Hot Hand Handicaps the Bounce

by StockJockey

Monday, July 21, 2008 - 11:14 am

How much gas does the rally have left in it?

1320 at best, on the S&P 500, before reality sets back in, according to the hottest technical analyst on the Street, ISI Group's Jeff DeGraaf.

The sudden appetite for oversold financials came at the expense of energy stocks, as a mini-rotation took hold. Energy stocks, at least if the Energy Select Spyder is your proxy (XLE-AMEX), have been the source of funds, along with idle cash. But breakouts in rank and file stocks are few and far between, despite the one day wonders we experienced last week in breadth and volume.

Stocks have been treated more like commodities for sure, valuation has not mattered a bit as stocks crack five and 10-year valuation troughs time and time again, burning buyers who, until last week, were getting more gunshy with each passing day.

Breadth last week was rather punk however; DeGraaf was looking for more like 9:1 than the reltively tepid 3:1 we witnessed on Wednesday's rally. And while he is respectful of a bounce, until credit markets improve, and crude cracks $121, DeGraaf remains skeptical.

With financials quickly approaching overbought status, he thinks the next trade might be back into energy. Still, "counter-trend bounces often last longer than anticipated", and DeGraaf admits it is possible the percentage of stocks above their 50-day moves back above 80%, from the 20% we saw early last week, before the bounce runs it course.

As Tickerville noted on July 8th, the T2108, was at 17-18 year lows, as the percentage of stocks trading below their 40-day moved to the lowest levels seen since the early 1990’s. Subsequently the VIX touched the magic “30” number everyone was looking for.

But with Ed Hyman looking for the unemployment to rise to 7% by 2009, you might want to curb your enthusiasm. Gunning for shorts in financials is one thing, but as retail stocks show today, this is not necessarily going to be a one-way affair.
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Don’t mess with the Spartans…

JEFF DEGRAAF is a Senior Managing Director and head of ISI’s technical analysis team. He has been an Institutional Investor’s ranked technical analyst for each of the past 7 years, and was ranked #1 in the last 3 years. Prior to joining ISI in 2007, Jeff spent 9 years at Lehman as managing director and chief technical analyst and also served on the firm’s Investment Policy Committee. Prior to joining Lehman, Jeff spent 8 years at Merrill Lynch. Jeff graduated from Michigan State University in 1990 and is a CFA and CMT charter holder. In addition to his professional responsibilities, he serves on the finance board at Michigan State University.
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Rotation Out of Energy (XLE) and into Financials (XLF) took hold last week

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

Comments:

My question to you Stock Jock; is this a “mini-rotation” as you say or a real and important rotation out of agriculture and materials. Regardless of the rotation “into” part, I really think this rotation out of the winners from the first half could be real and last longer than people might think. What are your thoughts?

Posted by on 07/24/2008 at 07:59 PM

Oops missed this and just reviewing the post and subsequent trading action.

Clearly the rotation has been severe...it was as if nobody was paying attention until the 2nd quarter ended and everyone saw how bad the Value Guru’s had done...and woke up and began to consider they herd might try to shift at once.

The PPT moves mid-July certainly helped, but the XLF has essentially moved sideways since the intitial move in the 48 hours after the “hard to borrow” shorting rules from July 16-17th

The rise in the number of stocks above 5p=0 day has cleary shown up in the Russell...last 6 trading days have been strong for small fry…

Posted by on 08/17/2008 at 10:59 PM

With a little hindsight I have a different opinion. It seems the rotation out of first half winners has been so fast and all encompassing that it may be oversold. Again, I was not making a case for rotation into financial or really rotation into anything just talking about the rotation out of all of these ags and material stocks. I’m a contrarian by nature and I can’t tell you how scary it is to hear every asswipe talking about strong dollar trades. This rotation happened too fast for my liking. As of right now I’m thinking of taking all of my short ag bets off.

Posted by on 08/18/2008 at 01:55 AM