Separation

I'm trying to see what the market is doing rather than what I want to see happen; most traders want to do that but quite often it's our models that we're seeing. There's just too much information to process so the solution is to build a model or have rules of thumb. It's generally a pretty good approach but you need to be a fox rather than a hedgehog, that is, you need to understand that it's just a model and be quite happy to temporarily switch to another way of seeing the market.

The game started to change once we entered the new financial year when stocks that were in tenacious downtrends began to have sharper rallies. It looks like we've entered the next phase of this cycle because traders and investors seem to be positioning themselves ahead of earnings season and the dogs are barking.

One of those barking dogs is Aristocrat Leisure, a gaming machine maker. I thought this was a no brainer the other day but like one of Pavlov's dogs, I'd been conditioned not to buy it. I thought I was right when the minor break failed but it was a sign of things to come and the stock has pushed again and this time it has escaped the peloton. I presume that there are nervous shorts ahead of the result or perhaps a change in sentiment. I paid 245 for a few just to see what happened. The stock has kept going and reached 251 before dropping a little. With any luck, it will drop into the low 240s and I can buy some more.

It's 11.14 am and the market is waiting for the CPI number at 11.30, with an early sell off pared back to a loss of just 6 points.

TOL is another one which looks cherry ripe to have a good bounce. I'm pretty much limit long but I'd be prepared to risk some option premium. The markets are wide though so I might need to wait for a natural seller of options.

11.39 The CPI was higher than expected so another rate rise is back on the cards, not good for my bullish scenario and the Asx 200 has sold off about 12 more points which is cautious for the moment but it could easily gather steam.

11.52 The market is not tanking and has recovered a point or two to be lower by 15. The pundit who was wheeled onto CNBC was looking for 1.1%, well above consensus of 0.7% and the actual rise of 0.9%. I wonder how surprising the number really was and since the previous flood affected figure was 1.6%, it's possible that the impact from that event is still working its way through the system.

12.11 Scanning through some news alerts, it seems that the number was above most estimates but analysts remain of the view that a near term rate rise is an outside chance and there was one comment to the effect that the flood impact continues to be felt. Down 22 and the dam hasn't broken yet but I've got my finger on the trigger with a couple of longs and particularly FMG which sold off disappointingly yesterday and has broken that low today.

I'm happy enough with my long August calls in FMG, it's just the stock against puts where I'm concerned. The puts expire tomorrow and I would have been looking to sell out by then anyway.

1.01 Hanging in there, the Asx 200 is down 16. An economist pointed out that the biggest impact was from bananas and fuel although he also noted that cherry picking (or banana plucking) the data is always possible and not necessarily wise. Fuel prices have had me scratching my head for months because even if you use Brent prices, the cost of fuel in AUD terms must be lower unless refining costs have rocketed. The shares of refiner Caltex are not strong so the margins can't be fantastic. The prices at the pump are almost as high as when crude was trading at USD 150 per barrel and the AUD was trading at around 70 cents to the USD. All I can think is that customers grew accustomed to a price of around A$1.40 per litre at that time and the margins for the petrol stations have grown. Either way, we're due our periodic round of public anger and futile government enquiries which should mean that petrol prices do not cause concern in the near future, barring a big jump in the oil price.

2.40 BSL has had a nasty sell off today, down 6% at 123.5. There's a definite possibility of a pennant correction ahead of a drive to a new low. I don't have much stock left fortunately, although the Aug 130 calls are down to 5. I'm prepared to ride it out with the calls and the stock cut is at about 118.

3.11 I'm watching the early stories for European trading and steel maker Arcelor Mittal is going to make more money than market forecasts so you take your pick; sell off like we have today on US steel stock weakness or rally on European strength. I'd suggest that they're both irrelevant to us as I assume they are focussed on their own domestic markets. It doesn't hide the fact that BSL is very jittery right now.

I sold out half of my FMG long at 657. The rest is covered by July 650 puts and since the stock is at 653, my downside is limited.

3.19 According to FnArena, ANZ economists suggest that there's a fair way to go in this tightening cycle which may explain the market sliding away as the afternoon goes by. Off by 27 points.

4.14 Damn those bananas! A reversal of fortune for the 4th consecutive day (up, down, up, down) although the losses were a bit lighter than the previous numbers. For the Asx 200, the wash up was a loss of 36 points. BSL was my worst performer, closing at 122, and I added to the losses with some premature buying of more stock at 124. I'm not thrilled to have got it wrong but the stop is pretty close on the rest. Otherwise, I was a net seller again but did buy a few more ALL at 241.

We ran our own race today on CPI news with the rest of Asia mixed and US futures flat.