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MLR - PMP 8/20/13

The major market averages fell on lower volume. The NASDAQ Composite and S&P 500 are still within 2-3% of their highs, but the NASDAQ has broken below support at 3600 while the S&P 500 remains below its 50-day moving average. Futures are up this morning as the market continues to bounce off of last week’s sharp gap-down move on Thursday. Nevertheless, a tug-o-war between price/volume action of leading stocks and major averages vs. quantitative easing has been playing out as the market which is forward looking senses the Fed will begin to taper QE at some point within the next several months if not as early as September. The FOMC minutes will be released this Wednesday which will provide additional clues. Bernanke has so far been more of a dove than a hawk with respect to QE thus the minutes may reflect a continuation of full QE until the fragile economy shows a definitive recovery. In the meantime interest rates continue to rise as bonds of all stripes move lower, with the long end of the curve taking most of the damage.

Chinese online real estate company Soufun (SFUN) had a pocket pivot yesterday. Earnings and sales are strong, group rank 8, and pretax margin is at a stellar 51.4% and ROE is at 125%. Position size with care as the market has been acting weak and SFUN is a thinly traded Chinese stock that carries more risk. As an example of this sort of risk, Lightinthebox (LITB), which had undercut its Buyable Gap-up move on August 7 and should have been sold on this basis. However, the stock was able to turn back up to new highs, but had a mini gap down on August 15 on heavy volume so if one had decided to sit through the initial BGU failure, then that would have been a day to sell. LTBI blew up yesterday after-hours following its earnings report and this morning is trading around the $12 area after closing at 19.27 yesterday. The warning signs were there, but the stock serves to illustrate the hazards of buying into these types of names, particularly in the current market environment. It also was a thin Chinese IPO which, as we've stated, adds risk to the trade.

This morning futures are up slightly as the market remains in what we would call a “dead cat splat” sort of position where it has failed to bounce after gapping down sharply last Thursday, despite the S&P 500 sitting near its 50-day moving average. So far the indexes have not been able to gather enough strength to stage such a bounce. In our view, investors should remain on high alert.

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