Our first full week of the new year and even with some red flags, we ended the week slightly higher.  The Europe crisis has shown its face once again and Friday saw a list of credit downgrades dominate the headlines all day long.  Even as I write this days later, you can find articles galore discussing that topic.  The situation is not pretty, but these downgrades should not come as a shock. 

In fact, it should not be a shock when the US is downgraded later this year.  Last year was the first time in the history of the United States that our credit was downgraded and with no Government plans to cut our deficit and combat our record debt levels, another downgrade this year is fully expected.  This would make the second time in the history of the United States that we have ever received a downgrade.  To not turn this into a political discussion, I’ll leave it there, but the point is most everyone expects the downgrade.  When we expect it, we can usually bounce back fast.  It is the unexpected that becomes market moving, especially negative news.  None of the recent downgrades were unexpected.

Bonds had shown some weakness coming into last week, which would have been bullish for equities if this continued.  Many market players, myself included, are looking for the day bonds start to unravel fueling equities higher.  Instead, we had a week that bonds were strong and stocks were slightly up on the week.  This is not typical, especially over the past year.  When bonds are stronger, I tend to move towards cash because I lose trust in the support levels for equities.  This past week had some weakness on the days bonds were strong, but we received light-volume buying that kept us afloat all week.  Some believe this was manipulation by big funds trying to protect gains.  On such light volume, anything is possible.  While this is a good sign that we ended the week higher, it’s not something I trust so I will not bet aggressive without an edge.

A trend seems to be developing in bonds over the past few weeks and it seems one week bonds are up and the next they are down.  If this trend continues, we should see some bond weakness this week, hopefully propelling equities higher.  Another positive sign for equities is I’ve seen many other seasoned traders initiated short positions in bonds via short iShares Barclays 20+ Year Treasury Bond Fund (TLT) or going long ProShares UltraShort 20+ Year Treasury (TBT).  This gives me more confidence the next week should at least have modest gains.  Also, options expiration is this week which could create some additional emotions and volatility, so keep that in the back of your mind.

Economic Calendar

Last week, retail sales was a very important indicator that was in focus.  To the shock of many, it was a disappointing number.   Many were hopeful a strong number would show a strong economic recovery this Holiday season, but it did not.  Retail sales, excluding auto’s, came in at negative .2% whereas the market expected a positive number of .3% (.5% miss) with some expecting as high as .6% (.8% miss).  This was a significant miss, but the market shrugged it off nonetheless.  This number means we should not be rushing to embrace the idea of a faster economic recovery, we will need more confirmation of that.

This week, we have some important data that should be in focus for the talking heads on television.  Every day this week has an important indicator.  I’ll personally be focusing on how strong the Fed surveys are as well as what CPI comes in at.  The surveys will give us a better idea of how strong manufacturing is and CPI will give us an idea of how the Fed’s inflation numbers are.  A weaker CPI gives another justification for QE3, which I firmly believe we will see later this year after the bonds unravel.

Game-Plan

Biotech was a strong sector last week and I will look to see if that continues this week.  Many of the charts exploded higher, but now they have put us in a position of overbought conditions.  A pullback would be beneficial to reducing risk rather than chasing above support.

Technology had some bright spots, but semiconductors took a hit on Friday that gave back most of their gains for the week.  Oil and Gas has been slightly pulling back and I will keep this in focus as some of the charts have consolidated nicely.

Per my StockTalks, I had short bursts of aggressiveness that did not last more than a day trade.  With bonds showing so much strength, I did not have much comfort in holding large long bets overnight.  Instead, I traded core positions with smaller trades and added some new plays to my portfolio.  You can review all of this on my StockTalks, but I still have long swing trades in Applied Micro Circuits (AMCC), Magnum Hunter Resources (MHR), Caribou Coffee (CBOU), Nanometrics (NANO), Rudolph Technologies (RTEC), Northern Oil and Gas (NOG).  I initiated swing trades in a risky short-squeeze candidate Boyd Gaming (BYD), which is an online gaming/casino play that has run nicely as well as establishing a starter position in Flotek Industries (FTK) for another trade in it.   None of these positions are bigger than a starter position, but I will look for the ability to be aggressive this week if bonds start to give fuel to equities.

For my long-term positions, I added back to Gastar Exploration (GST) under $3 and Dejour Energy (DEJ) finally broke support, so I was able to start accumulating more shares with room to add more if it continues to fall towards the $.39/.40 area.  Even with my long-term positions, I still trade core positions in them and lock-in profits when I can.  A long-term position, for me, is not one I buy and ignore.

If you can’t make it to the live-chat where all the magic begins, you can view my trade updates throughout the day by following me on SeekingAlpha StockTalks.

Stock Radar

I am sticking to stocks showing relative strength over the past weeks preferably with more cash than debt and valuations showing reason to believe it is undervalued. I look for these stocks to pullback towards support levels where I start to buy incrementally. I am cautious of buying on breakouts unless I am in a very aggressive mode.  This aggressive mode may be just for a day-trade rather than risking the large position overnight where my stop-loss may not protect me from a large gap-down.  Market players have been reluctant to buy stocks on breakouts over the past year and I have adjusted my strategy to be more selective and patient.  If we can gain some very positive sentiment or a QE-based environment, I’d expect that will change.

The second radar is the short squeeze radar which is compiled of stocks showing relative strength, but having high short interest (you will notice duplicates among both radars because of this). Any bullish spark may set them off in a short squeeze run netting significant profits if you trade correctly. Always trade these short squeeze candidates carefully as stocks with high short interest will have negative rumors swirling around them trying to shakeout investors who have not done their homework. However, some of those rumors may indeed be true, hence the importance of doing homework and being very selective. The risk is higher for these types, so make sure you know what you are getting into before you buy, not after you buy.  The key is to be selective and find those stocks which the shorts are wrong about, not to blindly believe every high short position is wrong.

[Related: CLICK HERE TO REGISTER FOR A DAILY EMAIL NEWSLETTER OF OUR ARTICLES]

Cambrex (CBM)
CONMED (CNMD)
Ebix (EBIX)
Emulex (ELX)
Flow International (FLOW)
Furmanite (FRM)
Fushi Copperweld (FSIN)
Green Plains Renewable Energy (GPRE)
LeCroy (LCRY)
Lattice Semiconductor (LSCC)
Magic Software Enterprises (MGIC)
Mitek Systems (MITK)
Newport (NEWP)
Ruth’s Hospitality Group (RUTH)
Santarus (SNTS)
Spectrum Pharma (SPPI)
Uranium Energy (UEC)
ViroPharma (VPHM)
Quiksilver (ZQK)
Arctic Cat (ACAT)

Short Squeeze Radar

Boyd Gaming (BYD)
Constant Contact (CTCT)
Ebix (EBIX)
Fushi Copperweld (FSIN)
InnerWorkings (INWK)
Northern Oil and Gas (NOG)
Sonic Automotive (SAH)
LodgeNet Interactive (LNET)
Media General (MEG)
The McClatchy Company (MNI)

You can follow my trades alongside the 36,000 plus market players who follow me on SeekingAlpha (Shameless promotion). As always, do your own homework to see if you agree. Good luck out there.

Mike

At the time of publication, Kudrna was long CBOU, DEJ, MHR, GST, AMCC, RTEC, NOG, BYD, FTK and NANO, but positions may change at any time.

About Michael Kudrna (http://michaelkudrna.com) “The market can remain irrational longer than you can remain solvent.” James Maynard Keynes In an industry which caters to the greedy and already wealthy, it has become increasingly complex for the individual investor to find a path to success. “Buy and hold” is an inadequate investing philosophy yet has been promoted by Wall Street as the most successful style for the individual investor. Many intelligent investors have debunked this myth over and over again yet it is still endorsed by some and blinding a new generation of young investors. The reality is Wall Street wants to make money off you, not with you. Wall Street makes money by being better than you, not helping you. Selling is the most powerful and underrated ability for the individual investor. The ability to move in and out of a stock with speed, when necessary, is a major advantage over a large institution that would make large waves doing something similar. The idea is to create an investing style based around your own personality traits and amount of time. Through that, you can start to use the strengths that we, the individual investors, have. When this is accomplished, despite the times when the market acts completely illogical, you can still make money. Awareness is critical. A large drawback to the individual investor is finding quality information to base your investment decisions on. Unfortunately, in a greedy industry as such, most everyone else’s agenda does not benefit yours. Kudrna’s Stock Market Talk was created to build a community of like-minded individual investors who want to help one another rather than manipulate the novices. The chat-room is moderated unlike other sites. What you will find is we actually care and prove it every day. Follow us on twitter for updates and join the community by interacting in our live chat during market hours. Bring your research to the table and benefit from others research as well. Stick around and see why this has become the best community for the individual investor. It is simply because, “we actually care.” Good luck out there. Michael Kudrna Owner/Author Kudrna’s Stock Market Talk DISCLAIMER: Mike Kudrna and the information on his site are for educational purposes only. You should speak to your own financial advisor before making any decisions based on Mr. Kudrna’s opinions. Mr. Kudrna is not responsible for any actions you take upon reading his perspective and opinion. Keep in mind that positions that Mr. Kudrna has can change at any time without written notice.