After five days of a mostly-bearish drift towards the lower side of a narrow trading range, the S&P 500 bounced up, fairly firmly, to highs not seen since the 19th. It was the best close since the 17th. Not bad. Not great, but not bad. My only beef stemming from the analysis is that - once again - the 50 day moving average line (purple) is acting as resistance. And bigger picture, my line in the sand at 918 still hasn’t been crossed. So, I guess I’m not overly-excited for two technical reasons.

The VIX closed lower, though no lower than the bottom edge of its near-term range. That’s still more on the bullish side of the fence though… just very weakly. It’s probably more a sign of volatility being reigned in than a directional clue for the market.

The futures are barely in the black as I write this. However, I suspect today will be an very uneventful day, and more apt to be slightly on the bearish side as traders wrap up any selling for calendar for 2008. There’s no particular advantage in buying in calendar 2008, so any significant pressure should come from the last minute sellers. Even then, it should be barely perceptible, as most traders are not working….volume should be oddly light.

My advice for investors is to do the same - take care of whatever trading/investing business you need to as soon as you can, and enjoy some time off after you’re done. I’ll be working, but that’s my problem.
I may add another blog entry later today, but if I don’t get to, have a great and safe New Years event (whatever that may be for you).

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The first batch of feedback from yesterday’s ‘Top Ten Market Predictions for 2009′ has arrived. Since everything in it, and all the responses to it, are going to be broad, I’m going to post them here in the blog. As more roll in, I’ll add them in other blog entries.

Here’s the first one.

Interesting predictions but I am not fully persuaded. First, I am much more bearish. I do agree that the Glass-Steagall Act separating investment banking and commercial banking will not be restored in 2009. More likely investment banking will go the way of the Dodo bird. But I don’t see the Titans taking the Superbowl this time.

Editor’s response: Interesting. Who do you think might be doing investment banking going forward? I ask because someone has to do it….maybe. You make an interesting point though - how much investment banking do we need, and what will it look like in the future? They (all the IBs) seem to be disintegrating. I don’t think it will go away though. If not the Titans, who do you like?

Next up…

If you think Linux is worthy, look at Leopard. a fantastic OS!

Editor’s response: Thanks. I’ve never heard of Leopard, but I’ll check it out.

And finally, we got this e-mail, which touched on several topics.

Thanks for all the neat predictions. I had put off going from XP Pro SP2 as long as could. Probably still be with XP Pro if I’d guessed how bad Vista was to be. In the end tho with the Vista SP2 beta release things have been more stable. Any probs that do arise are generally from the occasional rogue program I try like an old chess game I might find from some years back. Running Vista’s disk check during the reboot required for that does return things to normal. Things that usually go wrong on a rogue s/w are loss of sounds and presence of DVD. But as mentioned that clears up. Someone else also mentioned Windows 7.0 is just more bloar for now as with IE 8 beta. Oh, also heard some others on TV liking Slumdog Millionaire. Couple clips I’ve seen were so so. Prob have to be there. Ben Button tho got some glowing recos. But then it took me forever to finally see In Bruges and Casino Royale. All the best for a better New Year. Doubt can be more shaky since now we know what can really go bad.

Editor’s response: Thanks for the note. In order….

1. I understood about half of what you said regarding Vista’s functionality. I’ll get my computer-guru friend to translate the rest. I’d really like to get away from Vista, but can’t find all the drivers I need.
2. Yeah, if the chatter is correct, Buttons gets the nod, but Slumdog will be a contender. It seems like the Oscars are always a surprise though.
3. Agreed; it may not be any better in 2009, but it sure can’t get any worse than 2008.

If you’ve got any feedback, you can add it below.

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If my math is right, after Monday, 11 of the last 15 Mondays have been bearish. So, I’m not too rattled by yesterday’s selloff… it’s par for the course. My concern is rooted in something much deeper than that. Remember the 50 day moving average line (purple) we started to toy with on the 16th? We still haven’t broken past it. Usually - though not always - those breakout moves happen pretty quickly and decisively. I don’t like the way this one is lingering…. I don’t get a warm fuzzy for the bulls.

Likewise for the VIX - after reaching new multi-week lows last week, it’s just been moving sideways (though the market has too).

If I were totally objective I’d point out how the last four days were nothing but a consolidation phase, and I wouldn’t be an optimist or a pessimist. I’ve been trained to be skeptical though, which has been the most productive/profitable mindset since October.

The good part about a consolidation phase is that whichever way the index ends up moving out of the tight range, it should stay pointed in that direction for a while. We might be able to squeeze a trade out of it.

Futures are up this morning, though they were up yesterday morning too when the Gaza/Isreal situation was less troubling. Either the conflict there wasn’t the real reason for the selloff on Monday, or someone is trying to push the futures higher so they can sell a bigger position into that early strength.

It just makes me want to reiterate something… the only price that matters is the closing price, which lately has only been determined in the last hour of trading. I wouldn’t worry about the futures or the opening price much, if any at all.

I’ll update this chart at the end of the day.

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Looks like the tepid buying mood we witnessed in Friday’s lethargic session has carried through to this morning - index futures are up slightly. So is oil though, thanks to some geopolitical turbulence in Gaza. It’s nothing unusual though, so I don’t see oil prices staying pressured for too long. Either way, trading should remain thin - even if modestly bullish - this week, as most traders are taking the week off to celebrate Christmas and New Years.

Just to catch everyone up, we’ve been semi-optimistic about the apparent change in the market’s overall direction. The S&P 500 broke out of a bearish rut in early December, and started to make higher lows. That’s good, though we haven’t actually seen the SPX make higher highs yet. In fact, the index closed under the 20 day moving average line (green) on Friday… a pretty clear indication to me that things aren’t en fuego.

The line in the sand is still 918, which the S&P 500 has brushed several times in the last few weeks, but has thus far been unable to hurdle. If we get above that line, then I’ll be very excited. Take a look.

Now, as far as oil goes, it’s been a while since we looked at a chart. I’ll correct that today.

The daily chart is pretty much meaningless anymore, since the pullback has been so huge, and so prolonged. I’ll show it to you anyway just to make that point.

So, we have to focus on crude’s weekly chart to get any kind of reasonable bearing on what may be next for oil. Take a look at this chart and see if you spot what immediately caught my eye.

Yep, last week, oil futures matched - but didn’t fall under - the lows seen in late 2001 and early 2002. I don’t think it’s unreasonable to assume support’s going to be made there. My key clue is the fact that oil’s trading well off those lows today. However, being waaaayyyyy oversold is a decent argument too.

How far might any bounce take us? I’d look to the $59-ish area; it’s been support as well as resistance in recent months. That’s just a rough guess though. We’ll pinpoint a target for oil when/if the need arises.

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Not that they’ve done anything right before this, but the Fed’s decision to lower interest rates last week - to unprecedented low levels - has indeed fostered a little more willingness to lend. It’s still not great, but it’s better than it was.

My basis for the assessment lies in the TED spread… the measure of risk banks perceive they’re taking on by lending to other banks. The TED spread is as low as it’s been in months, after peaking at record-breaking levels in October when the credit market was frozen solid.

(What exactly is the TED spread, and why does it matter? We explained it on full detail in early October. Click here to review that explanation.)

As of right now, the TED spread’s reading is 1.44. For perspective, that’s almost back to the 1.1 level we saw before the lending market fell apart, and it’s well under the October peak of 4.63. In other words, the credit market is almost on its feet again, as banks aren’t terrified to lend to other banks. (Nobody actually lends their own money… they borrow money form other banks to lend to their own customers.)

Just for the record, I think when/if the TED spread gets back to 1.1 - though it wouldn’t surprise me if it didn’t though - I don’t think the lending market will actually be the same “no holds barred/no questions asked” kind of industry.

Even people with great credit are struggling to get loans now, so the standards will be much healthier going forward. That’s a good thing though - the interest rates will now actually reflect the true risk, whereas they didn’t before. We all have to jump through a few more hoops to get the rates we deserve, but it’s better than going back to the way things were (which caused the mess in the first place).

I digress though…. my point was just to let you know that the lending market is getting healthy again. Here’s the chart.

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Though the market was in the red yesterday - again - not every industry was giving up ground…. particularly among small caps. The S&P Small Cap Distributor Index was up nicely (4.7%) on Monday, as it has been for the last four weeks. Were it just Monday we were seeing this strength, I might dismiss it as a mere curiosity. But to see this oddball group perform that consistently in this environment? I think it’s worth a closer look, just to see of there’s something worth adding to our portfolio.

First of all, a ‘distributor’ in this sense is a technology and electronics distributor… mostly. The actual definition is a little blurry, but the group includes the likes of Tech Data (TECD), Ingram-Micro (IM), ScanSource (SCSC), and GTSI Corp. (GTSI). (Be sure not to confuse these stocks with food and beverage distributors.)

However, it’s specifically the small caps in this group that have been on a month-long tear.

As for Monday’s pop from the small cap distributors, it’s attributable to two - and only two - names….Peerless Systems (PRLS), and Pomeroy IT Solutions (PMRY). They were up 3.7% and 2.4%, respectively. Impressive numbers, though the fact that they’re both priced under $5.00 means a small gain goes a long way in percentage terms. Still…

Both are ‘of interest’. I’d lump these two smaller names into a more speculative category, while based on the intermediate-term strength, I’d be willing to take a look at a couple of the larger names mentioned above as a less-speculative possibility.

It’s not just the chart I’m digging though. The underlying results for these companies are compelling too. I don’t have time to get all the way into the rationale, so I’ll summarize it with a “now and later” look at their price multiples (a.k.a. P/E ratios). You’ll find that data in the nearby table.

My first thought was that the ‘N/A’ was a nice way of saying nobody expected profitability from that respective company. As it turns out though, ‘NA’ actually meant ‘not available’ in this particular instance. These companies are small enough - and boring enough - to avoid analyst coverage. However, I know for a fact that GTSI and Pomeroy were both profitable last quarter, though they had not been profitable at some point earlier in the year (i.e. they’re not imploding).
Now, do I believe even the adjusted projected-P/Es? I don’t distrust the genuineness of the guess, though I don’t take it to heart either. I think there’s still an overly-optimistic bias from these companies as well as from the few analysts following these companies.

At the same time though, I do firmly feel that at least a couple of these names will be surprising leaders in 2009. I believe the worst of any recession has already been priced in, and I suspect we’re at the beginning of an economic upswing. As the global economy starts to improve, I think many of the individual company results will be no worse than meeting expectations, and possibly exceeding them.

What I like best, however, is that nobody else is even interested in these names….analysts, or investors. It’s still hit-and-miss within the group, but I like the overall group quite a bit because the bulk of the outside world hasn’t meddled with them yet.

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At 3:25 PM EST all hope seemed lost…. the S&P 500 was under water by 3.2%. Within 35 minutes, things didn’t seem nearly as bad - the S&P 500 only closed 1.8% below Friday’s close. It’s still a loss, but one that leaves the bulls with reasonable hope. Indeed, the strongest volume of the day came with the rally in the last 30 minutes of trading. The bulls are resilient, even if a little flighty.

Anyway, I promised a chart update, so here it is.

Even with the last-minute (well, last-hour) rebound though, we still saw the market close below its 20 day average. Not good. As I mentioned yesterday, however, volume is going to be light this week, and will get lighter as time passes. So, this is not a majority opinion….. it’s just a frustrating drift. (Still, how things take shape this week sets up how they do next week.)
As for the VIX, you can’t deny it looks like it’s pushing off that lower Bollinger band line. That’s strike two.

The futures are on the plus side of the  board this morning, though that may not mean much - if anything - regarding how we’ll end the day.

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Just for the record, 10 of the previous 14 Mondays have been bearish, so don’t get too worked up about this one. Considering how far we’ve come since this point in time last month, the bulls deserve a break. My only worry is the one I gave on Thursday… that the recent retest of the 50 day moving average line was just going to end up being a set-up for a knock-down. The S&P 500 is back under its 20 day moving average line today; that line needed to hold up as support if the bulls were going to stay decisively in the hunt. So, today’s a bit of a wrinkle.

The day isn’t over yet though. In fact, I’m inclined to give the market through the end of tomorrow before I close the book on any potential rally.

That said, I’ll also point out that the VIX is indeed finding support at its lower Bollinger band (20 day)… a known reversal point. That doesn’t exactly encourage.

Check back at the end of the day for an update on this chart. Everything could change - radically - in the last hour.

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As George Castanza would say about the Bernie Madoff fiasco, “This thing is like an onion - the more layers you peel, the more it stinks!” We got another round of news regarding the scandal this past week, and it stinks even more than it did.
I’m not going to rehash that here though… I’m more interested in some of the remarks about the latest batch of investigations. Some of them are funny, even if they don’t mean to be.

Here are a couple of my favorites….

Felix Salmon of Conde Nast’s Portfolio.com stated about the resulting confidence crisis…

“if you’re an investor, yes, you should be worried about losing your money to fraud — but you should also be even more worried about losing it the old-fashioned way, by investing it with a hedge fund manager who blows up spectacularly.”

Comparing the SEC’s complete failure to a Keystone Cops shtick, Greg Newton rebutted:

“characterizing the SEC as The Keystone Cops does defamatory disservice to The Keystone Cops’ investigative skills.”

Those were the only two I found that were appropriately bitter but also funny. As more of these jaded quips arise though, I’ll be sure to post them here.

Anybody else have one I missed? Leave ‘em below.

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Do you wanna’ know where the market is going to close today? I‘ve got a pretty good guess….either it will be spot on, or way off (how’s that for non-definitive). Frankly, I hope the guess is way off, because reaching the ’spot on’ target would be a sharp move lower. More on that in a second. What I wanted to do first was update my chart of, and thoughts on, yesterday morning’s look at the S&P 500 and the VIX.

Below is the exact same chart I gave you before, only updated with yesterday’s closing prices. Two problems immediately come to mind. The first is, the S&P 500 slid back under its 50 day moving average line. The second is, the VIX appears to have found support at its lower Bollinger band line. Both suggest the rally is winding down. All hope is not lost quite yet though.

It could take a few days for the market to get comfortable with the idea of a recovery. As such, we might see several ‘retests’ of the recent upward thrust. That’s a good thing. As long as we can hold our ground, and the down days come on lower volume than the good days, we’ve still got a better-than-average shot at emerging on the bullish side of the fence. Take a look at the chart, but then keep reading for the less-optimistic reality.

Ever heard of the ‘max pain’ theory? As far as the market is concerned, it’s the somewhat-cynical (though not entirely untrue) idea that the market has a way of providing the maximum amount of pain - losses - for the majority of investors.

The options market has a way of showing you a potential ‘max pain’ effect by indicating at which particular strike price most calls and puts are owned. Wherever the market can close and cause most options to expire worthless, well, that’s likely where the market will close on expiration day… which is today.

There’s something of a quirk with the idea though…..it’s either dead-on, or waaayyy off. There’s no in-between. That ‘way off’ result still provides some pretty decisive pain, but only for most of the call owners, or most of the put owners. Point being, this isn’t the kind of thing you want to bet on too early… sometimes the outcome we’re headed towards doesn’t become clear until the last day of expiration week.

Anyway, right now most of the owned calls are at 850, while most of the puts are owned at the 825 and 875 strike…right between 850. The most pain would be created by a close somewhere below 850 (where all those calls would be worthless) and above 825 (where at least the 825 puts would be worthless). A close under 875 would still be profitable for owners of the 875 puts though.

Here’s the SPX option open interest grid from CBOE.com. Take a look, but then keep reading for the alternative possibility.

The second scenario is a close above 875. That would make all the puts - both the 825 and the 875 strike - worthless, though it would reward all those folks who own the 850 calls. Normally the odds of this outcome would be a distant second. However, there’s obviously a lot more open interest with the puts than with the calls here… so the ‘max pain’ could actually come with a bullish close. I prefer that scenario, but I’m not getting married to any guess.

The good news is, the futures are well up this morning, and we sold off sharply yesterday. That sets up a strong possibility for the second (bullish) outcome today. As always though, be diligent and keep an eye on this erratic market.

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If the last several weeks hadn’t taught me to be so jaded and skeptical of any rally, I’d probably be very excited to see the S&P 500 on the verge of breaking above a significant resistance level. As it stands though, I’m not going to fully believe it until I see it. When the S&P 500 moves past that ceiling of 918, then I’ll get excited. The VIX, on the other hand, is doing a much better job of convincing me to be bullish.

The chart below says it all. There’s resistance at 918, where the market has topped-out or stalled too many times lately. But look at the VIX. The volatility index has already fallen under a short-term support line (dashed), and is close to moving to new multi-week lows.

My only concern right now with the VIX is that it’s just now running into its lower Bollinger band, which we know is a potential reversal spot. This time, however, there’s a little more momentum behind its pullback - it may be able to keep driving the lower band line even lower.

Notice the S&P 500 hasn’t yet tested its upper Bollinger band; I’m not sure what’s going to happen when/if it reaches it. Based on what I see so far though, I’m inclined to think the SPX will keep driving higher. The key is getting past 918.

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It may have only been a technical/legal hurdle to get over, but it’s still one that bulletin board company Voyant International (VOYT) is glad to have in writing rather than just in spirit. Harris Corporation - the creators and owners of the software that will make Voyant’s aviation broadband offer work - has officially inked a licensing deal with Voyant. Prior to the contract being finalized, there was only a letter of intent between the two companies.

I had little doubt it would happen, but now that it has we can all sleep a little easier.

As for what Harris “software-defined radio technology” actually does, well, you’ve got me… the connection technology is very advanced, and not really comparable to land-based broadband (nor even comparable to wireless connectivity commonly known as wi-fi). Aviation Broadband’s offer is truly high-speed broadband, delivering a fast digital connection through the air. Of course, the big difference is that the point of connection is always moving, and each connected device still needs to be handled by a router/modem-like device that can handle the geographical movement. Maybe that’s what Harris’ software does. Or, maybe what Harris is providing is the know-how for the entire technology, from start to finish. It doesn’t really matter - it’s a done deal.

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When’s the last time you saw a bulletin board stock get featured on CNN? I’m sure it’s happened before, though I can’t remember when. More important to us though was the stock in question…. it was our very own China Energy Recovery (OTCBB: CGYV). The company was the focal point for a two-minute clip regarding potential clean energy initiatives here in the United States. Roger Ballentine, a former Clinton advisor and a current member of China Energy’s board, was representing the company.

If you missed the original airing, don’t worry - there’s a clip available here on the CNN website. A short advertisement plays first, then the fearture starts up.

There was nothing particularly new in the clip for us; the point here is how this two minutes was a very important two minutes for the stock. CNN has an audience most companies can only dream about. Tell a good story to a large, profit-hungry audience, and the result is lots of focused eyes and ears. That’s what’s behind today’s 10% pop, though I think more will trickle in over the next few days.

The best part about publicity, however, is how it garners more publicity. I wouldn’t be shocked to see China Energy featured somewhere similar in the near future, once again in a forum usually reserved for the biggest of the big companies.

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The bulls may not perfectly hold the ground they took back yesterday, but at least they advanced into it. It’s an attempt they couldn’t have even made a few weeks ago. And, even today’s early retreat isn’t a permanent situation. I, for one, am excited about this shift in momentum.

What exactly am I looking at? For the S&P 500 (and all the other indices), it was yesterday’s cross above the 50 day moving average line. We haven’t been above that line since early September. I’m also looking at the CBOE Volatility Index (VIX), which has been under its 50 day line for several days (that’s bullish), but yesterday moved under what had become a relatively significant support line.

Of course - and par for the course - the futures are deep in the red today. I guess the Fed can only buy so much of a rally despite a rate cut that takes lending costs to unprecedented levels. I’m not surprised - the one thing that’s been such a pain for this market over the last several weeks is a stark inability to string two decent days together, back to back. That entirely stems from a lack of moderate pacing… it’s nearly impossible to rally 5% in a day and not invite profit-taking the next day. Hence, we’re headed for a lower open, at least according to the futures.

Even then (and as you’re probably tired of hearing by now), the only price that means anything is the closing price, which has only been decided in the last hour of trading for the majority of the last several sessions. So, don’t worry too much about the bearish pre-market pressure. You can check in around 3:00 PM EST and catch all the important action.

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Government bonds were never the sexiest of investments, designed more to provide safety and assurance than to offer growth. Now, they don’t even accomplish their primary goal. Indeed, they may not even accomplish their goal of reliable returns. One has to wonder if lending to the government is riskier than investing in publicly-traded stocks.

As it stands right now, the yield on 10-year Treasuries is a whopping 2.4% (annualized). What’s so stunning is that folks are still buying them – there’s a moderately active market. Why? Great question. The only possible answers I can come up with are habit, a lack of understanding, or insanity.

A couple of different times I’ve heard the argument “Well, at the very least they’ll fight inflation.”

No they won’t – that’s the point.

If you buy $100,000 worth of 10-year bonds, your annual interest payment will be $2400. You’ll get $100,000 back a decade from now, and you’ll have collected $24K of tax-free income in the meantime. Unless we enter a period of deflation, and stay in it for 10 years, odds are you’re going to lose ground to inflation.

My sensitivity to the ridiculous reality is heightened by the knowledge that the Fed is allegedly going to cut rates again tomorrow. All well and good, but this could conceivably make the low-yield problem even worse (though how much worse could it get?).

On that note, no matter how much of a rate cut we get, know that the effective overnight rate (not the stated rate we hear so much about) is already rock-bottom. So, a rate cut won’t make borrowing noticeably cheaper… it’s more for show at this juncture.

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By now you’re all well aware of Bernie Madoff’s $50 billion heist - you know the party’s over when the FBI comes a-knockin’. What I’m still not clear about is what actually triggered the investigation and arrest. I think one of his employees got suspicious and reported the oddities. However, I’d love to know the exact details of the red flag that got the ball rolling. I suspect somewhere in the ponzi scheme, someone was supposed to get “paid”, and didn’t. People don’t like it when they’re on the wrong side of the table. (And when I say ‘paid’, I don’t mean employees - the word was that his employees always got paid. I mean there was supposed to be money or stocks for someone, somewhere, but it wasn’t actually there when they tried to claim it.)

Anyway, I’m not here to rehash what’s been all over the news…. you can do that on your own. All I wanted to do was point out an article about Madoff that appeared in a 2001 edition of MAR/Hedge….. a hedge-fund-related publication that’s a little obscure even within the hedge fund world. Here’s a link to the PDF. I can’t find a web page with the article, so you’ll have to use/get Adobe’s Reader if you don’t have it already.

The article is something of a contradiction…. suspicious of the consistent returns and minimal volatility boasted by his hedge fund, yet also impressed by those same returns and minimal volatility. Nobody ever questioned whether it was too good to be true as long as everyone was happy with the results. There’s a lesson in the realization of the truth…. now.

Read today’s news, then read the 2001 article, then compare the two side-by-side. The red flags were actually there, between the lines. I suspect there are more Madoff’s out there, even with all the oversight we now have.

On the other hand, I want to be clear about something else - most hedge funds are completely legitimate. In the same vein, most financial advisors are honest and honorable. They’re not always right, but I’ll take that over something ‘too good to be true’ any day of the week. Keep the 2001 article and today’s news in your mental ‘back pocket’. The next time you hear about red-hot performance and next-to-no risk, pull it out to remind yourself that the best of crooks can fool even the best of journalists.

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So let me get this straight…. the Senate shot down the automaker’s bailout, and three hours later the Treasury steps up to the plate and says they’ll keep the industry afloat since Congress didn’t? I have about a thousand questions; I’ll only ask a few of them…

1. If the Treasury is authorized to do this, why didn’t they do it two weeks ago?
2. Is the Treasury actually authorized to do this?
3. Has our government - and rules of limits and procedure - just turned into one big free-for-all?

The answers are…

1. Don’t know
2. Technically yes, philosophically no
3. Yep - there was never a clear plan for the $700 billion, and any department can do whatever they want now

Frankly, I’m not sure why automakers weren’t lumped in with the first bailout package… the $15 to $50 billion they need is nothing compared to the $700 billion ear-marked in the original bill. And, considering some money from the first bailout was used to assist fisherman, a rum company, and a company that makes wooden bows and arrows, you’d think throwing some cash at Detroit would be palatable. Guess not.

My beef isn’t the money - it’s the complete pointlessness of the process. If the Treasury can do what the Senate won’t, why bother with a bill at all? Just go to the Treasury. On that note though, another question is raised…..who oversees the Treasury? It’s technically the Executive branch (i.e. the President), which as of this morning is apparently how that branch to get around the Legislative (Congress/Senate) branch’s decisions in certain cases.

I’m not here to pass judgment, nor am I going to start accusing anyone of jump-starting communism or working towards a monarchy…. two arguments that have been made quite a bit lately. However, I have no problem saying this mess has become more than a little worrisome for reasons beyond the amount of money and lack of control. The apparent ineptness in Washington isn’t just an opinion anymore - it’s the Wild West… where anything goes.

OK, I’m done venting. Thanks. You can vent too if you like - the form is below.

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This certainly isn’t the kind of thing the media is going to cover - particularly when the Blagojevich debacle is just getting juicy - so I’ll bring it to your attention …. coal stocks are starting to smolder again. Could it be an omen of a fully-stoked fire? Methinks it could be, which is why I want to put the industry back on your radar. (I put it on your radar back in September, but never got a chance until now to follow up.)

Just so you know, coal stocks are well up this week-to-date. That’s not a big deal, as a lot of groups are up this week. However, there are two key points of interest about the Dow Jones Coal Index (DJUSCL) to make. First, it is THE leading group for the week so far, and second, these stocks may be waaaayyyyy undervalued. They took more than their fair share of drubbing since June, so I have to wonder if a recovery is going to be particularly strong. I think it will be - it has been so far anyway.

Take a look at the chart of the Dow Jones Coal Index… for the first time in months we’re seeing higher highs and higher lows. It looks a little like the gain over the last few days may be pushing the chart’s limits, so I expect a small pullback from here. As long as we don’t make a lower low though, I think this is something that’s more than a little interesting. In fact, as long as the 20-day line (blue) holds up as support, I’ll likely buy on a dip. Why there? That line has been a big factor - bearish and bullish - for months now.

I also wanted to throw in a chart of Arch Coal (ACI). This is an idea we were kicking around a few days ago as a possible ‘official’ site trade. We opted for the ProShare Ultra 500 ETF (SSO) instead, as we felt better about a market call than a sector call. However, we may add ACI to our official pick list soon - if this chart does what I think it’s going to do. Keep this one on your back pocket, along with the Market Vectors Coal ETF (KOL) [not shown]. Either have a lot of potential.

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It’s a stand-off at 895 for the S&P 500. The bulls and the bears are each waiting for the other side to flinch…. to make a strong move above or below that level. After a three-day wait though, fatigue and boredom are starting to set in, and the tension is building. Now it’s likely to be a matter of who walks away from the contest first - a forfeit of sorts.

I do think whatever’s going to happen is going to happen soon. Once the S&P 500 popped above a resistance line (orange) as well as the 10 and 20 day moving averages (red and blue) on Monday, it stalled. Since then, it’s been working its way into a shrinking wedge (lower highs, higher lows, black lines), which will have to be broken sometime.

Outside of the smaller wedge is a not-quite-as-small wedge framed by the 50 day line (purple) on top, and the 10 day moving average line below. That wedge is also closing up too.

Clearly sooner than later those support levels or resistance levels have to give. It appears like the bulls have a little more fight than the bears do right now, so I’m willing to bet bullishly. Well, actually we did bet bullishly … we bought the SSOs last week. We’re up 12% so far on the trade, but are looking for a little more upside.

Either way though, this is  a classic consolidation, on a very small scale. The thing to keep in mind about wedges and consolidation is that once the boundaries are broken, the move outside of those boundaries is usually big, and fast. So, you speculators may not want to mull it over too long.

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Looks like the market’s enthusiasm from yesterday has been reigned in a little today. Indices are slightly in the red (save the NASDAQ 100) as investors weigh what’s likely to be coming next … following what ended up being an 11% rally over the prior five trading days. You know where I stand; I’d rather pay a small price now - and prove the market is stronger than it was a month ago - in order to acheve something bigger down the road. To do that, the market needs to give up a respectable amount of ground (enough to close Monday’s gap from the index ETFs), and then fully recover on the way to higher highs. It’s a step back, but a necessary evil.

But when has rational thinking ever gotten in the way of a rally or selloff? If the market wants to unbridle its enthusiasm, I can’t stand in its way. My caution is the same though … the stronger the move, the stronger the reversal.

Nevertheless, our trade is the beneficiary of the move higher.

You may recall back on Thursday morning before the market opened we issued a trade suggestion for the SSOs - the 2x leveraged ProShares Ultra S&P 500 Index ETF. With an opening price of 22.70 that day compared to the current price of 27.07, we’re up about 19% (talk about falling in love with leverage).

You’ll also recall we were basing our target and stops not on the SSOs themselves, but on the S&P 500’s chart; the exchange-traded are surprisingly more volatile than their index counterparts, so the adjustment is prudent. Our target level for the S&P 500 is 957, and our stop level is 790. That just means when-and-if the index hits one of those lines, we’re going to make an exit on our ETF. So far, barring any major reversal, it looks like we’ll be locking in a nice gain. Stay tuned on that front.

As we all know by now though, the early and mid-day action means little compared to the last hour of the trading day, where the bulk of all the recent moves have been made. Check in later - let’s see if the bulls can keep the pace going. I have my doubts because I’m inherently skeptical, but I also acknowledged that “this time it’s different”. With this rally, volume and persistence - the two key ingredients - have been measurably better than previous-but-hollow surges.

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