Scott Redler of T3Live

Investors Business Daily finally changed their Big Picture to “Cautious Confirmed Uptrend.” If you’ve been reading my notes, I have been cautiously buying since we had our reactionary reversal on Friday, February 5th at around 1,044 on the S&P. I will save everyone the flashbacks, as I have been trying to give a play-by-play every morning.

The S&P broke its wedge to the upside. Today we are opening near 1,120, with big resistance checking in at 1,130. I do think we test that level this week! Then, at some point, if the composure stays in tact, a move through the old highs of 1,150 should happen by MAY.

The Rundown:

• Apple (AAPL)–has come a long way since last Thursday’s reversal. $202 was the new technical buy price and now the stock is opening up on it’s attempted fourth consecutive up day. $210-215 is a big resistance area. It would be better to rest a bit and consolidate before breaking out to new highs in the coming weeks. I have been trading AAPL from a macro long stance–which I maintain–BUT TODAY, I will look for a cash-flow short if I see a negative divergence.

• Amazon (AMZN)–Was the rock star trade yesterday. $119.75 and $121 were the prices to buy. My short-term target was $124-125, and we hit that yesterday. So, I will not focus here for now as it could be choppy, but we should be seeing $130 sooner rather than later.

• Baidu (BIDU)–at new highs. It’s hard to be long, hard to be short. I will continue to avoid it.

• Google (GOOG)–is popping back into its lower range. It’s not good to trade unless we see some type of resolution with China and HUGE HUGE volume. There are far better stocks to focus on right now.

• Research in Motion (RIMM)–STILL LOOKS GOOD. I will go after this one if it can trade through $72 and HOLD $72 for a move into its gap. This one has a potential target of $77-79.

• Palm (PALM)–below $6 I think you are safe to accumulate this piece of JUNK. If it gets any cheaper, you will see “takeover speculation.” After a move from $14 to $6 in no time, I felt compelled to start nibbling yesterday.

• Qualcomm (QCOM)–I started talking about this stock at around 3:30 yesterday. I took a bit home to track the close and got lucky with some afterhours news. BUT, I would rather have had another down day in order to enter the position with size. Today I will be looking to buy a dip intraday.

• Microsoft (MSFT), Cisco (CSCO) and Intel (INTC)–All are decent if you need to just “put capital to work.” They will see new move highs this year.

• MY THREE AMIGOS (last month I stated that these will all make new highs on the year).

• Cree (CREE)–has provided great trades. It’s at new highs and is a bit extended. There is no real long setup right now. I might look for a scalp short today after such an extreme move.

• VMWare (VMW)–This one is finally over $50–it’s a slower mover, but it’s at new highs. I have been long from much earlier and will sell some into this open, but not get short.

• Intuitive Surgical (ISRG)–yesterday this was my play of the day. The stock had a great breakout above $350. Take a look at the chart and you will see exactly what I mean. The easy trade is now over.

• The Financials:

• JP Morgan (JPM)–is the new leader. It could use a bit of a rest right here. I would let it reset.

• Bank of America (BAC)–nice bounce as well, but might have some pressure with the government selling its warrants.

• Wells Fargo (WFC)–I nibbled on some yesterday and will buy more through $27.60.

• Goldman Sachs (GS)–This one is lagging big time. I would listen for headlines. If they get some resolution to the “Greece Inquiry” then it could get a big move. The buy are is around $157.50 with VOLUME. If this were to happen, I think FAS will blast through $76.50.

• Gold–last Thursday I sent a note that I bought gold for the first time with GLD at $107.10, DGP at $2610. Personally, I will look to add small if GLD can get and stay above $110.20 and trade it. This one looks good.

• The Casinos look decent. I did nibble on MGM (MGM) yesterday at $10.55 and will add through $10.80. I see a nice descending channel building. With more time, we could get more upside. Las Vegas Sands (LVS) looks very similar.

• Freeport McMoran (FCX) and U.S. Steel (X) have all met my targets. X cleared my buy price yesterday–a midlevel base at around $53.50–it could still get to $56. FCX has not yet. I might consider a buy through $77 to see it clear the midlevel consolidation and follow X’s footsteps.

• The agricultural stocks are back in play today. Monsanto (MON) did a RedDog reversal yesterday. It could be worth a bounce buy. The CF Industries (CF) for Terra (TRA) talks are back on. We might get some action in the sector.

• China Agritech (CAGC) has been a rock star. Great trades lately. I will look for a small short today as it’s very extended on its fourth upday.

In Conclusion, today could be tricky, as on Thursday we were as low as 1,086 on the S&P and now we are opening near 1,120. So, even as I think we go higher this week, this 3-4th UP day for most stocks and the indices will be tricky to maneuver today.

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Joe Weisenthal of Clusterstock

In his latest Breakfast with Dave, David Rosenberg dumps some cold water on the latest spending and income data.

The analysis is a little long, not violently decisive, and not filled with rhetoric, but the kind of in-depth take you need to get beyond the headlines.

U.S. personal income came in below expected, coming in at +0.1% MoM in
January versus expectations of a 0.4% increase.  This was the weakest increase
in six months but the gain was held back by declines in interest, dividend and
farm incomes — the key was that wages and salaries rose 0.35%, to the second
decimal place, the strongest in nine months.  Transfers from the government
have become a mainstay, rising 0.7% MoM in January and 12% on a year-over-
year basis.  Just to make matters more confusing, ‘real personal income
excluding government transfers’ fell 0.2% MoM and this is the measure the
NBER uses to determine if the economy is in recession or expansion.

What about the spending side?  Well, in nominal dollars, consumer outlays rose to
what appears to be a healthy 0.5% MoM pace, and +0.3% in real terms.  In fact,
we have the consumer now having a +2% “build in” so far for Q1.  But 60% of that
headline consumer spending print came from food and energy — everything else
rose a tepid 0.2%.  In fact, spending on durables or ‘big ticket’ items rose by less
than 0.1% in its weakest showing in four months.  Almost all the growth was in
non-durables, which surged 1.8% and most of that were groceries and gasoline —
the two ‘G’s.  Services eked an advance of less than 0.2%, held back by
housing/utilities.

All in, the gap between income and spending growth last month pulled the savings
rate down to 3.3% in January from 4.2% in December, the lowest it has been since
October 2008.  This is indeed a surprising result, but then again, the government
has been doing everything it can to promote consumption over the course of the
past year.

While spending of all kinds still shows up in the GDP data whether it be on
speedboats or ice cream, we think it is important to do a proper accounting of
what the drivers are in any given month, quarter or year.  It is tough for us to come
to the conclusion that the consumer is feeling too good about the future when
spending on items that requires a high degree of confidence over the economic
outlook tapers off as was the case in January.  Auto spending was cut by 1.2%, the
first decline since last September.  Furniture spending fell 0.5%.  Home
improvement outlays dropped 2.1%.  Just a few examples about how the
household sector still refuses to make a long-term commitment to the economy.
But spending on feel-good pleasure stuff certainly did improve.

• Personal care products jumped 2.9% (more cosmetics).
• Clothing rose 0.6% (women’s +1.0%; men’s +0.4% — surprised?).
• Health services were up 2.9%.
• Magazines/newspapers rose 1.1% and books by 2.1%.
• Spending on cable picked up 0.9%.
• Jewellry rose 1.7%.
• Video/audio equipment spending increased 1.1%.
• Spending at restaurants rose 0.7%

While people did spend more on luxury items and things to help them improve
their mood during these tumultuous times, there was still very much a frugal
‘stay at home’ cocooning theme in the spending report.  For example, there was
less spending activity on sports events (-0.7%), amusement parks (-0.3%) and
movie theaters (-4.2%).  Instead, people spent more money on books (+2.1%),
cable (+0.9%) and television sets (+0.7%).  Games and toys were up 1.4% —
family fun for everyone!  While there was more money for fast food outlets,
grocery spending was more robust during the month (+1%).  People cut back on
their travel, that is for sure too — rails down 1.5% and airline spending was flat.
Hotels were cut back by 4.4%.

There was also a bit of a ‘do it yourself’ theme in the data too — sewing items up
1.6%, clothing materials also up 1.6%, auto parts rose 0.7% and furniture repairs
were cut back by 0.2% while laundry services stagnated.  Accounting and business
services spending was sliced 0.7%.  Interestingly enough, we can still see a
relatively high level of insecurity in the data.  How else to explain that gambling
rose 0.6% in January and within that even more spending on lotteries, which has
risen in each and every month since January 2009?

CalculatedRisk

Courtesy of Vincent Fernando at Clusterstock/Business Insider

A new research paper called “Do All Individual Investors Lose by Trading?”, written by Wei Chen, Zhuwei Li and Yongdong Shi, by shows how retail investors, who account for 90% of trade volume, are taken to the cleaner by large institutional investors on China’s Shenzen stock exchange.

They used complete trading data for all 68.4 million individual and institutional accounts and came out with some pretty damning numbers:

In aggregate, individuals lose at an average annualized rate of 7.2% over the sample period, equaling 1.36% of China’s GDP and 3% of total personal income. Sources of this loss are gross trading performance (32% of loss), broker transaction fees (34% of loss) and government transaction taxes (34% of loss). * Institutions capture part of this loss, realizing an average annualized gain of 2.63% after broker costs and government transaction taxes. Each category of institutions exhibits raw profitability.

Institutions always win and retailers always lose:

To make matters worse, the most wealthy retail investor accounts perform far better than smaller accounts:

Individuals with mid-size and large accounts (representing only 3% of individual trade value) realize an average net annualized gain of 0.57% from trading.

We feel this has to be due to trading on inside information. Trading on inside information is pretty rampant in many emerging markets including China, and we can imagine it’s an issue in Shenzen. Big players, whether they be rich individuals or institutions, tend to have inside knowledge through private company meetings. Thus we don’t feel like we’re going out on a limb by saying that the above research results must due to this insider problem.

Which means that this Shenzen research sheds light on the fact that blind investors are taken to the cleaners in emerging markets, whether they realize it or not.

So think twice before throwing money into emerging market index funds and ETFs, you’re just setting yourself up to be quietly picked off over time by savvy local traders. If anything, go with an active manager with focused positions rather than index funds or even closet-indexer funds who hold giant portfolios of ‘actively selected’ emerging market stocks. Else you’ll be just like the unsuspecting Shenzeners.

By Ilene with guest author Chopshop

This article is a follow up to The Missing Volume, my previous article on the diminishing volume in the U.S. equity market. (So the first part of this article may be familiar because I’ve included the interview with Nicolas Santiago to provide context.); Previously, Nick at InTheMoneyStocks.Com shared his thoughts on market volume with me. After interviewing Nick, I contacted Chopshop at Fibozachi to further investigate the disappearance of market volume. This article reviews Nick’s thoughts and adds Chopshop’s observations.

Nicolas Santiago asked “Where has all the volume gone?”

Excerpt from ”The Missing Volume,”

Are retail investors and non-professional stock market traders still actively involved with investing and trading their accounts?  Phil sent me an article on the subject, “Where Has All the Volume Gone?” by Nicolas Santiagoat his Rant and Rave blog, and I called Nicolas up to talk with him about it…

Nick writes in Where Has All the Volume Gone?

“Let’s say the market is in an economic recovery and the financial crisis is behind us. Normally one would expect the trading volume in the stock market to increase. This has not been the case. Volume for the month of November and December 2009 have been lighter than August of 2009. Remember August is notoriously the lightest trading month of the year. Hence the term ’summer doldrums.’ January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.

Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’. This is as dull of a market as we have seen in many years. While there are some stocks such as Apple (NYSE:AAPL), and Amazon (NASDAQ:AMZN) that have traded with respectable volume the bulk has come from government owned names. Stocks such as Citigroup (NYSE:C), American International Group (NYSE:AIG), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE), have often accounted for one third, and sometimes half of the daily volume on numerous trading days.”

Ilene: Nick, why do you think volume is so low?

Nick: The public is out of the market, for the most part… In a healthy market, as it’s going up, you get heavy volume. We’ve now gone straight up, on low volume, without any meaningful corrections. These are not normal movements for a bull market. It’s not healthy to move up on low volume – this is the opposite of what you would see in a true bull market.

But on down days, we do get heavy volume. The market is trading as though someone is propping it up, someone doesn’t want it drop…

There’s also huge volume in several largely government-owned stocks, such C, FNM, FRE, and AIG. These are only four stocks in a market which has thousands, yet you can see a small group of stocks accounting for sometimes half of the daily volume.

Who would buy these stocks to own, who would buy Citi? It’s government run, with a $75B market cap – humongous, and it’s probably not even worth zero.

Ilene: How do you know there are one or a few institutions in the market trying to keep it up?

Nick: We don’t know for a fact. However, when markets trade higher on light volume it is usually just a few institutions involved. Heavy volume means many institutions are involved.

Ilene: How do you know when the market’s going to be “propped up”?

Nick: Chart patterns. I can see when the buy programs kick in and can almost predict it by watching the charts. You can catch the market tipping its hand, and that’s in the chart patterns you get familiar with. You can see the buy programs better in GS and in AAPL than in smaller cap stocks.

Ilene: Is the government involved in manipulating the market?

Nick: I don’t know. There are definitely large forces in the market. The government certainly interferes and has an effect.

Ilene: What do you think the market will do through the rest of the year?

Nick: This market reminds me of the top in 2007. In 2007 the market had three panics – all with very heavy volume sell-offs. But volume on bounces leading up to the October top was light. When markets trade higher on light volume it’s very concerning.

This year, 2010, is not going to be like 2009. I think this will be a negative year, maybe 15-20% down. I don’t think there’s any economic recovery. It’s a traders market for the next 10 years. The consumer won’t be spending. The system doesn’t work. They’re inflating the market to make it look good. The plan is to inflate the market up to apparent health, but it’s going there on the back of the dollar going lower.

I don’t see the S&P going past 1178. At least one more bounce back higher, probably in early to mid February. These bounces should give good shorting opportunities.

What makes capitalism work is fail, and they don’t let anyone fail now.

*****

Here’s Nick’s chart of the volume on SPY. Notice the decline in volume over the last year:

*****

Here’s another chart via Charles Hugh Smith, Of Two Minds, showing that the volume of trading on the NYSE has also been declining since peaking in 2006.

*****

Volume moved to derivatives and foreign markets.

Chopshop at Fibozachi watches the markets nearly 24 hours a day and rarely sleeps, so as expected, he had several thoughts on the matter.  After a multi-piece discussion, Chopshop wrote back the following summary.

Chopshop: Volume isn’t in ‘America’ anymore, and it’s not in the ‘stock market’. Investment Banks (IB), broker-dealers (B/D), qualified institutions such as the mythical ‘hedge fund,’ trade futures and options, not stocks.  They may ‘invest’ in equities of all stripes but they aren’t trading nearly as much gurgle (GOOG) ‘n goldilocks (GS) as they did previously, in ’09, ’08 or ’07, whether measured by simple volume tallies or aggregate notional value (volume x share price, indexed to tracking currency).

Even mutual funds (mufu) and pension funds are moving toward allowing portfolio managers bi-directional integrity (the ability to ‘short’ ~ see ‘130 / 30’ funds) … How long before mufu constitutions regularly write 5% derivative allowances (futures & options) into their charters? And when institutions hold equity positions, they’re employing options (and futures) on the underlying to hedge their stakes. They might even be trading around the core or arbitraging the group / space with anything from a simple barbell pair trade (long X, short Y) to some ridiculously capital intensive spider-web to capture ephemeral implied volatility.

Retail traders buy stocks and hold them, for at least a few days. Many who were trading and many of those who might’ve been trading, see the system as a rigged one.  In many ways it is.  Thanks to the illuminating work of folks like Tyler Durden of Zero Hedge, market participants are at least aware of the high-powered algorithmic adversaries that await their orders across the digital seas of the National Best Bid Offer system (NBBO).  (See also Zero Hedge’s articles Zero Hedge reports in Vapor Volume Resulting In Major Swings Indicates Evaporating Market Liquidity, Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,and Ever Wonder Who Controls The Endless Gunning In Afterhours Trading? Here Is One Suggestion.)

So, where has the volume gone?

Well, it’s still in ‘the market’, just not in markets that most Americans follow.  Volume continues to migrate from US exchanges and common equities (stocks) to global bourses and basic derivatives such as equity options and futures.  For a daily reminder of this trend, check out the news flow over at Mondovisione; you’ll see record volumes across global exchanges of all stripes.  Record notional values on RTS (Russian) oil futures, expanded hours in Hong Kong, triple digit y/o/y growth for Dubai gold futures, shrinking lunch hours in Tokyo.

Meanwhile, NYSE Euronext and NASDAQ OMX have gobbled up most regional equity / option exchanges on both sides of the Atlantic while Chi-X and BATS continue to siphon off sizable market share.  On February 11thGETCO was named a DMM (designated market maker) by the NYSE, and on the 12th, the Merc (Chicago Mercantile Exchange (CME)) broadly expanded its strategic partnership with Brazil’s Bovespa ~ Chicago & São Paulo Marry Futures.

It’s not that supra-national exchanges have forsaken America or equities, rather they are practicing Wayne Gretzky’s approach to offense and skating towards where the puck is going to be.

So, I’ll ask you, rather tongue-in-cheek: where is volume going to be?

NYSE EURONEXT ANNOUNCES TRADING VOLUMES FOR JANUARY 2010

NEW YORK, Feb 08, 2010 (BUSINESS WIRE) — NYSE Euronext (NYX) announced trading volumes for its global derivatives and cash equities exchanges for January 2010. Derivatives trading volumes in January 2010 were stronger, with European derivatives volumes increasing 32.4% and U.S. options trading volumes increasing 102.4% versus prior year. Cash equities trading volumes were mixed in January 2010, with European cash transactions increasing 4.1% and U.S. cash equities trading volumes declining 23.7% from prior year levels, respectively. Both European and U.S. cash trading volumes, however, increased from fourth quarter 2009 levels.

Animal spirits moved elsewhere but did not die.

Chopshop believes that trading volume has moved from U.S. Equity markets to derivative markets and foreign markets.  Trading patterns, such as low volume market rises and high volume declines, and the use (misuse) of after-hours trading to generate most of the past year’s gains, show that previously normal market forces have changed. These patterns also support the notion that the public in less involved in market action.

Nevertheless, the U.S. Equity market has experienced a dramatic run from the March 2009 lows into 2010.  Chopshop cautions, “whether you are a full-time trader or casual investor, you’re primary concern remains singular: risk management.  Market opinions / biases aside, where financial markets stand today, it is extremely difficult to argue against exercising extreme prudence.  ‘Rationalizations’ of market behaviour (whether brilliant or brain-dead) have nothing to do with effective risk management or tactical allocation.  Bottom line: if you must continue to play in this pool then ask yourself one simple question ~  ‘am I prepared for the possibility of a thunderous typhoon back to lucifer’s lounge round 666 on the INX (S&P 500)?’”

Phil’s Stock World provides frequent intraday news updates similar to this one to members. As part of a special opportunity, readers of The Market Guardian blog are offered a free subscription. Use referrer code “Braunie” (which is included in the links here) and select the $49 per month option and – using my code – your $49 subscription will be free (monthly fee will be waived) and you will receive a 20% discount on premium services, should you find Phil’s Stock World to be a valuable resource. Click here to sign up.