If Some Hedgies Are Blowing Up, Bring On the Dynamite

By Duru

May 16, 2005


The conventional wisdom out there says that there are one or more hedge funds out there blowing up after taking on too much risk.  These naughty boys and girls have fiddled around with exotic credit derivatives, spreads, aggressive bets on cyclicals and commodities and what-not.  If someone is blowing up, you could not really tell by looking at the indices.  My man, Mike, noted that the major indices have essentially gone nowhere during these rumored blow-ups.  And now today we find ourselves with a Nasdaq knocking AGAIN at the door of the magical 1999 for a 3.5% gain in the first two weeks of May.  Heck…if this is what happens when disaster strikes in the market, let's bring on the dynamite and really get this party started!

OK…I am being a bit glib, but I always get fascinated by the contrast between the conceptual notion of blood in the streets versus the reality of a calm, albeit churning, market.  Certainly, this slow steady monotony is the way frogs get boiled, but for now, it is easy for the casual observer to wonder about the source of all this fuss.

I wrap this quickie note with some charts that caught my interest tonight.  I did not annotate, so I will trust you to do your own admiring, ooh'ing, and aah'ing.  I will introduce each chart though…

NEM:  While gold is blowing up along with the rest of the commodities out there, NEM finds itself at a fascinating juncture. It conveniently stopped right at the up-trend line.  The second chart shows the short-term daily chart of NEM…and it is quite ugly indeed.  Note carefully the test of the 2004 lows which themselves tested successfully an important gap up in July, 2003.


The Dollar:  To increase the drama on gold, the dollar has been streaking hard in the past week.  It now looks like a true jailbreak over the 200 daily moving average.  I will stick to my skeptical ways and grumble that I smell a head-fake. Isn't the market now hoping that the Fed is going to slow down and stop hiking rates soon? Go gold! (Besides, how could Warren Buffet be wrong, right?!)

Energy Sector:  The energy sector has gone from market leader to injured reserves. A steady, grinding down-trend has been in place since the highs of early March, even featuring numerous head-fake snapback recoveries.  Today, I am taking special note of a pattern that can lead to more lasting snapbacks. Check out how XLE, the ETF (Exchage-Traded Fund) for the energy sector, has sold off on high volume for three days in a row with the third day featuring a decent comeback.  That third day has printed a pattern called a hammer.  Typically, you prefer to buy this during an up-trend.  In this case, we are not only in a short-term downtrend, but the 50 daily moving average is even beginning to turn downward.  Sounds like a great time to make a contrarian move now that everyone seem to be licking their chops for ever lower oil prices.

SBUX:  Remember when I "quasi"-tried to call a bottom in this beloved barometer of caffeine addiction?  I was watching the long-term up-trend line like a hawk and figuring there was little chance that buyers and bulls would let this one escape through the hatch.  Escape SBUX did and for over a 10% drop below the long-term up-trend line.  Stock has since gone almost straight up in a very nice recovery as the news has suddenly become as good as it was bad just a few weeks ago.  Talk about manic!  As SBUX hovers around that old up-trend line, it faces a crucial test of mettle.  A further move from here could re-establish some well-deserved luster to this bad boy.


© DrDuru, 2005