Epiphany Research

Energy

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

Energy stocks are acting strong so far today. The idea of a slowdown in the economy knocking back demand hasn't carried over from Friday. The XLE and OIH are rallying and are approaching the highs set three days ago. This group is moving towards overbought so pushing higher here will prove to be increasingly difficult until the overbought condition is worked off.

The Core

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

The financial indexes remain the core of strength in this market. If your wondering how the S&P 500 is holding up in the face of the brutal evisceration the tech sector has received then all you need to do is go look at the financials. These stocks has held up extremely well during this corrections, but the relative strength in this group actually started in November of last year. This sector was doing well in a rising rate environment with no end in sight for the cycle. That's impressive considering this is a rate sensitive group. Now that the market is forecasting a halt by the Fed we have to believe that things can only get better for this group. Unfortunately sentiment in this market is driven by high beta tech names and not low beta financial stocks. Look for a continued build out to the upside for this sector.

The Transports Have A Flat

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

The transports have driven into the ditch recently. Bearish earnings news out of UPS and Norfolk Southern as well as a weak GDP report have helped solidify the idea in traders heads that this group is done. The transportation index rallied back strongly off of the June lows, but has since given all of that rally back and has moved to new intermediate-term lows. Technically this is weak price action. The index has formed a bearish double top reversal / distribution formation in the daily chart. This suggests exhaustion of the trend.
The internal picture for the sector is not quite as bearish, especially the bullish internal momentum divergences. This tells us that the weakness is concentrated in the largest-cap names in the sector. If the market continues to rally this week then this sector should get dragged up, but the transports appear to be off of the offensive for now.

Early Rally!?

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

Here's the headline news this morning, "Economy Slows Sharply, Inflation Heats Up". Not exactly what you would think the market was looking for, right? Sounds like we're talking about stagflation fears if you take the headlines at face value. Well guess what, so far today the market loves this news. We are looking at an early rally that is taking the Dow up 100 points so far and the NASDAQ up 20. The energy sector is a casualty to this slowdown data and weak earnings out of Chevron didn't help any.
The interest sensitive and financials should be loving this news and the idea that the Fed is on hold. Look towards these groups for broad-based strength. Tech remains oversold, but we did see several weak earnings reports last night, lets see if todays strength can get anything moving out of this sector.

Oil is Ready

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

Crude oil look to us like it's getting ready to make some sort of move here. We say this because the commodity is showing  contracting volatility that usually precedes a move. We are noticing that the Bollinger bands are "pinching in". Volatility contractions such as this usually lead to an expansion of volatility since volatility is anti-persistent. All this mean is low volatility usually leads to high volatility.
We can also see that the commodity has formed a bull flag in the uptrend. This type of formation is  a continuation pattern and suggests that the volatility expansion should be to the upside. It doesn't have to be, but the odds favor it. Keep an eye out for crude headed into next week.

China's Getting Serious

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

After posting the strongest GDP numbers in 10 years (11.3%) the Chinese Premier called for "urgent" measured to curb economic growth and avert an "economic disaster".
"We must take forceful measures to resolve prominent problems to prevent the economy's rapid growth from turning into overheating,"- Prime minister Wen Jiabao. (do they have a prime minister? almost sounds democratic.) (Article here )
It seems that China's primary choice for slowing down the economy is not the greenspan type of incremental rate hike, but to jump directly into the banking system and change policy there. They have recently raised bank reserve requirements and will increase restrictions on construction lending and new construction permits. If you follow China closely this is nothing new and in-line with the way they run economic policy in that country. They have already put restrictions on construction this year and will likely tighten existing policies.

What's Up With Oracle?

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

Have you looked at Oracle lately? This stock is trying to breakout from a base formation while the rest of the large-cap tech stocks are being beaten to death by the short sellers. ORCL is showing some relative strength vs. the technology sector here. From what I hear business at the worlds largest enterprise software company is picking up and the company has done well with the acquisition strategy it has pursued over the last couple of years. The news must be good for this stock to be finding a bid in this technology environment.

Perspective

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

Take a look at this chart and tell would would you rather be short or long this name.

Most technicians I know would say, "the trend is my friend, I wanna stay short this name." Then they would go and put out 300 basis point of this thing. If you haven't figured it out yet this is an inverse chart of the S&P 500. You could take the bet that the downtrend line is going to be broken, but this would be the more aggressive call. Sticking with the trend would be the more conservative trade. Do you believe that sentiment is with the trend right now? I have been holding a fairly bullish long-term outlook simply because a lot of my lines are still pointed up. It doesn't mean I'm right it just means that I am choosing to stick to the more conservative interpretations of the market action.

An Important Session

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

Today is an important session. Why? Because after yesterday's big rally day the market now has another opportunity to follow through. This is an inflection point. We have fallen into a pattern recently where a big day up (or down for that matter) has been answered quickly with an opposite and equal reaction. This has happened enough times that traders have picked up on the pattern and are anticipating it. A follow through day one way or the other should catch everyone leaning the wrong way.
There is a sense of bearish complacency settling in here. If the market fails today then there's no change that's what traders expected, but if the market follows through and surges to the upside a lot of bears should panic and cover shorts that they didn't get covered yesterday. Today has the potential for an interesting session.
Earnings news was mixed again so the market can take out of it what it wants, but I did see that 70% of the companies where exceeding estimates. I found that interesting. The bearish response to that is that this is the last good quarter before the slowing economy takes hold.

Strong Close

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

The market put in a strong close today. Operating companies breadth came at better than 9-to-1 in favor of the advancers today. The DOW was up 181, followed by the NASDAQ at 41, and S&P 500 at 20 points. Another ridiculously strong day. The question now is  "do the bears come in hard tomorrow and sell this market?". They have each time we've had a rally like this. There seems to be a pattern developing here so I suspect that we may see some sellers attempt to knock this market  back after an up opening in the morning. The only way this market can show any follow through is to have the sellers rebuffed tomorrow and possibly generate some panic on the short side.