Last week was finally a week to be bearish. The stock market decided to finally care about rising interest rates as the yield on the 10-year Treasury reached for the highs of 2006. Thursday was particularly devastating as the yield launched over the psychologically important 5% level. I wondered aloud with TraderMike how long it would take for the market to care about these rising rates, but I was just as surprised as the stock market over last week's rapid run. And yes, the long-term trend is STILL down! At this point, we don't break that trend until 2006's highs are breached. While I think rates should go higher because of inflation risks, the market continues to think otherwise. And I won't fight 'em on that point! Anyway, thanks to tracking with TraderMike and CNBC's Fast Money (yes, I am a fan!), I actually went into last week 100% bearish. Being "right" had its consequences, because almost every one of the longer-term plays I have recently mentioned on these pages took significant blows. Let's review...as painful as it is (see disclaimer here.):
Housing (WCI, BLG, KBH, IMB, BZH)
This latest rate scare was particularly devastating to housing-related stocks. They got absolutely crushed on Thursday with many of the main names I follow making fresh 52-week, and often two-year+ lows. While many of these same names made nearly full one-day recoveries on Friday, things have gotten even uglier with a quickness for these stocks.
WCI is still holding on well. The old Icahn bid seems to have successfully put in a floor. There is still about a month left on the BLG trade. If the gap up in late May fails, this trade may be aborted early, especially if 10-year rates manage to break through the long-term downtrend. Higher rates are not only bad for the fragile housing market, but it makes leveraged buy-outs more expensive and thus deals a little less likely. The KB Homes (KBH) trade failed quickly as the stock easily sliced through the launch point from the buy-out rumors. My position stopped out right below that point, and I saved myself a lot of skin. I am still deciding how to play this one, if at all, going forward. Finally, I missed another excellent buy the dip and sell the sizzle on IMB. IMB made a dream set-up in late May, and somehow I missed the play even as I was watching it evolve in "slow motion!" The chart below shows the nice hammer at oversold stochastics on May 30 that produced a 10% move before peaking.
If the current short-term trend holds up, Friday's recovery could mark another buying point, but I am more wary than usual on this one. Finally, I have put BZH back on watch. The recent selling has buried BZH deep in oversold territory, right under the 50DMA, and retesting price levels that preceded the selling panic on news of mortgage fraud investigations.
Well, I said the potential break-out pattern was not ideal. A downgrade on "valuation" came on Thursday and GILD was no match given the wave of selling in the market overall...even with other positive newsflow during the week. On a day when almost everything got sold, bio-techs got hit for a sizeable 3%+ loss. GILD dropped 3.5% and convincingly below its 50DMA. The stock now looks like it is desparately clinging to the edge of a cliff. (see chart below).
I think that bio-tech buyers are ready to take a break for the summer. I will be keeping an eye on this one. If it breaks to new highs or successfully tests the 200DMA at around $71, I will consider re-entry.
I will close by giving a quick kudos to Google (GOOG). The stock made a new all-time high on Thursday before succumbing a bit to the overwhelming selling pressure of the day. The stock finally showed me some spunk. Now let's do it again this week...!
Be careful out there!