even lance lewis is bullish. time to sell your calls? <g>
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Revelers Buy Stocks To Celebrate The Coming War
Asia was lower again last night, with Japan falling 2 percent and back to its lows of the year. Somebody obviously needs to pass on Tokyo that now is the time to celebrate the coming war. Europe rose 4 percent this morning, and the US futures were roughly flat after trading quite a bit lower last night in the wake of the Azores “Summit.” The one hour social event in the Azores between the US, UK, and Spain (that was dubbed a “Summit” for some unknown reason) turned out to be precisely what we discussed it would be on Friday, (i.e.- announcing an end to the UN process and beginning the countdown to war). The official cutoff for diplomatic efforts at the UN was said to be today, but things had obviously reached an impasse as of last week (that’s where our rally came from). In any event, with that backdrop, we opened down slightly and milled around until it hit the wires that the US was “closing the diplomatic window” and that Bush was going to be giving an ultimatum speech this evening (pretty much according to our script on Friday). However, instead of selling off, we immediately began rallying like it was 1999. We made a Harrier jet move to the tune of about 3 percent within the first hour or so. After backing off a little from that launch, we proceeded to trade in a sideways chop for the remainder of the day, and edged back up to the morning’s highs in the last hour as panicked shorts covered into the close. Volume was chunky once again (1.7 bil on the NYSE and 1.9 bil on the NASDAQ). Breadth was over 2 to 1 positive on both exchanges. Upside volume was over 90 percent of the volume on both exchanges in what appeared to be another upside panic.
Tech was of course chased the hardest once again. The semis were soaring. After being up 10 percent at one point, XLNX finished up 7 percent to a new high for the move. MXIM and LLTC were not too shabby either with each posting up 5 percent romps (both moving to new highs for the move). The equips were up even more. CMOS rose 9 percent, AMAT 6 percent, NVLS 7 percent, etc. The SOX jumped 6 percent.
The rest of tech was flying as well. It seemed like the trashier the tech stock was the more it rallied, as people sought “beta” ahead of the “war celebration.” For example, the Internet stocks were top performers. AMZN jumped 7 percent to a 52-week high. This money-losing business trades at 3x sales. Online travel service provider EXPE jumped 6 percent to a new 52-week high and trades at a whopping 5x sales and 75x trailing EPS. These Internet stocks have been quietly rallying for some time, and I’m not exactly sure what that says other than the fact that the mania seems to live on.
Financials were rocking as well. The BKX rose 3 percent, and the XBD rose 5 percent. The derivative king had an unusually big day and rose 6 percent. GE rose 2 percent to a new high for the move. Credit insurers also rallied sharply. MBI led the group with a 7 percent launch. FRE rose a percent, and FNM rose 3 percent (last week’s losses having been all but forgotten at this point).
Retailers were up across the board, as the RTH rose 5 percent to a new high for the move. WMT launched 5 percent, which makes a gain of a little over 12 percent in the last 4 days form this “low beta stock.” The homebuilders were also higher across the board, with gains of 2 percent being the average.
Oil was slapped for 82 cents to $32.50 on word that the US could unleash its SPR at any time. Natural gas rose a penny. The XOI rose 2 percent, and the XNG and OSX both rose a percent. The CRB fell over a percent to a new low for the move. This is of course part of the “war rally” trade (buy stocks, sell commodities). Gold was limit-up for most of the Tocom session overnight in Japan and gapped up $6 in NY. The metal rallied up another couple dollars and then rolled over to give up all of its gains and slump back to Friday’s lows. There was a small bounce at the close to send the metal out up 60 cents to $338.10. The HUI fell a percent.
The US dollar index rose almost a full percent. The yen fell an eyelash, and the euro fell a full penny to 1.06. Treasuries were hammered, as the yield on the 10yr rose to 3.81%.
Well, events unfolded pretty much as I expected over the weekend, but the reaction in stocks was not what I expected to say the least. Once again, we see that if the herd believes in something strongly enough, it ends up manifesting itself in stocks no matter how overloaded that side of the trade is. I’m of course referring to the “war rally” that everybody has been buying calls for and expecting for the last 2 months. Things are so out of control at this point, there’s no telling how far this rally can go, especially with an expiration coming on Friday. Exhaustion may be the only thing that can stop it at this point. Barring some sort of exogenous event that sends the war in an unexpected direction, my guess is that due to the fact that we have rallied into the war (just the opposite of what I was expecting), we’ll probably sell off on the news (the old buy the rumor and sell the fact routine) but after that who knows. Once the war is over (or if Saddam happens to do everybody a favor and leave), everybody will get a look at the post-Iraqi war US economy and discover that the hoped for post-war boom never actually materialized, since that was never the problem in the first place. But in the meantime, any old post-war fantasy may pass as a reason to buy overpriced stocks, so we’ll just have to see how things unfold. While we’re pretty overbought in the short-term and are probably due to have some sort of pullback, Bears beware. This is not the inverted head and shoulders bottom that so many chart huggers have been imagining, but things can get a lot wilder to the upside now that the bulls have gotten stocks in motion. Again, barring some sort of exogenous event that causes a sudden reversal, with the last 2 months of trading having been virtually sideways, this move to the upside that is underway could be big. Be careful.
Tonight, we’ll likely get some sort of 48-hour deadline for Saddam to leave the country from President Bush, and then we’ll see if Iraq does anything in response. Tomorrow, we have the FOMC where I doubt we’ll get a move from the Fed, but in this environment, that is likely to be seen as bullish also. Basically, the bulls remain firmly in control. Don’t ask me how we have put in a low in stocks with everybody buying calls and more Investor’s Intelligence bulls than bears, but we have obviously done so at least for the short-term. |
