Market Rap 18 September 2009

The S&P closed +2.81 at 1068.30. Spot gold ended at $1,006.15/oz. The USD index closed +0.237 or +0.31%. Comex Copper was off 3.83% or 11.10 cents at $2.7850 per lb. The dealers I spoke to said copper weakness was due to talk of a slowdown in Chinese imports.

China

The Shanghai composite closed -3.20% before Friday’s open in the states. After topping in early August, Shanghai found support in Early September and has rallied from a low of 2770. The rally has taken the index to the lower end of my regression analysis. A short has signaled with stops above last week’s high and target at +/-2700.

Shanghai Composite - Daily

Housing

Toll Brothers has been raising capital — most recently on 15 September $250M of 10Y notes — to pay off shorter term maturities. By paying down shorter term debt, the company is attempting to protect itself from cash flow troubles. Coupled with paying off shorter term debt, insiders are hitting the sell button in large numbers. The CEO recently sold 1.58 million shares on 16 September. In light of these data points, JP Morgan upped the shares from neutral to overweight ($29 price target).

Disconnect

Ubiquitous as the signs of fundamental weakness are, the trend in equities remains one of re-risking as opposed to de-risking. Vol term structure (VIX/VXV) is indicating risk ahead. The credit market has priced in far more risk than equities. As tough as it is to fade this move higher in equities — on a technical basis — the earnings multiples have definitively priced stocks for a V shaped recovery.

Opportunity

In light of these cross currents, these times offer tremendous trading opportunities. In conversations with several traders last week, I sensed frustration at their performance to date in 2009. Odds are, if you were short last year, you were not long this year. It was very tough to nail it both ways. No matter, it’s about what lies ahead. The fourth quarter is upon us. Gains of large proportions tend to manifest themselves in Q4 each year. Are you ready?

Ready or not, one thing is certain. The beat goes on.