U.S. News

Market Intelligence: Resistance and Selling Into Strength

Jim Kingsland

A second day of stock market advances sizzled at the open, but then faded. Some strategists are concerned that momentum could easily wane if those who bought on the rebound Monday opt to book fast profits and sell into strength.

McMillan Analysis president, Larry McMillan, says the S&P 500 1490 level will be a clear resistance point and could induce selling if the market becomes strong enough to rise to that level.  McMillan says the turnaround is welcome, but it's "likely that the market will encounter resistance in the 1490 area or slightly higher, and then will retest the lows."

CNBC bond market reporter Rick Santelli. at the Chicago Mercantile Exchange, points out that S&P futures could be on their way to flashing a sell signal. He says, "there something big going on here".  If S&P futures close out this month below last month's level of 1488, "you get a pretty big sell signal," according to Santelli.

In addition to technical levels, sentiment continues to be driven by developments surrounding mortgages and high yield debt.

The latest mortgage industry crack centers on MGIC Investment and Radian Group .  The two jointly control C-BASS which invests in the credit risk of subprime and is now seeking investors to provide money after what it described as "unprecedented" distruptions in the mortgage markets.  MGIC and Radian had stakes worth a combined $1 billion.  MGIC says it may be forced to write down the entire half-billion dollar value of its stake.

The LCDX index gauging risk aversion in high yield corporate debt was able to put in another modest bounce of about a cent on the dollar Tuesday with the spread coming down to 31 basis points, according to Markit.com.

David Dietze, portfolio manager at Point View Financial says the market was "due for a rebound" after last week's slide but feels the present buyers are "in for a trade".  He says "it's an oversold trade after too much panic, and short covering.  Brave souls are placing these bets."

Dietze sees opportunities for the "brave souls" in major investment banks. "Basically there are two themes in 2007 -- weakness in the U.S. real estate market versus strong global growth," says Dietze.  "These investment banks are caught in between, since they all have sponsored and benefited from lots of loans in subprime.  However what investors are not focusing on is that half their revenues come in from overseas in being involved in robust economies in China and Europe."

"Contingent on subprime not spiraling out of the control names Goldman Sachs, Merrill Lynch and Morgan Stanley are interesting," according to Dietze.

There are bulls looking for a longer term rebound in the market. On CNBC's "Squawk Box," Abby Joseph Cohen, chief U.S. investment strategist at Goldman, Sachs and longtime Wall Street bull, calls last week's tumble a "market event".  She says "many investors had been too willing to look at risky securities.  When we take a look at the S&P and the Dow, our feeling is the fundamentals support those stock markets are in fact in very good shape."

With those positive fundamentals in mind, including a rebound in second quarter Gross Domestic Product, Cohen says the year end value of the S&P 500  should be in the area of 1600. But Cohen also cautions that "we may not have seen the end of (liquidity fears) because we will be hearing reports from a variety of portfolio managers over the next few weeks taking about the damage to their portfolios."

Oppenheimer chief strategist, Michael Metz, says "my guess is that we’ve seen a tradable low. Last week's decline reflected urgent and forced liquidiation. But even with an upside bias, we’re going to have some accidents with some hedge funds." 

Metz says adverse fundamentals are not over for Wall Street. "Unfortunately I believe the next problem is going to be slowdown in personal consumption.  There is deflation influences on housing prices  and also evidence commercial real estate is slowing down. Both are real negatives for economic growth."

Analyst Actions

Citigroup reiterates a Buy on American Express saying recent weakness is overdone.

Uranium producer Cameco was upgraded to Outperform at CIBC.

the children's apparel retailer upped guidance, Gymboree has been upgraded to Positive from Neutral at Susquehanna.  Friedman Billings also upgraded the stock to Outperform.