Yesterday’s Action: Burritos and Bullion

by Dan June 16, 2011 7:58 am • Commentary

Looking at my quote screen on Bloomberg this AM, taking another look at the damage done yesterday in the equity markets. There are two things popping out to me, one of the few equities that I see that closed up on the day was CMG the other green on my screen was Gold…..neither that surprising really, who could argue with a Burrito chain that trades at 40x next years earnings and only down 7% from the all time highs, but still up 30% ytd, is one of the few stocks on my board not to be down in yesterday’s slaughter.  Gold, I guess, seems like a more obvious choice for out-performance given the dollar rally yesterday. Really??? 

At this point in the corrective phase that we are in we are going to see some things that make a lot of sense, and others that don’t make much sense at all……. Even-though the markets were making fresh multi-year highs 6 weeks ago there were many once market leading stocks in full-on bear markets; CSCO, MSFT, GOOG BAC, GS & TGT.

Now as we are likely to extend the longest weekly losing streak since 2002, (approaching 7 weeks) we are starting to see some serious bear market activity in some names that recently made all time (or multi-year) highs….CAT is down almost 19% from its May all time high,  AAPL down 10.5% from its all time high made in Feb, AMZN down 10.5% from last months all time highs, WYNN down 15% in 2 weeks, but still up 25% ytd!   All of these stocks, like CMG could see considerably more downside if in fact the slowing world economy causes the earnings picture to sour a bit from the now rosey expectations.

The internet IPO machine, that some have called a bubble (not me), might have stalled a bit with Pandora’s relatively difficult debut yesterday (deal was priced at 16 and the stock closed at 17.42 after trading as high 24) even-though the deal was massively oversubscribed……If we see LNKD finally break-down a bit and Pandora break the 16 IPO price this could be one of the first signs of uglier days ahead and the shutting of the capital markets door to new issues.

Don’t be afraid to raise cash and stay in cash, its  going to be a rocky summer and while there will be fits and starts like Wednesday’s rally, most will be head-fakes until there is some form of capitulation…..the sell off has been all too orderly.  I wouldn’t even rule out a little flash crash at some point as it appears the mutual fund big boys haven’t pulled the plug yet in some crowded longs.   What I am waiting for, that will be most instructive as I proceed is how we act when the SPX gets to 1250…I have been saying this for sometime, but I assume there are a lot of stops right below that level and we could possibly go from orderly to ugly at that point.  While markets can turn on a dime, economies generally don’t, and the main risk in the last couple years of being short has been government intervention in periods like this, I wouldn’t rule out the floating of QE3 trial balloons if it looks like we are heading back into recession……so be nimble and move your feet, take some profits when things get oversold on the short side.