Market Rally Hangover?

So we ended April with quite a beating. I expected it. Let's face it. The market has been over bought at these levels for quite some time. The pull back today was necessary and in my opinion long over due. Now, my subjective bias is still tilting towards a market meltdown in the future, but as I have learned repeatedly in my short trading career, what it seems is never what it is, at least in the short term. Did that make sense? To put it more clearly, the market gods have a way of exhausting, demoralizing, and ridiculing you until you give up your thesis. Then the thesis comes to fruition. Anyone care to refute that?

I know that we are treading on thin ice here with the economy. Like I have said in my past few blogs, some of the market actions seen in the past 3 weeks do not happen at market tops. However, I am still biased towards negative economic impact on the stock market within the next 6 months or so. This teflon market cannot continue in this fashion. I am hopeful that we can have a meaningful pull back from today's action to wash out excess speculation and to bring the fundamentals of this economy more in sync with the technicals of the stock market. Some of my respected bloggers have been calling the rally that occurred in April a blow off top. But I tend to disagree. It is still too early in the cycle to be able to characterize this rally as that. I think it will come, but I would expect such action more in the future, say in the Fall. Read: Watch out for October this year!

Today's market beating was broad based and just about everyone was taken out to the wood shed and shot. Economic indicators continue to point to slowing economy with inflation just above the FED's comfort level. Like I said, in the short term, the FED will do nothing. But in the longer term, the FED must do the right thing and hike interest rate by at least 25 basis points. It will hurt and there will be much agony but it is necessary and worth it. No pain, no gain. Otherwise, if Bernake makes a bone headed move and cut interest rates to jump start the economy, which won't happen, we would be definitely mired in "stagflation".

Many of the market pundits are coming out and calling for a correction, announcing caution, calling for defensive stock plays (read: Cramer), and Mark Hulbert calling this rally stale. My how fast sentiments change, but it was long over due. On what grounds did this market rally the past 4 weeks? Was it that the market is pricing in the bottom of the economic slow down and pricing in for more robust growth of 3% or higher in GDP within the next 6 months? Possible but doubtful that this will happen. But funnier things have happened. All I can say is that this market continues to baffle me and I choose to stay on the side of the trend, which is firmly up, for the time being.

Now, just about the only company I am bearish on is Countrywide. Yes, I have paid dearly in April for my bearishness, but I am even more emboldened by the recent media shift on subprime and housing slow down. It is clear that some one is not telling the whole truth and it isn't the investors in this terrible company. AP has even gotten into the act these days by reporting on Mozilo's record setting rate of selling. This despite Mozilo continuing to spew diarrhea from his mouth regarding how strong Countrywide will be, utilizing the whore Cramer to pump his stock into earnings, and now pleading the powers that be to see things "their way". Sorry Angelo, the only thing you'll likely get is a prison term and a rate hike in the future. Oh by the way, did anyone see the news today that David Lereah is leaving the NAR? That guy single handedly propped up the real estate market during the boom and now the bust is here, he is leaving. Be worried. Be very worried because I think the fun is about to start! I am short Countrywide with 500 contracts of July $35 puts. If I lose that bet, I will continue to buy puts out to October! (remember what I said about October this year!)

Now, let's focus on what I am doing on the long side.

I am very bullish on Cisco (CSCO). Technically, Cisco is forming a double bottom base with tight 3 weeks of trading. Additionally, the right side of the double bottom base is forming an ascending triangle base which can indicate accumulation. That is proven when you consider the last 3 weeks of above avrage volume accumulation in tight price patterns. What will propel Cisco above that proverbial $30 mark? It would have to be another outstanding quarter but with the cooperation of the markets. So far, any companies that are levered to the global economy has been rewarded. Cisco's global business comprises 45 to 50% of their business. With their recent Webex acquisition, it is clear that Cisco is serious about video conferencing and telephony leadership. Also, this will allow Cisco to also lever itself to selling software to manage these new technologies. There has been quite a bit of chatter about Cisco's Enterprise division which comprises 50% of their entire business as slowing down. There has been rumors of Cisco "borrowing" sales figures from Q4 to Q3, but those are all bunk. I believe that Cisco's core enterprise business has kept up or has increased a bit (little bit of increase is all it can muster as this is a very mature cash generating business for Cisco). What will be interesting is the overseas revenues especially since Cisco has had 2 full quarters of sales with record low dollar versus just about any other country. That will mean huge profits that will be recognized even for a company like Cisco. I am in accumulation mode for Cisco June $27.50 and $30 call options. I currently have accumulated 110 contracts thus far of Cisco $27.50 and 50 of $30's. I would like to ultimately own 300 contracts of $27.50 and 500 of $30's all expiring in June 07. The call is short which I normally do not do but I am that bullish on Cisco's prospects.

LHC Group (LHCG). This stock has broken all aspects of my technical trading parameters but I still remain bullish on this stock. Perhaps I am fighting the tape like I did with Countrywide in April but listen me out a bit. This stock fell on huge volume today and pierced the 200 EDMA. It has began to form the right side of the head and shoulders base on the weekly chart and quite frankly the daily chart is god awful as well. Why is all of this happening and why am I still bullish? It is for two reasons. People are worried that Medicare will cut reimbursement rates for home health care providers and agencies. Amedisys went as far to say they are uncertain what medicare will do when they announce changes. The rules for home health care will change but for the better. One of the things that people fail to recognize is that institutionalized care in nursing homes and rehabilitation hospitals cost far more than home health care delivery. It is cost effective and affords better health care and increases patient compliance. In the long run, this unfounded concern will be just that. I am banking on this issue. I am banking on the fact that LHCG will profit and benefit from the new Medicare rule changes. I am holding 22 call options for $30 strike expiring in June. Once the news is released, which should be any day now, we can expect this stock to trade above $35 and possibly test $40. Also, preliminary earnings were announced today and it was a beauty! Net service revenue increased 50.7% to $70 million. Net income increased 51.4% to $6.3 million and EPS rose 34.6% to $0.35. Conference call is scheduled for tomorrow 5/1/2007 at 10:00 AM EST. I expect to hear more on medicare rule changes and its status tomorrow. If favorable, we can expect a quick $3 to 5 gain.

Starbucks (SBUX). This stock is dissed over and over again. It is left out in the left field to rot and die. People have just about given up on this stock and it is trading down from its high of $40.01 on 11/15/2006, which is about 24% down. They have shown that earnings growth was slowing and that there have been questions whether or not Starbuck's days as a growth stock are over. With increased competition from MacDonald's which was purportedly serving better gourmet coffee, this fed fuel to the fire that perhaps Starbucks competitive edge was finally diminished. But that is where everyone is wrong. Starbucks had some mis-steps the past 2 quarters due in part to rising coffee prices and vendor issues. But Starbucks have broadened their initiatives at newer growth arenas including a new music label business which should add some sizzle to the stock price. Their foray into China has been successful and with the weak dollar, this should again give some "Oomph" to the earnings this time around. Starbucks still commands strong brand name and top notch executives leading this company. This company has a tendency to surprise just when people have given up on it. Technically, the stock has bottomed and has been trading in tight 7 week pattern. It has also broken the down trend and this earnings might just propel this stock higher on May 3rd. My feeling is that Starbucks should post a surprising $.22 EPS.

Google (GOOG). Oh Google! I haven't given up just yet. It is forming a cup with a handle. But boy is this stock frustrating! This is definitely a good long term hold stock, not for the faint hearted. It is just not getting any love and the Doubleclick deal seems to not have settled well with the Street.

There you have it! Be careful out there. This week will price in negative employment and unemployment numbers. I think that this will also be a temporary pull back which is necessary!

Just hoping that Mozilo will finally pay his dues! Down with CFC!