Wow, if Friday didn’t get your heart racing then you shouldn’t be a trader, that was a lot of fun.  We may have seen an intermediate term bottom put in yesterday as the big boys bought materials in size going into the close.  Let’s start with Monday though when it seemed we may have escaped a further sell off to the 200 day moving average.  The $SPY traded over its flat 5 day moving average and successfully tested it twice on Tuesday.  I remarked in Tuesday night’s note that a failure of that 5 day moving average would get ugly and a break through resistance at 110.50 would produce a squeeze similar to the one seen in November.  The market opened below the important 109 support level on Thursday and it was straight down from there as the dip buyers fled.  A lot of people tried to buy into the fear on Thursday afternoon but it was obvious the destruction was not over with the jobs number coming up Friday morning.  We proceeded to capitulate after some fight Friday morning and touched the 200 day exponential moving average at around 2 PM.

Aaaaaand this is where things got interesting.  Materials have been slaughtered during this sell off and there are some monster players out there who still believe in the gold / hyper inflation trade.  It was only a matter of time before the decided to step in and buy what they must see as value.  Gold $GC_F was the first to make the turn having bottomed out in a capitulatory move before noon.  Crude was also down a ton before noon as it failed some important support levels.  After a little bit of churning the volume picked up and major players came after the gold miners $GDX.  Gold Corp. $GG ended the day up greater than 6%.  This was major buying but guys with deep pockets, they sent in orders to the institutional desks and told them to keep buying until the close, it was relentless.  The $SPY closed green and we now have one major hammer candle to think about this weekend.

Is it time to go all in and buy what you perceive as value, no I don’t think so.  The longer term technicals of this market are now quite ugly.  The 20 day moving average has crossed below the 50 for the first time since the March 09 low.  This is a sign that rallies should be sold into until further notice, just as a 20 day moving average trending above the 50 is a sign to buy the dips.  There most likely is a bounce coming though, and it’s possible that we could go into a period of several months where the market does not trend but chops around.  Until the 200 day moving average is broken, I believe you should be playing mean reversion now, do not be buying or shorting breakouts or breakdowns respectively.  Below the 200 day moving average and all bets are off, we could see a complete meltdown, I’m not kidding.  Look for the US Dollar $USDX to pull back in the coming weeks, it’s overbought after breaking through that big bull flag from a few weeks ago.

I stayed above 40% cash for most of the week as I did not trust the rally attempt on Tuesday until that major level of resistance was broken.  I did sell a few things on Thursday at the open but should have sold more in order to pick up more alpha on the downside.  I dipped in Friday afternoon as the market turned, buying positions in $ANR $TIE and $NTCT as well as more $DV.  This is a little bit of style drift for me, $TIE and $ANR are both support plays off very oversold conditions, not momentum moves.  I will most likely be selling into any major strength in these two names over the next week or two but believe there is a nice bounce in store.

Over all I made up some good ground through my large cash position and I’m poised to take advantage of any further strength in the market next week.  It’s very important to be extremely nimble in this environment unless you have chosen to move primarily into cash in order to play for a further sell off.  I think we are going to see some tradable bounces and will be quick to sell into them.

Stocks that I own and still look very nice to the long side with good momentum include $DV $CMG $NTCT $CREE $ALGT $VRX $PEGA.  I will be looking to add to $VRX and $PEGA on any strength next week.

I’m stalking a few other stocks including $PFCB and $GRA for entries.

The food service names have held up amazingly well through this sell off, frankly I have no clue why.  Possibly because of lower commodity prices, but who knows, they still show great momentum and I’m very interested in adding another name or two.

The major theme here is that if the market has found an intermediate term bottom, I don’t believe we are set to rocket back up to the highs.  The market needs to to base out and collect itself.  Wait for stocks to show good basing patterns and give good risk reward entries before you load the boat back up to the long side.  If we fail Friday’s low, run for the hills.

I’ll get to the market a little later, today’s action was interesting for sure, but I want to talk about what happened on the hill today.  Mr. Volker sat for the Senate finance committee today and took questions regarding separating commercial banking operations from proprietary trading.  He seems to believe that these two things should not take place under the same roof so to speak.  I won’t get into all of the specifics of the policy he would like to see enacted, you can read some of it in this WSJ article here.

Here is what’s interesting.  Back when the world was ending last February, the fed and treasury gave boat loads of cash to these banks with the sole aim of having them buy assets for their own accounts so that they could reflate the world.  Believe me, they didn’t give that money to the banks so that they could just give it right back by buying treasuries.  The banks took the cash and bought risk assets, for their own accounts, so that they could repair their balance sheets with the profit.  The biggest beneficiary of this plan was of course Goldman Sachs, hence the ensuing backlash against them for taking TARP and making record profits.  Well yea, if you have the play book straight from the government it doesn’t take a rocket scientist, which by the way they do employ a few of.  The other banks with internal hedge funds and trading operations all had the same play book, it was in all our interests that these banks make some money.  It doesn’t excuse their actions leading up to the melt down, but looking at the situation from a pragmatic point of view, this country is better off with the banks making loot.

So now that the government’s asset reflation plan has worked, for the time being, it’s time to close out their trade with the banks.  Frankly, I see it as being pretty fair, the banks fucked this nation, along with some politicians and other actors, then the banks helped the government out by reflating the asset bubble.  So my view is that Obama, maybe Bernanke, and obviously Volker believe that it’s time to close out that trade and reform the system.

Here’s my problem with separating regular lending operations from trading activities.  Well, the truth is I don’t really have any problem with it, I just have a problem with the government’s motivation for wanting it done, especially that of Obama.  Banks are not there to be an extension of government economic policy, they are there to make money, they are private industry.  Banks should be left alone to lend at the frequency and amount they are willing, not told that they have to lend money to small business instead of hording cash.  There is a very good reason that banks still aren’t lending, it’s because they don’t see a favorable credit environment to lend in, and I don’t blame them.   If Obama wants to go to a command economy structure, well he should just come out and say it.  It’s never worked at the scope and scale of the United States in history, command economies tend to fail miserably once they reach a certain size, with the obvious exception at this point of China, which is of course no longer communists in nature, only name, but does exhibit many command economy aspects.

If Obama wants a separation of lending from trading, then fine, let’s break up the banks, but don’t go half way and allow Bank of America to have a capital markets group.  If $BAC is going to just be a lending institution, they need to divest all other businesses.  I don’t want to see this crap getting muddled together so that the legislation is completely ineffective where loopholes are easily walked through.

So what does the world look like if there is a complete separation between lending and trading / advisory / capital markets businesses.  Well, Goldman Sachs is fine, I’m sure they would be willing to divest whatever little bit of lending they do in about 10 seconds, remember that they are just a big hedge fund at the end of the day, with an advisory arm.  Bank of America gets torn to pieces and spins off Merill Lynch, Citibank is torn to pieces, Wells Fargo is torn up, and JP Morgan is torn to pieces.

Is this going to happen, not a chance in hell.  There is no way the banking lobby is going to let these banks get picked apart piece by piece, end of story.

So is Volker’s plan a decent one in theory, sure.  Is Volker’s plan a good one in practice, no way, they will never do it correctly or thoroughly, that is if they get anything done at all, which I highly doubt.

Another week of schellacking for long only strategies.  The market took a bath this week, led by materials and tech, which until Thursday morning made up about 2/3 of my portfolio.  I was playing buy the dip, it obviously didn’t work.  My cash position at the open on Thursday was south of 5%, I loaded up and went all in.  When the major indices failed to crack their declining 5 day moving averages, I ran for the hills.  I was upset at myself last week for not bailing on this market when obvious signs of distribution were evident.  I should have taken my exposure down at that time.  I played this week correctly though and I’m able to sleep well at night knowing that I traded my plan, and executed well.  The fact that I trail the $SPY by a little more than 1 % since 11/9/09 while holding high beta tech and materials names throughout this massacre of the longs, is incredible.  Believe me, I’m not celebrating negative alpha, but I should be much further in the hole right now than I am given my decision to load up earlier in the week.

As you can see below, investors took materials and tech to the woodshed.  The trend in most, but not all momentum names is busted now, it will take some time for issues to base out and give goo low risk entries to the trend.  If we see a quick bounce back from the high momentum names, I feel it will be shorted into relentlessly.

Some stuff I sold out of this week: $NFLX, $AMZN, $AAPL, $IBN, $IAG, $MHS, $RHT, $RGLD, $CERN, $EGO, $CTSH, $ATHR, $LZ, $ANR.

The Netflix sale is really the only one that haunts me, not holding into earnings was a huge mistake and an emotional decision based on the overall market and my portfolio, not the fundamentals or technicals of the individual issue.  I fell victim to the emotion of just not wanting to be exposed to risk, when I should have traded the stock.  This should be a lesson to you all, not to be overwhelmed by the performance of your portfolio or the overall market when making a decision regarding an individual issue.

Some stuff that I still like.  The education names have held up very well, $DV even had a monster breakout this week.  I’m holding $CPLA and believe we could see a massive breakout on the weekly chart imminently.  $V still looks good and I’m happy to own this name until the weekly chart breaks or the government takes their candy away.  I don’t see either happening in the near future.  I’m looking to add to my $SBAC position on any strength.  The tower operators may not be the best businesses in the world, but hedgies are chasing them to the ends of the earth off the idea that $T and $VZ need to jack up their networks to deal with the onslaught of mobile devices requiring massive amounts of data transmission.

My cash position is now above 40% and will likely stay that way for the next few weeks.  Stocks need time to heal, and catching falling knives is not my game.  I’ll also be limiting the number of positions I have on, there are still some good trends out there, and new leadership, but I don’t believe I can spread myself out to 30 positions in this market while momentum names are getting picked off one by one and shot.

This is a long / short market now, trade accordingly.

A few quick thoughts on the new $AAPL iPad.  I won’t give a full review of what I think about the product, there are plenty of other people who can do that far better for you.  I’m not really a tech geek, I just like to look at innovative products from a business and technology trend perspective.

First off, I can not understand why there is no camera included in the product.  This really makes no sense to me.  I had the idea that one of the most innovative aspects of this device was going to be video chat made mobile, I guess I was wrong.  Maybe it will be in the second release, but how hard would it have been to include, I just don’t get it.  Imagine being able to talk to anyone face to face like you do now over skype, except mobile, that’s a game changer, that makes the world smaller, that’s innovation.

As it is now, the device is just a larger, supped up iTouch.  Yes, the other functionality is going to be awesome, I won’t go into them all, it’s really cool.

Now here’s the most amazing thing, and the aspect of this device you need to watch out for from an investing perspective.  There’s no voice plan!  There is 3G connectivity through AT&T, and the 20$ / month all you can eat no contract plan sounds awesome, but there’s no voice.  Now I’m betting there is going to be a crap load of speculation as to why.  Well here’s my take.  I believe Apple is about to destroy the idea of having a voice plan.  So far, they have not allowed full use of skype or any other voice application that would use the internet instead of a voice plan which you had to pay $T for.  This is ending in my opinion.  I think they are on the cusp of allowing one or many of those services to make calls through the 3G data plan.  What does this mean for the telecom companies?  Well, just think about it, if Apple allows data users to make calls over the data plan, the telecoms are screwed.  Time is really running out on the days when they will be able to charge 60$ for a voice plan.  This is the most interesting part of the device, no voice, and I believe they may have done it for a reason.

Here’s the problem, the network is going to completely crash soon.  Frankly, I probably won’t buy an iPad just for the fact that it won’t work in New York City on the $T network.  I already have major problems making a simple phone call let alone trying to make a data call.  Something needs to give here, and I believe $AAPL may be cooking up a solution of its own.  This device is only going to go as far as the network its on can take it, and god knows Steve Jobs doesn’t want that part of the equation to be out of his hands.  If things stay the same, and you can make unlimited voice calls through a skype type application on this thing, $T is going down, quickly.  I don’t know what the answer is, I need to give it more thought.  There is a major war brewing between the edge developers of the internet and the core network providers as to who is going to pay for the expansion of the pipe that carries the data.  Someone has to pay for the expansion, or there needs to be a partnership there.

These are interesting times, huge companies will grow and fall based on the outcome of the network build out and how the iPad offers voice.  I’ll keep you updated as to my thoughts, sorry for rambling.

Quick post tonight, but I want to comment on slew of different stuff that I’ve neglected to speak about.

We closed a penny away from VWAP on the $SPY today, no coincidence.  Today was the epitome of wait and see, traders are playing some serious chicken.  Don’t be the first to move, wait for the winner to appear and join the crowd.  Bulls want to see a slow, methodical strong bid in the market over the next 3 days, not a quick run up that is going to be heavily shorted into.  The longer we churn down here the move bears get trapped, the more fuel to push past the year’s highs and on to 1200 $SPX.

It appears that crude $CL_F has found a short term bottom.  It’s still suspect as the oil market has been unable to hold a bid for more than a few minutes at a time.  The US Dollar has a lot to do with this, we are on the door step of a huge breakout, everyone is in wait and see mode now.  I think there is a playable bounce here in crude with a tight stop under today’s low.  I want to see it climb back above a flat 5 day moving average, I won’t be able to take as much size, but I’ll feel more confident that the bid is back.

Gold $GC_F is in the area where you want to be accumulating it for a longer term position (3 to 6 months), as well are the gold miners.  You’ve got to buy the materials on dips, chasing breakouts has only led to heartbreak.  That said, if $GLD breaks 110.14 I’ll completely reverse my positions and get short gold, that kind of action could be signaling an end to the asset reflation scheme.

Copper $HG_F continues to hold the bid.  It’s showing a very pretty bull flag on the daily chart and continues in its trend.  The Chinese equity markets are struggling, but copper continues, a divergence for sure, I’m not quite sure what to make of it, something to ponder, keep an eye on it.

Grains continue to get destroyed, don’t touch em.  I missed my short entry, I’m not happy about that.  Sugar $SB_F continues to fly, pure momentum there.  I don’t play the sugar futures, too illiquid, along with the $SGG.  One way to play this is through $IPSU and $CZZ which both show nice momentum and patterns.  You take equity risk by playing these names, but it does give you some exposure to the trend.

I’m short the long bond via $TBT.  I hate to use double short products but I couldn’t get a borrow on $TLT and this looks like a trade too obvious not to take.  My stop is above Friday’s high on $TLT, check the trading book for my exact entry and size.

Apple crushed their earnings, although iPod sales were lite.  The tablet, slate, widget, or whatever the hell you want to call it is going to be a game changer, I have no doubt.  That said, I feel that there may be some serious institutional selling in $AAPL this week as retail money pours into the name, giving the fund enough of a bid to distribute their stock.  They’ve made a lot of coin in this name and I think some are itching to take a few dollars off the table.  I’m long, but a little nervous.  I want to see the stock get into clear air above 215 and I’ll stop sweating.  If it goes it may not look back for a hundred points, I’m not kidding.

Have some patience with the materials if you stepped in last week, these aren’t day trades.

I’m off to hockey, second round of playoffs tonight.