The setup, at last, is a good one. And it's the leadership for once, not FANG -- the acronym for Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), all of which did nothing or at least next to nothing, thank heaven, because when they lead, nothing follows. And that's why we can rally as hard as we are. (Amazon is part of TheStreet's Dividend Stock Advisor portfolio.)
I often talk about the setup of a given day. Typically, in Squawk on the Street, I will say I like the setup, meaning I think you can buy the market for a trade. Or I say I don't like the setup, which, sadly, has been the case for ages and ages.
Until today when I said, holy cow, the setup could be a good one. There are too many people who are getting negative, the market's oversold and, like I said last night, it will take tremendous discipline to buy something, and that's often a sign that we could be at a short-term bottom.
Let me give you a blow-by-blow, though, of what defines the setup for me and why today's was positive vs. most of the other days I have seen of late.
It all starts with China because, remember, we are trading with China when it is bad and when it is good we are free to trade on our own.
We left last night thinking China would be bad, and it sure didn't disappoint. First Baidu (BIDU), the online search engine company that has China all to itself because Google's not allowed in without self-censorship, reported the worst quarter of any company to date in 2015. That's why it has deservedly plunged more than 30 points or almost 17%.
First, its expenses soared 81%. That's just plain absurd. Second, expenses soared because the company is trying to be all things on the Web, everything from an Amazon to a Netflix to a GrubHub (GRUB), you name it. That has to be one of the dumbest things on Earth to do. It's got China all to itself, without Google, and it decides to go after every other area of e-commerce. Are these guys nuts? The low in a conference call of many lows? One of its original shows, The Running Man, was mentioned, which I quickly grabbed on YouTube. It's a cross among The Bachelorette, MacGyver, Fear Factor and American Idol. And it may be the first time I can recall watching a show and hoping for a commercial break.
Anyway, next thing you know, the Chinese market opens down 4%. And I say to myself, holy cow, now this is the positive setup I have been waiting for. Instead of China opening up, filled with hope, or opening flat, making the direction quizzical, it opens down big. That's the maximum fear signal I was looking for, and I said to myself, the Chinese Communists, good traders all, have trapped the shorts, they have allowed the weak hands to sell, and now they are going to come in with both guns blazing and walk this sucker right back, taking it up for the night before gently letting it come down a bit and holding it there down a percent. Believe me, in that uber-bear market, that's a total victory for the bulls. And that's just what they did.
That took the pressure off the U.S. and you saw a rise in the futures immediately.
Next up, oil? Every day during this whole hideous decline in oil, in the early morning it tries to hold its own or make a stand just a few pennies below where it went out the day before. Pure torture, as it never holds.
Not last night. There was instant capitulation as oil traded down to the $46 level, off almost 70 cents in the early hours. Ah-ha, the pattern is broken. Finally we got the long-accepted defeat. That early morning capitulation allowed the bulls to mount a rally, as is often the case when you get a give-up after a long struggle, and that's exactly what happened.
With oil up and the Chinese Communists back in the game, you had a real chance for a rally, but if you are a bull, you don't want it from the get-go because it brings in too many sellers. Voila, we get a muted opening. You know I hate big up openings. I like tepid ones like this, where you have a total lack of belief even in the strength of the futures.
Ah, but would the stocks play along? Would we be led by FANG again? Just as we started taking off, those stocks faltered. Instead, incredibly, we found strength in the two weakest groups of the moment, the industrials and the oils, both of which have been severely oversold because of the weakness in China and the price of crude. It was like two jackboots coming off two jugulars. The blood flowed again.
It wasn't just these big so-called macro issues that went for the bulls. There were individual stocks that created a different environment than we have become used to. For instance, Cummins (CMI), the big engine company, had been expected to follow in the footsteps of Caterpillar (CAT) and give you disappointing results. Nope, Cummins gave you a tremendous upside surprise, and right on its heels Caterpillar announced an accelerated buyback plan. Those have been horrendous stocks to own, suddenly they became bear traps giving hope to the bulls that all was not lost.
DR Horton (DHI), the huge homebuilder, and Masco (MAS), the kitchen cabinet and bath company, both reported excellent numbers, rekindling the housing investment thesis.
The transports have been horrendous of late, despite the decline in oil. You had to figure it could only get worse when we got earnings from United Parcel (UPS) and Norfolk Southern (NSC), both of which have repeatedly disappointed. You know how good FANG has been to the longs? Let's just say UPS and Norfolk Southern have been that terrific for the shorts. Wonder of wonders, miracle of miracles, what happens? UPS reports an actual, legitimate upside surprise. Gigantic with tremendous commentary even about Europe. Bingo, up five on a huge spike. Probably not done. Should get many upgrades. Then Norfolk Southern reports a terrible number, but it wasn't any more terrible than Union Pacific. Bang, another squeeze, with Norfolk Southern launching two points and Union Pacific (UNP) four! Glory be! (Union Pacific is part of TheStreet's Trifecta Stocks portfolio.)
It's not over. Honeywell (HON), one of the most bankable industrials, which had been very weak of late, announces it's buying Elster, a maker of gas and electric water meters, to further its stable of energy control products. Honeywell needs deals to keep growing and this $5 billion acquisition is just what the doctor ordered. Honeywell can streamline it, take costs out and create a very healthy outlook for 2016. (Facebook, Google and Honeywell are part of TheStreet's Action Alerts PLUS portfolio.)
It gets better. Last week, Carolyn Boroden, the Fibonacci queen, made a bold call during chart week on Mad Money, saying that if Exxon (XOM) could hold $80, it could be a springboard for a huge move. Sure enough, Exxon went right there this morning, momentarily piercing $80, but then rising back up above $80, surviving the test. Next thing you know, it's up three points or 4%. This isn't FANG, for heaven's sake, it's the $344 billion oil colossus. As Exxon leads, all other oils follow, and that's just what happened.
For days I have been saying watch Freeport McMoran (FCX), the gold, copper and oil company, for a sign of life, as it has acted like a real goner. It was looking like another downer for the China proxy, another annuity for short sellers, until 10:52 a.m. ET when the company surprised Wall Street with a plan to cut costs dramatically to conserve capital. Shazaam, a real short head-slammer.
Now, before we get too giddy, let's remember, the Fed meets tomorrow, and if it isn't concerned about China and says it has to move rates quickly, then the dollar will fly up, China will come down and all of this positivity will be over. Second, we get oil inventories tomorrow and earnings from Chevron (CVX) and Exxon later in the week, plus the rig count. I would have to say that unless inventories and the rig count are down and Exxon and Chevron report OK numbers, then oil's going to start retreating again. The Chinese government could take a powder after a couple of days of good buying, giving us another tailspin.
However, the key takeaway from today is simple. The shorts have had the run of the joint. They now sense vulnerability while the longs get courageous. Yep, that's a decent setup, one that can last if China, the Fed, oil and earnings cooperate. Could be too tall an order. But it did happen today, so it can happen again.