I heard on CNBC today that Quant Funds (Pools of Funds Traded Solely By Computers Using Algorithms and Formulas) are responsible for anywhere between 55-75% of all trades in the markets.

These funds need to change their name to Mad Dash Chasing Funds.  All they seem to do is chase momentum.  Once they see their peers take one side of the trade, they pile on.  They were killing commodity stocks (Gold ETF, Freeport McMoran, Chesapeake Energy, etc) regardless of the underlying fundamentals.  Potash Corp at 150 was a price we haven't seen in months, and prices in a forward p/e in single digits.  I always say that we need some humans involved in the market, only humans know what is overbought, overvalued, oversold and undervalued.  These computers were thinking that Oil at $145 was a strong buy and Oil at $120 was a strong sell.  These computers thought Bank of America at $19 was a strong sell and a strong buy at $34.  We really can't tell if these computers are on the wrong side of the trade, but they have continue to cause endless havoc. The Human element is needed to take the other side when bubbles or oversold conditions occur.  

So is the rally in financials over?  If the this year is any indication, then the answer is yes.  We have had capitulation bottoms 3 times in financials...January, March and July...and the first two times we tested lower lows, with momentum fading off after one month.  I don't think unless Fannie or Freddie blows up officially we will retest the July lows, but we can still go a lot lower as there are lots of "fluff" money that still needs to take profits.  Stocks like Blackrock, PNC Financial, BB&T, Meritage Homes, MDC Holdings, Bank of America have rallied parabolically and still have a lot to correct.

The exact same thing is the case in the inverse trade...there is a lot of "fluff" money that also needs to be taken out of commodity shorts.  Why these two sectors still trade in inverse stumps me but that's how the Quant Funds like it and double their gains.

At these levels I like oil infrastructure stocks.  Foster Wheeler (FWLT), Fluor (FLR), National Oilwell-Varco (NOV) and Transocean (RIG) are at levels unseen in 4-5 months.  I like the solar/chip stock Emcore (EMKR) and chip/future solar stock National Semiconductor (NSM), both stocks with large short interests but continuingly improving fundamentals.  I like Natural Gas producers XTO Energy (XTO), Cheseapeake Energy (CHK) and Williams (WMB).  I really really like ABB Ltd (ABB) a swiss electric infrastructure company at these levels unseen in a year.  

I never liked and still do not like financial stocks and I don't think you can buy gold or minerals stocks just yet...we had a nice bounce...but after such a steep fall, it could be a dead cat bounce.  Freeport-McMoran Copper and Gold seems to everyone's favorite.  It is at the same levels as a year ago and has a floor in the fact that if it gets too low, most likely Rio Tinto, Bhp Biliton or Vale will come knocking.  But I would like to see some consolidation and not see the daily 10% gyrations.  But that won't happen because Quant Funds love FCX as a trading vehicle for copper.

I think oil will regain the 125 level soon...and to play that trade I would like to short Carnival (CCL), Simon Property Group (SPG) this stock trades as a solid inverse trade, and be long SRS (Double Short US Real Estate).  Other shorts include Sherwin-Williams, Barnes & Noble, Thor Industries, Wynn Resorts, Tiffany, Guess, Deckers, Williams-Sonoma and KB Home.  These are stocks that get real fluffed up when the sector rotations occur, but their fundamentals are awful.  At current levels I would short them all aggressively (with stops in place).

In the long run I think we will start to see demand destruction globally, oil can only be kept at these levels if the dollar sinks (which I think will happen) as Mr. Bush & Company continue to print money at record pace to cover deficits and bailouts.

Everyone should sock away a few gold bullion coins at these levels...just buy it and forget it.  Cash them in once Fannie Mae and Freddie Mac gets nationalized.   Very easy trade.

quoted

"These computers were thinking that Oil at $145 was a strong buy and Oil at $120 was a strong sell"

Computer programs I am aware about ( and I was writing trading programs back in 80th) were "thinking" that oil is a screaming short all the way from $130 to $148 and kept shorting it all the way up and covered on the way down from 130 to 115. And vise versa. Pros fade the trade, they have better staning power to survive drowbacks....unless they are REALLY STUPID PROS like majority of great American financial companies and they just don't know "when to stop"

And...markets did not change ...

( Tim Knight posted on his blog "Slope of Hope" - although I disagree with Tim on a lot of things - I like that find )

Congressman Frank Oliver: Is it not a fact that the collapse in the prices and disappointment of the people is teh main reason why they are blaming everything on the stock exchange?

NYSE President Whitney: Very likely, but that is a mere conjecture of my part.

 

Congressman Frank Oliver: But the stock exchange has no agency and does not purport to have any to evaluate stocks.

NYSE President Whitney: None whatsoever.

Congressman Frank Oliver: When [stocks] collapsed from the high to the low, the public started to blame "the shorts" for that. Is that not a fact?

NYSE President Whitney: I think from a hindsight point of view, they blamed the shorts.

Congressman Frank Oliver: They blamed the shorts, whereas, as a matter of fact, if the prices were inflated, they should have blamed the "longs" for having inflated them?

NYSE President Whitney: And themselves.

Congressman Frank Oliver: But instead of being logical about it, and blaming those who inflated prices, they blamed those who might have deflated them had they the power at that time - that is, the "shorts"?

NYSE President Whitney: Yes.

I think some of the oil stocks are near a bottom right now.  BP is my top choice at 57 and change.  It's at a 5 year low, and a very stable stock price wise.  I think it won't be long before it heads back up to the 62-65 range.  

Natural gas is almost there too.  I would like to own UNG etf at around 36 although I am not sure it's going to go through 37.

I think financials are not done getting hammered.  Unless they bring back the Naked Shorting restrictions again.

Commodities..hmm.. Commodities are scary right now and not because they're sinking like there is no tomorrow.. That would be great if you don't own any.  Time for shopping spree.  But because I think they are still going to drop another 30% after a brief 10% rally.  There is too much selling right now.

thats funny david above me:  I am pro financials pro airlines - among other things - for short term gains (with continuted downward volatility of course).  I don't think commodoties are going to reverse downward trends anytime soon with any degree of volume or consistancy.  I think the US Dollar has bottomed out, and is on the way up.

You and I have the exact opposite strategies...LOL>>>  One thing about this business I am learning is that when things shift away from my viewpoints, I have to be willing to shift my trading strategies as well.  I am a former commodoties man myself !  Later.   don