Waiting For Godot...

Yes, that's what it feels like trading in this market. The sickly tree, played by the 1168-1205 SPX technical trading range [described at length in previous posts], has indeed sprouted a few leaves, those being a few of the stellar earnings announcements over the last week or two. The two tramps of course are being played by the bullish and the bearish investors, who keep waiting and waiting for Godot (a.k.a. the market) to do anything. Well, Godot is not showing up any time soon, it seems. As soon as the top of the range is reached, like yesterday's 1204 top, the market retreats. Same thing goes for the bottom of the range, where there are quite a few willing value buyers. What is the catalyst for some excitement?

It's hard to say at this point. Exxon Mobil and Royal Dutch Shell posted unbelievable 3rd quarter results, net profits of $19bn combined, rivaling the GDPs of quite a few small countries. Yet, those earnings are not enough to move the needle -- it's all already in the price. The market and everyone's expectations out there care about one thing only: the next sector leadership wave; who is going to lead us higher? I've been saying for some time now that it simply has to be technology and financials, in the absence of the obviously exhausted energy sector, but we can't seem to get over the overhead resistance hump that's looming just above us at the 1205 SPX index level. The longer we stay below that level, the more courage the bears will gather, and the more they can push the market below the lower end of the range -- below 1168. I still don't think that will happen, but my faith had better be rewarded pretty soon, because we are simply running out of time and steam this year. And 2006 is likely to be a whole different ballgame -- a new Fed chairman, questionable prospects for growth in the U.S, given the macro climate, and last but not least, probably much higher interest rates to counteract the inflation scare (which I wrote about only yesterday!).

Speaking of interest rates, let's take a look at Toll Brothers (TOL), the dearest of darlings of many a homebuilder-bullish fund manager this year. Well, the stock is pretty much flat for 2005 YTD, having described an almost perfect triangular-looking curve from $34.5 in January to $58 in July back to $34.5 in October. I do admit that it looks cheap here again, based on a variety of fundamental metrics; however, with the inevitable slowdown in the housing market (and by this I mean prices just ceasing to go up and maybe homes staying unsold for longer than expected), one has to wonder about the prospects of this sector for the next few years. TOL insiders seem to agree -- they have been selling their holdings in very decent size on the way down. Still, it remains a good company, so should you wish to be a contrarian and buy a homebuilder with a great track record, look no further than TOL.

Which brings me to good companies vs. bad stocks and vice versa. Personally, I like buying junk. By this I mean that I like buying companies that are so crap, and so beaten-down (usually under-followed by the Street), and so vehemently hated by the investment community, that they could not possibly do any worse than they already are doing. These are also the type of stocks that one should never ever be short, especially if those companies still possess juicy-looking assets which might attract the hungry packs of private equity or distressed fund managers wallowing in cash and willing to take the risk of turning around the situation. Albertson's (ABS) -- the supermarket and food-drugs chain -- was one example earlier this year where careless shorts suffered because of buyout bids that suddenly materialized out of thin air, despite the general incredulity of the investment community. Safeway (SWY), ABS's miserable food-chain cousin, could be next. And no, I wouldn't be short that stock either. Petco (PETC) and Pier 1 (PIR) are two other names, albeit in different industries, which I would stay away from on the short side, in spite of the multitude of problems they face, and the poor management execution of their respective strategies. Bad companies rarely stay bad stocks for long, because their stock prices adjust to expectations much quicker than most of us think.

Well, where can we find good shorts? How about good companies whose stocks have risen so much and become so expensive that it makes sense to short them, even if they are "printing" cash at that particular moment. TOL at $58 was a good example. A 40% return on the short side isn't something one should turn one's head at. The market tends to overshoot both on the way up and on the way down. Another good company that might be a great short early next year (after the holiday period) is ... oops, bad man, bad man, how dare I say it!! -- Apple (AAPL). When all the lofty expectations are in the price and things" just couldn't get any better", then and only then is the right time to put on a short. Even great companies suffer from unrealistic expectations.