Thursday, September 3, 2009

Ira Schnell at Kaufman Bros. "Morning Note"

After showing some cracks in the foundation over the last few days, I got the sense yesterday that people were content to look for further evidence of a breakdown before they need to start kicking out their longs and/or laying the shorts out again….Almost like everyone was waiting around looking for someone else to make the first move…Certainly cant blame institutional or retail investors for acting this way, because over the last few months, if you sold after initial cracks in the foundation formed, you got very burned.

Combine that with the fact Labor Day is fast approaching, and maybe we get a pause here before the next move (unless Friday’s non farm payroll # is way off consensus, in either direction)…And after virtually 6 months of equities going straight up, I don’t think you can discount the fact that even if they are going to unwind this thing, you might get one last sucker rally right back through 1010 to 1020, before they finally hit this thing through 970 to 980….I talked yesterday about the key role plain vanilla long only funds will ultimately play in dictating price action if selling momentum increases as we roll into 4Q09 (will they buy on the way down or turn sellers?)…Wanted to throw out one more piece of the puzzle…Short sellers have been taken out on stretchers for months now….I know most have been burned to the point that they would rather short only on weakness than try to top tick this market and run the risk of getting steamrolled (again).

So my point here is if the snowball starts to roll down the hill with regard to sell momentum, and the shorts get in motion, what are there expectations for that trade?.....It seems to me that when you get smoked repeatedly with the same strategy, and that strategy finally starts to work, it is human nature to close out the trade too early and lock in your profit, because you just want to right (I am certainly guilty of that on a personal level)…

And not sure that is all that atypical…So what am I saying here?...I think if this market does come off, short covering should come into play maybe a bit earlier than it would normally, thus stemming the down move (at least initially)….Combine that with a 6 month uptrend which has been firmly entrenched, and I think you could certainly make the case the above scenario might take place…

Although it appears that most of the heavy bleeding in the unemployment picture in the US is behind us, the #’s just don’t paint any kind of picture the biggest problem plaguing this economy has abated…The ADP # yesterday still demonstrates that people are losing their jobs at a pretty healthy clip…And the other huge missing piece of the puzzle (the actual hiring of people) still seems like it is very far away….In fact, I saw something the other day that illustrates this point pretty well…The Robert Half Financial Hiring Index says that 84% of CFOs surveyed have no plans on hiring for the rest of 2009….4% expect to add staff, and 10% see more cutbacks (actually up from 8% from the last survey)….Look out for initial claims out @ 8:30 (consensus is 565k, and consensus for continuous claims is 6.125mil), followed by the ISM non manufacturing out @ 10:00 (consensus is 48).

Source: Kaufman Bros.

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