This week, I voted “bullish” in the Ticker Sense Blogger poll and haven’t done so since the first week of November. Even though this was my first chance to vote on the poll after the HEDGEfolios Timing Indicator gave its bullish bias last week, it was not an easy choice. One of the most challenging aspects of the poll for me is that I have to predict whether I think the S&P 500 will be higher or lower a month from now. I toughed out all those weeks of bearish votes and was wrong for most of them until the most recent pullback.  I really didn’t have much time to enjoy being vindicated for all those months of bearishness.  Now I have an opportunity to be bullish in my one-month outlook and it is unsettling. I gave it some thought because I am very doubtful that this rally will break through February’s highs and there is a very good probability that a failure at those levels will precipitate a move below the current level of 1436. As I wrote the other day, I didn’t like the slope and extent of last week’s move. Nonetheless, I am going with the data I have and that info from last week is bullish regardless of my personal opinion. While I expect the current rally to be short in size and duration, it’s not up for me to decide - so I am going to just watch it play out. For what it’s worth, I expect the next decline to be longer lasting and deeper than the mini-correction we just went through. Until then, I am going to try to enjoy being bullish.

Some people have suggested that yesterday’s action in oil trades was an overreaction to the Iran / UK navy issue. That may or may not be true. Let’s look at some facts. From Wednesday’s close to Thursday’s close - oil gained 3.5% and that was before Iran abducted UK’s Royal Navy. What was the overreaction attributed to on Thursday? I don’t remember a cause being given, just the result and that is my preferred way of dealing with it. From Thursday’s close to Friday’s last trade, oil only gained 0.96%. I just don’t see how that was an overreaction to Iran, especially compared to Thursday. Oil has moved plus or minus 1% in a day about 1/3 of the time during 2007 (with 1/3 coming above 1% gains, and the others worse than 1% losses). Suggesting that the oil markets were solely focused on Iran and that the results were an overreaction is ignorant at best. This is just another example of the misinformation and exaggeration that goes on every day you use financial media - tv, print, internet, radio, etc. Stocks, commodities and currencies move on more than one factor. Whenever I hear someone identify the the move as being related to a specific cause, it’s usually not true.  Oil definitely moved higher because of the added geopolitical tension from Iran’s action but I don’t think it was an excessive reaction and I am certain that the bullish move had other factors.

Prior to Tuesday’s (3/20/07) open, I posted a shortlist of stocks that I thought had a good chance to head higher this week. Obviously, the post-Fed move and a more bullish tone to the market made picking winners easier so I won’t be patting myself on the back too hard. From Tuesday’s open until Friday’s close, the S&P 500 advanced 2.43% and an equal weighted portfolio of the 79 stocks I mentioned would have performed 75% better than the benchmark index for a 4-day gain of 4.26%. Of the 79 stocks, 85% went up and of the 12 losers, LUB was the worst at -3.4% and the average of all losers was -1.7%. Winners fared much better with an average gain of 5.3% and the best was IMCL at 26%. The top 10 gainers all exceed 9.5%.

These lists are only guesses of stocks that I think have an abnormally high probability of moving during the week that I publish them. HEDGEfolios is not a stockpicking site and does not make recommendations for buying or selling any security. Each investor is unique and should analyze each stock and discuss it with their financial advisor before taking any action. I know this sounds like a standard cover my ass disclaimer but I actually believe this stuff and I greatly dislike stockpicking sites. One of my concerns with services that send out emails of their top picks every night (or however frequent) are that they do not encourage investors to do the fundamental and technical work that must be done to improve the chance of success. Do not confuse shortlists with shortcuts!

I have been asked why I don’t provide these lists every week and then follow each stock until it is removed or why not provide model portfolios or top ten lists, etc. The answer is that I do not believe your performance will be improved by others (including me) doing more work. I know everyone is busy with family, careers, etc. - but investing and trading is not a part time gig. Unless of course you want to index and then, I would suggest not wasting your time at HEDGEfolios. If you want to make money with stocks, you must do the work and be accountable for the results. HEDGEfolios will help you identify stocks that meet your fundamental criteria and give you some timing help on entry and exit points that I think have a high probability of being good.  But you should be using it to generate ideas or provide confirmation for your own ideas.

I cover over 4000 stocks and ETFs each week and I treat each one the same. I have no certainty about which stocks are going to move 1% vs. 10% or tomorrow versus next week and after looking at so many stocks, I cannot narrow down 200 that I really like to the top 10. About 3 months ago, I studied a long list of 200 stocks, a subset of 100, a subset of 50 and finally a top 10 for a one-week period. Remember - these lists are only my thoughts for the week after being published. Not surprisingly (at least to me) the statistics were not good. The performance of the 200 and 100 portfolios were relatively the same, the top 50 was slightly better and the top 10 performance was slightly less than the top 100. What concerned me the most was that the shorter lists had too many big winners and too many big losers. While the average was good, the negative extremes were bad. Why would this be? My analytical weakness causes it - stocks at support levels tend to either break through extremely or break down extremely and that is why I always accompany these lists with a suggestion of tight stops. Based on this analysis, my decision was to stick to prior beliefs and skip the pursuit of providing lists of defined limits. Some weeks, I generate lists of over 400 and other times, it may be between 50 and 100. It’s up to you to decide which ones, if any, that you like.

DCX is up again today on speculation that Daimler is closer to getting rid of its Chrysler unit. Supposedly - Magna (MGA) and private equity are teaming up to offer a bid of $4.7 billion. Finally, a number has been placed on the Chrysler deal so that’s a good thing. But I cannot help wondering whether Dieter should not sell Chrysler. Talk about selling it? Yep - keep doing that every time DCX stock starts to pullback a bit, let the hype push up prices and repeat as necessary. By my calculations, since Dr. Z said “all options are on the table” and got this party started, DCX has increased $17.50 per share or approximately $18 billion in market cap. Usually we look at M&A activity and discuss synergies and takeover premiums, but this time it’s different. Chrysler is such a mess that DCX shareholders keep paying more for the hope of a “Chryslerless” security and we actually see a disposition premium. So far that premium is being valued at $18 billion and I find it funny that Dieter has increased the market value of his firm more from selling the EADS stake and trying to sell Chrysler than he has by selling cars.  What is he going to do if he gets rid of Chrysler?

Oil traders will not wait to find out the whole story on the report that the Iranian navy captured 15 UK navy personnel at gunpoint in Iraqi waters. While it would be great to remain calm, I doubt the pits will be quiet today and in response, I am revising my bearish forecast for Oil that I gave last week. Following the Fed announcement, the oil markets have mirrored the move in equities that I commented on a few weeks ago. Clearly, traders had been worried about the prospects for slower global growth and declining energy demand and seem to be reassured that is not the case. China’s growth figures for the first quarter, OPEC’s decision to not change their quotas and the Fed statement has put some bullishness back into the oil trades.

I was surprised at the extent of yesterday’s 3.5% upward spike and had planned to revise my forecast based on the technicals. However, this Iran/UK confrontation just solidified that decision. From a technical perspective, we just had a somewhat satisfactory test of the 50dma at $58 support levels and if oil moves the way I think it will on the geopolitical tensions, we could take out resistance at the $64 level. Even if this Iranian abduction gets resolved quickly and peaceably, geopolitical factors are firmly back in the oil pits and while they have been largely ignored until now, I don’t see that complacency coming back any time soon. Until further notice, I am bullish on oil.

Regarding the political / military situation - this is not the first time Iran did something like this. In July of 2004, 8 members of the UK navy were abducted, taken as prisoners for 3 days, and were paraded in blindfolds on Iranian TV. Hopefully, today’s crew will not suffer any worse of a fate. The timing of this action is not surprising. First a joke to keep this light - maybe Iran is retaliating for the wicked Western world’s attack on Iran/Persia through the movie “300″ . As idiotic as it sounds, just read this CBS report on the matter and decide for yourself. Besides - that movie stars Gerard Butler, a Scottish actor - coincidence? Worthy of an act of war against his home country - the UK? You decide!

But seriously, Iran is within days of a new UN resolution chastising them for nuclear weapons development and that likely is some strange reason to take this naval action. I don’t know how they think this is going to help their case, so maybe it really does have to do with the movie. Regardless of the reasons, it happened. I hope the UK naval situation is resolved quickly but that will not change the underlying problems with Iran’s nuclear development. Given that President Imanutjob claims that the UN “lacks legitimacy” and their actions are “illegal”, I seriously doubt any new resolution will do much more than the gazillion resolutions the UN issued against Saddam’s Iraq.

It’s possible that warnings will get lost in all the optimism from a market rally. But when you consider HAL’s midday surprise yesterday and MOT’s fiasco this evening, it’s not a good start. When I look at warnings, market leadership is key. If MSFT warns, it means something for the market. If NOVL warns, it means something for NOVL and the market will not care. When it comes to energy, HAL is a big name to watch. When it comes to telecommunications, MOT is a big name to watch. Two companies don’t signal the certainty of major problems for earnings season but they should cause you to pay attention. I have been worried about slowing economic growth and estimate revisions so now I have more of a reason.

Motorola just had their phone disconnected. Actually, they just announced a huge warning on revenues and earnings. If Icahn was pissed before, I can only picture CEO Zander getting a Razr shoved up his ass. I gave MOT an UP signal 2 weeks ago and it was really starting to look promising.  Damn.  When this starts trading again, it will not be pretty.  There was a lot of bad news priced into Motorola since November but this miss was not in it.  And as it relates to PALM’s anticipated purchase by MOT, forget it and make sure you brace yourself for a hit.  If NOK or Private Equity is the real bidder here, they just got a gift from MOT  - the price just got cheaper and negotiations should be a little easier.  Bring on the iPhone!

Today’s post-Fed rally is a bit stronger than I would hope for.  It’s not that much of a surprise because it is eating through the 2/27 decline which fell so rapidly.  However, the slope of today’s move is not sustainable and not as healthy as bulls would like you to believe.  I cannot construct chart curves, but if I were to try, it would not look like today.  Just because I said I was bullish yesterday does not mean that I will stop criticizing questionable moves.  When the market was falling on 2/27, I made similar comments about the decline in emails to a HEDGEfolios member.  Here’s an excerpt:

“i have been bearish but i don’t believe today is the end of the bull run.  i won’t go into elliott wave crap or fibonacci but it would surprise me greatly if this market turned on a dime and went really bearish.  more likely, we will get some support around 1385.”

And on 3/1/07 I said in another email:

“i will be very surprised if we head straight down …..
“until then i’ll just make blunt comments and tell you that the slope of the decline is unsustainable”

“…. what ends up happening to this selloff - there is a high probability that we will approach the 2/22 levels although  i am not sure about beating it.”

I feel the same thing about this afternoon’s spike - the slope is not sustainable and I am expecting some selling in the very near future to bring this move to healthier levels.  If not, we are rebuilding risk at previous highs that would be tougher for us to handle.

Like everyone else, I was expecting to see very little action today until the rate decision. But this narrow range and light volume is off the charts - almost literally off the charts. Maybe we should just close the markets in the first half of FOMC days and get some extra sleep! But since we are here, I had a chance to look over enough charts to question my newly established bullish bias. I am obviously sticking with it but today’s vacuum of volatility is unsettling and if we hadn’t stayed above the high close over the past three weeks, I’d be even more nervous. Enjoy your last few moments of calm before the storm! One is coming.

Now that the VIX is being worshiped again (not by me), I did my periodic analysis of whether I am missing something important. NOPE - I still don’t see it. At least not in the ways that the VIX has been used in the past and I have yet to figure out how to use it in any non-traditional way. Before February’s decline, I was struck by the persistent lack of volatility in most asset classes from currencies - to Treasuries - to stocks and I proposed that we should analyze the relevance of an indicator like a Treasury VIX. Now that volatility has returned in all these areas, I did think it was fair to give the equity VIX another chance. If you are fascinated with the VIX, the only site I can point you to is VIX and More. Even I have enjoyed reading Bill’s stuff. Unfortunately, like I said before, the predictive abilities of the VIX just don’t work for me. The time lag from October’s first sub-11 reading to the selloff at the end of February is tough to value. Furthermore, the upward moves in November and December didn’t result in any timely market moves either. So as I was thinking about this last night and reflecting on the trading of VIX financial instruments, I wondered whether we shouldn’t create a new indicator to measure the volatility in the VIX itself. Call it a “VIX of the VIX” or “VIX-Squared.” Since I have given up on the VIX itself (for now), I am more interested in the rate of change in the VIX and the associated volatility so if you know of an existing chart, let me know. Maybe there is something useful in that info - then again - maybe not.