TUES. JUL. 8 THOUGHTS

In the last 24 hours, the market shook off the gigantic decline in oil prices (discussed in yesterday’s blog) as the financial sector got hit extremely hard again with more shock and awe amid selected stocks. The most notable feature yesterday were the declines in Fannie Mae (FNM) and Freddie Mac (FRE). Taken from Yahoo, “Fannie Mae provides funds to mortgage lenders through the purchase of mortgage assets, and issues and guarantees mortgage-related securities that facilitate the flow of funds into the mortgage market in the United States” while “Freddie Mac engages in mortgage purchasing, credit guarantee, and portfolio investment activities in the United States. It purchases single-family and multi-family residential mortgages, and mortgage-related securities from lenders in the primary mortgage market that originate mortgages for homebuyers, including mortgage banking companies, commercial banks, savings banks, community banks, credit unions, state and local housing finance agencies, and savings and loan associations.” The companies use the government as the backer. Well, suddenly as the housing downturn worsens, it appears that both of these companies need an extraordinary amount of capital (provided of course by you and me via Uncle Sam) in order to cover losses much less maintain operations. This is but one more example of the carnage that is taking place in the financial sector. As day traders, it is simply our job to trade these stocks, but in order to do so in a micro standpoint, we need to understand from a macro standpoint what is going on. It is another lesson that just because FNM looked “cheap” to many people when it fell 50% from 60 to 30 in weeks, it easily fell 50% more to 15 in three weeks. It is also important for day traders because as we do indeed trade the micro, while it is important to have the macro in mind, it is just as important to keep said focus on the micro and not let our macro views conflict. We have to realize that stocks can indeed go lower for the optimists out there who think everything is going to be OK even from here yet for those permabears out there, there can easily be violent short covering rallies which take stocks up amidst the worst market environment in years.

Overnight, stocks in Asia and Europe were pummeled, but a continued extensive decline in the price of oil has helped stabilize the situation state-side. After trading down over 1%, futures are flat as of this writing. As far as today, look to the financials and oils. As always. If bank stocks start having trouble and/or oil get some short covering, the market is going to have major trouble. However, if oil remains down $2-3 barrel or more and the financials stabilize, all shorts better watch out. Thus, while I/we refuse to stick my/our neck out on a direction, I/we will say that the market should have a pretty good move today one way or another.

COP- warned. Stock should be down particularly with oil. Easiest trade is to buy thru unch; if market weak, A-B-A2 to the downside.

MDVN- positive phase II trial. Stock should trade higher. It was higher all last night. If not, short thru unch around 12.10.

GDP- convertible share offering. Don’t know if it gets there, but it is a buy thru unch and even a potential A-B-A2 to the upside if it opens below 68.50.

XL- closed weak. If it opens higher, likely a short thru unch if market weak. If market strong, nice A-B-A2 to upside.

ENER- announced nice deal with GM. Likely an A-B-A2 to downside.

FED- closed weak. If it opens higher and financials weak, looking to short thru unch.

FRE/FNM- very strong. Don’t see obvious trades, but keep an eye on them because the stronger they are the longer they are, the higher the likelihood the market holds. And if the market weakens badly, they will be prime candidates to be shorted.

Not a ton of newsflow. Will be busy, but on more of a momentum type trade than news trade today. As always, good luck today.