this imminent
announcement.  The move up was relentless and done via large blocks of
stocks. No complaints on this end, I just trade ’em as I see ’em, and as a
result to took full advantage. But it is a bit disturbing if, in fact, that news
leaked out. I would be curious what the call volume looked like on Friday.

Also keep an eye on Amazon
(
AMZN |
Quote |
Chart |
News |
PowerRating),
the came out with their first-ever profit on a per-quarter basis. If, in fact,
the initial reaction holds, Amazon may prove the doubters wrong. However, a 10%+
move in pre-market can potentially offer a nice reversal trade. Keep an eye on
the price action for an indication.

Turning to some longer term setups, I
came across the following two stocks for setups to the long side:

Some of you will
recall last week that I showed a couple of bearish charts of Consumer Finance
companies, specifically Household International
(
HI |
Quote |
Chart |
News |
PowerRating), Capital One
Financial
(
COF |
Quote |
Chart |
News |
PowerRating) and Americredit
(
ACF |
Quote |
Chart |
News |
PowerRating).  During the week,
Americredit experienced a decent decline, while the other two were up.

In reviewing my charts
over the weekend, it became obvious that the companies catering to sub-prime
borrowers were the ones to be focusing on within that sector. Americredit,
as noted, declined, as did Metris
(
MXT |
Quote |
Chart |
News |
PowerRating). Paying more attention to
that subtle difference would have made a big difference in performance last
week. Instead, the three shorts cited above had you about even on the week.
Focusing on the sub-prime end of the market, i.e., ACF and MXT, would have
yielded much better results. The ideal entry point on MXT was at roughly 25.55,
when the trend line was broken.

Overall, the sector is
vulnerable. Delinquencies are up, and overall portfolio quality has
deteriorated. However, it is still a much loved sector, and will probably need
some sort of a negative catalyst in order to ignite a slide. It is this waiting
game that keeps it interesting. Use protective stops.                                                    

Key
Technical Numbers

Random Observation:

Since the
beginning of 2001, gold shares have begun to outperform equities and in
particular financial stocks. The market, therefore, seems to indicate that there
might be something rotten in the financial system. In the course of 2001 another
important change occurred. For the first time in many years, emerging markets
began to outperform the US stock market.

As always, feel free to send me your
comments and questions. I am keeping an eye on some nice
intraday setups, I will do my best to alert you of them in TradersWire
if they develop.

Dave