PRINTABLE OTA Lessons from the Pros 10/18/05: Bouncey, Bouncey?

Bouncey, Bouncey?
For the Trading Week Beginning October 17, 2005

David W. Aloyan is a Technical Analyst providing analysis of the markets and securities. Dr. Peter Navarro is a business professor at the Univ. of California-Irvine. He holds a Ph.D. in economics from Harvard, and is the author of "If It's Raining in Brazil, Buy Starbucks." and When the Market Moves, Will You Be Ready? Mr. Aloyan and Dr. Navarro are the founders and managing members of Platinum Capital Management, the general partner of the Macrowave Investor Hedge Fund. Dr. Navarro has also created an excellent Cd in conjunction with Online Trading Academy, covering his Macrowave topics in an easy to use multimedia format.

Navarro's Market Rap: Earnings Week or Weak?

We're three weeks into my short side call and if there is going to be a technical bounce, this is the week that such a bounce is likely to occur. That will be all that it is – a technical bounce as some shorts cover and some desparately bullish money managers see "bargains" where there ain't none.

There are just too many bearish wheels spinning in motion now: Rising interest rates and oil prices, a bankruptcy here (Delphi) and a scandal there (Refco), gridlock in Germany, a housing bubble flirting with bursting, a continued loss of manufacturing jobs to Asia, a rise in credit card debt repayment requirements, and a shrinking window on the October to November annual bull rush.

The Week Ahead: Earnings Dominate

The data calendar is exceedingly light, although the PPI could be a market chiller if something besides food and energy turn up the inflation heat. That's why the start of the earnings season will be more of a market mover. This is always a crap shoot and one that I don't find to be a particularly good environment to speculate on.

Peter's Portfolio: Shorts and Longs

I double up on my cubes short and am still in the green. ARDI earnings come out this week, but I saw NOTHING in its price and volume action to suggest any strong upside surprise. So I have just sat tight.

Chicken that I am, I cashed out my SVA position with one of the nicest gains of the year. I remain bullish on this stock and will begin a more caution scale-in and rebuild the position if SVA holds above $6.

Dumped both Japan and German ETFs (EWJ and EWG) on the assumption of a positive correlation with the U.S. cycle, continued gridlock in Germany, and rapid technical deterioration of both. Got out clean… Cut LVLT loose as well as my green position was going red.

Holding ARTX and ASTM while I added DSS, a data storage play with sound technicals.

LASTLY, I opened up a semi-big position in our old friend CPTCQ. It seems to have settled the lawsuits that got it into bankruptcy and is likely to start releasing some positive news on orders. Under two bucks, it's like buying an option.

Hedging Your Bets With Matt Davio: Volatility on the Rise

We continued the sell off in the markets this week as we neared 1170 on the SP 500, before getting a nice rally Friday nearing 1190 on the close to finish the week on a high note. The market was definitely tired of going down by late Thursday as the selling pressure had ebbed and we got a nice gap up and retest Friday to rally to the highs of the day.

We have now sold off about 5.5% from the recent tops in the markets. I think we are testing the bottom of the range 1170 to 1250 we have now been locked in for over two years. The question is will we go back to 1200-12110 again or retest the next level of support near 1140. My bet is we rally the next few days and this will allow a good spot to sell stocks that are lagging but the upside remains capped until we can take out 1250 and the downside will offer more opportunities.

Interest Rates continue to rise and we spent a good part of the week on the Ten year @ 4.5%. The trend is now up for interest rates, and this will not end well for the great American non Saver Nation. Lets look at the at a Debt chart below. Easy Credit in asset bubbles has never ended in a pleasant way.

Real Estate has risen not because of wage increases but due to this easy credit. This credit expansion will not end well, to me it is not a matter of if, but when the adjustments will be taken. Rates are on their way up, the bottoms are clearly in.

Volatility has broken out and the complacency that we have been locked in for the past two years is starting to wane. This means higher volatility will demand more risk constraints when managing portfolios. This is not the time to buy Index funds and ride the wave up.

I can clearly see a possible bottom with a Head and Should formation with the neckline on the VIX solidly settled @ 11. Movement has and will continue to be on the rise in markets creating both higher opportunities and higher risk for all investors.

I am going to leave you with one final and powerful chart. I truly believe a picture is worth one thousand words.

DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.