Friday’s Action and Playing this Rally

by Dan July 5, 2011 9:13 am • Commentary

Friday’s rally in the SPX was fairly impressive for a couple of reasons; first it was the greatest % gain of the five day rally and second although it came on a Friday before a long holiday weekend, its volume was fairly healthy, marking the third most active day of the week. Volumes were likely helped by equity inflows for the new month/quarter, but this will be important to watch as you will not want to see volumes peter off as the rally becomes narrower in range.

Chart below shows the inflows adding some fuel to the fire with Friday’s surge.  Notice how everyday last week the low of the day was essentially the opening print and the high was withing a few basis points of the close…..obviously very impressive action.

[caption id="attachment_3058" align="aligncenter" width="300" caption="6 Day SPX chart Provided by Bloomberg LP"][/caption]


So here is the deal, or at-least the way I see it, the strength and the swiftness of last week’s rally may entice you to want to jump in and ride the euphoria, but, believe it or not the easy money wasn’t really that easy…..if you were to have caught that rally you really had to draw a line in the sand and be willing to get long into some events that could have easily gone the other way…..the first few days was a traders’ rally and the last couple were mutual funds piling in…..Traders will likely start to take profits as things quiet down, and mutual funds are committed and will continue to buy as we go up or down…..they will as they always do chase performance and likely made their beds for the balance of the year.

One thing seems fairly certain to me, is that expectations as we head into earnings season just got a heck of lot higher….we went from a glass half empty 6 trading days ago to a glass half full. For instance, IBM made a new 52 week and ALL TIME HIGH on Friday, the stock is up almsot 19% ytd, dramatically outperforming the SPX up 6.5% ytd… you tell me, where the heck is this stock going if they report an in-line qtr and have a slight raise when they report Q2 on July 19th???  Yeah, Yeah, the stock is cheap and this, that and the other, but I don’t buy run away break-outs and with what ORCL told us about hardware sales in the qtr it may make sense to take more of a cautious stance heading into the print.  I know, I wanted to be short this stock 10 points ago, but I did so with a low premium put spread in July, I defined my risk and lived to fight another day.  I will look to re-establish this positioning and with vols as low was they are there may be opportunities abound to express directional views.

If the rally continues it will likely have to broaden out a bit, look for laggards and try to figure out why they have not participated to date….if you can’t find a good reason than try to find a catalyst that may help the stock catch up that for some reason is being under-appreciated by the market.