Epiphany Research

Alcoa

John Hughes 212-692-6391 jhughes@epiphanyresearch.com

Alcoa put out a good earnings report last night beating the street estimates. We thought that might bode well for the market and or basic materials stocks as well. While Alcoa is indicated higher, it has not having any trickle down effect. This means the market is more concerned with other issues and that the reasons for Alcoa’s success are most likely in the past and the conditions that allowed for their success will not exist going forward. In a healthy advance, this news is a positive and at other times, it is no help. When the news is not helping that’s indicative of underlying weakness and a potential change in participant’s expectations. Yet another change we are seeing, good news isn’t as having a positive impact.

Another Potential Insight

John Hughes 212-692-6391 jhughes@epiphanyresearch.com

We were unimpressed with Monday's rally attempt. Breadth was flat and volume was light. No real momentum behind it either. With Today’s higher open indicated by the futures trading above fair value, we should get another insight into the developing weakness and its impact. The pattern of higher opens and flat or lower closes, has been another developing theme as well. It isn’t the way stocks start the day, but how they finish that is more telling. If this early strength does not old or build through the session we would view that as a negative and further signs of short term distribution. If the strength does build, then we would be inclined to think the selling pressure has not taken hold in a significant way just yet.

Value, Value Everywhere

John Hughes jhughes@epiphanyresearch.com 212-692-6391

Here we are again. Another Monday and takeover news dominates the headlines. It seems there is still value out there and if the “pros” see value, then maybe why shouldn’t everyone else. This is creating a little euphoria. Of course, the number of takeovers and LBO’s is, in itself speculative activity, and this is typical during late stage advances. For now, the market continues to push higher. The seasonal upward bias should keep stocks moving higher this week and this merger news is as good a catalyst to get the week off to a good start. We wouldn’t get too caught up in all the hype. We favor the large capitalization names as this is where the underlying demand remains strongest and the risk reward is the best at this point in this divergent rally.

Consumer Discretionary

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

The consumer discretionary sector has rallied very sharply during this rally, but the group is looking extended against a divergent background. John Hughes is highlighting this group in this weeks sector report, but I wanted to show a chart of the ETF against the divergent internal and price momentum indicators. See John's report tomorrow for an in-depth look at the group.

Guru Performance

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

If your wondering how your favorite market guru ranks here is an interesting report. I found it interesting the the best performing guru was a perma-bull and the worst performer was a perma-bear.
www.cxoadvisory.com/gurus/

Oil Services

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

We're seeing an aggressive opportunity in the oil services sector right here. This energy sector  has made some significant improvements in the last month. The broader group has broken out of a large bullish rectangle to the upside and breadth for the sector has broken out to new highs. This is bullish for the broader group.
The oil services sub-sector is the most volatile component of the energy sector. The oil service stocks formed very bearish looking distribution patterns over the last year. Traders get defensive on this sector as they anticipated the end of the energy bull market and a breakdown in crude oil. What we have seen instead is a resurgence in these names that is starting to nullify the bearish chart formations in the sector. When a bearish pattern fails it can be a very bullish situation as traders positioned for a decline on the short side are forced to cover and take the stocks higher. This is an aggressive trade right here, but it's an interesting opportunity.

Fed Day

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

We hate Fed day. The cross currents are crazy and we never seem to get it right. The Fed didn't make any changes, but did put out some dovish language. The market rallied on the report as traders ran with what was perceived as bullish news.
Here's an article from Barry Ritholtz talking about what he believes are important data points driving the Fed and why he doesn't believe in the "soft landing" idea.
http://usmarket.seekingalpha.com/article/22256

Our Biggest Fear

John Hughes (212-692-6391) jhughes@epiphanyresearch.com

We know the FOMC meets tomorrow and that may be the reason the trading has quieted down over the last few days. Our biggest fear is the market may be quieting down here and this choppy trading is what we can expect through year end. Most hedge funds are underperforming the major indexes and are playing here because they have too. We are worried that this has already forced most participants to cover shorts and get long. If that’s the case, the fuel for a further rally may not be there. The market rarely satisfies the majority and with most looking for further upside, it may not be that easy to come by.

It's really all a question of when participants decide to cash in rather then playing one more hand. With three trading weeks left in the year, we are getting closer to that inflection point.

Slowing Down

John Hughes jhughes@epiphanyresearch.com 212-692-6391

The economic news continues to show a weakening economy. The dollar believes this is the case as it continues to weaken. The bond market believes it’ the case as yields continue to fall. Metals believe it too, as they continue to rally. The stock market however, doesn’t believe it or is just ignoring it. We would be careful with consumer discretionary names at this point, especially the electronics retailers, which are showing signs of weakening and are vulnerable to further weakness. The multi-national consumer staples issues continue to act well and are strengthening with the falling dollar. We would look to this sector for long ideas. Pepsi (PEP) and Kellogg (K), are a couple of names to look at. Yes, we know they are boring, but they look good.

A Little Funky

John Hughes jhughes@epiphanyresearch.com 212-692-6391

The early rally was not as enthusiastic as the indexes made it appear, Breadth has been flat to negative all session. No increase in downside pressure, but the day, so far, has a sloppy look to Just be cautious, based on this daily price action. In general, we sense a loss of buying interest. Most pundits are in agreement stocks will rally into year end. We aren’t saying they will be wrong, but with everyone looking for such a rally, it would suggest that most participants are invested or more invested. This means a lot of bets have been made and participants are waiting to get paid. This usually leads to a period of lateral performance at best, as most money has been put to work. Commodity issues still acting well, look to energy and precious metals for long ideas.