Uptick and Earnings

alcoa earningsThe low volume trading seems to be favorable to the bears as we experienced our second consecutive down day, having the Dow close 186 points lower. I was a bit surprised at the degree of selling, especially on such a low volume day, but as I have been saying, I believe we are bit overbought at the time due to the recent severe bailout speculation and that we could retrace a bit before going back up, if we do go back up. We have experienced two consecutive selling days before throughout this rally, but rarely have seen three. So, another down day tomorrow would actually show some strong reversing trends in the market.

Tomorrow, the government discusses the future of the Uptick Rule as we should expect some sort of announcement. I, personally, don't see how even reinstating the Uptick Rule will make much of a fundamental difference in the market. If anything, it may cause for a very short term rally, but just as our October Financial short banning showed us, there can still exist massive sell off days. So, I will be watching to see the result of their meeting, but as of now, I don't feel the outcome is going to change my current strategy much.

SRS seemed to be back in business today, closing up over 15%, which is something that's good to see after its recent beating. I believe SRS should hold up better than the financial shorts at this time, due to all of hype about banks beating earnings this next quarter. FAZ remained pretty depressing in the 5% range most of the day, but then shot up to almost a 10% profit before close. There exists a lot of doubts for traders both long and short for financials, which I explain more on today's podcast (subscribe here). At any rate, for the time being, I don't plan on focusing much on financials until I can see some better opportunities for profits.

One lingering element that many have forgotten is the fate of the autos. It was only a week and a half ago that President Obama set the new rules for autos, which looks to be pushing them closer to bankruptcy. This has fallen to the wayside as big government spending plans has taken over the headlines. However, let me remind you of the destructive effect that a bankruptcy of the autos should cause in the market. In the past, just hints of bankruptcy sent markets down. I am keeping a watchful eye on that event, as it could be very influential to the market and to my decision to position myself stronger on the short side.

Alcoa opened up earnings season with a disappointment, which has sent their stock down a bit in after hours. In my opinion, this is just the first of many bad earnings report we'll be seeing over the next few weeks. The lack of consumer spending which has been present since the holidays is bound to eat into profits for businesses. It can be risky, but one strategy to consider at this point is shorting select companies about two days before they report. A bad report is bound to yield a quick 6-15% profit. I am guessing manufacturing and clothing retail will show worst sales. Watch out for home furnishing stores like Home Depot and Bed Bath and Beyond. Due to the recent bump in home sales, there could be some better than expected numbers from them, as we saw from BBBY today.

Once again, I am not expecting anything too dramatic this week, being the short, vacation week. Tomorrow should be our most critical day, mostly due to the uptick meeting. If by chance we see another strong down day tomorrow, I will consider buying into some plays like EEV and maybe some SDS. However, I do still feel we could ping pong our way back over the 8000 mark. So, we'll see what tomorrow brings. Morningstar has some great picks for 2009 at Morningstar - 35 Picks that Stand Up to the Bear. Sign up for the free trial to see them all, as it has some great picks and insights. I will be on chat tomorrow and look forward to seeing many of you there. Happy Trading


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