We didn't get the rally we were looking for yesterday.
In fact, if it wasn't for the famous "stick save" into the close, yesterday would have been a disaster. Were "they" just shaking off the weak hands ahead of the Fed cut or is cutting rates halfway to zero just not going to be enough to resuscitate the ailing markets? Already our markets are off far more than you may think as our S&P priced in Euros chart shows we have fallen 10% off the last test of the declining 50 dma last Monday, painting a much more dire picture than the more hopeful S&P priced in dollars, which is simply skimming along the edge of the declining 50 dma and looking for an excuse to break up.
That excuse could be provided today by the Fed, who may break the back of the US dollar today with another rate cut. The dollar is already down 7% since Thanksgiving, almost exactly offsetting the Dow's run from 8,000 (not counting the dip) to 8,600. When we were bottoming, I pointed out that our stocks were holding up against other commodities (stocks are a commodity too) and we are still outperforming oil and copper for the past month but we are beginning to lose ground to gold.
The underlying question is: Should the dollar be falling compared to the Euro and the Yen, is our currency in jeopardy, does our mounting debt and additional financial obligations make the dollar a joke? It's easy for your stock to gain value against "funny money" – the Fed can just print more tomorrow but there are only so many shares of IBM to go around. Right now, the only thing in more plentiful supply than dollars is oil. In fact, there is so much oil spouting out of the ground that they can't find enough people to take it off their hands. Usually people burn it but if not enough people are willing to go to the effort then the oil pushers are forced to store it but now we are running out of storage and the darned stuff just keeps spouting out of the ground at a rate of 86M barrels a day so they are going to have a meeting to see if everyone can chip in and cap some of their wells off before the storage costs ruin them.
So it's no surprise to see oil falling faster than the dollar and going in the exact opposite direction of gold, which has a somewhat more limited supply and is much easier to store (an $840 ounce of gold weighs an ounce and is about the size of a coin while 2 $42 barrels of oil are 4-foot tall cylinders, 20 of which weigh about 3 tons, which is 6,000 pounds or 96,000 ounces). Oil also has the disadvantage of being highly toxic and flammable and must be stored carefully so a speculator can either deal with the hassle of finding a location to store 96,000 ounces of oil that costs him $840 or he can put a one ounce gold coin in his drawer while he waits for the market to turn. Which one do you think is going to attact the speculative dollars as an inflation hedge?
Pictured on the right is less than $1M worth of oil, note the men on the platform who weigh about 200 pounds each, weigh about 3 times more than $1M worth of gold (75 pounds). Although the NYMEX has made a total joke of the oil trade, with the physical product completely removed from the mechanics of daily trading – when the economy slows and the music finally stops then somebody, somewhere needs to take delivery of a commodity and, if there are no takers – they have to find somewhere to put it until they can find a user. So the commodity pushers in general will have their work cut out for them, especially the oil pimps as Obama and other World leaders seek to break our addiction.
In the past 30 days, the energy sector is off 19.68%, accounting for roughly 4% of our index losses over that time. We are looking for rotation away from oil to give us a real bullish signal as it is certainly time for investment dollars to move on and begin investing in the future, which is why we put little stock in rallies that are energy led. We did get some positive action yesterday as oil was rejected off it's silly morning run (see my morning post for comments) and Pursuing Wealth points out that all 3 of our major indexes put in a key reversal bars, where you have an "intraday low that is lower than yesterday’s low, but the end of day close is higher than yesterday’s close. When you see it the next trading day will “usually” be an up day because the momentum from one day spills over into the next." Despite the overall weak trading yesterday, we are still expecting to at least retest 8,650 et al into today's Fed cut – it's what happens next we have to worry about.
We're moving past GS earnings, which were not too bad but not great either with a $2.12Bn loss in Q4. Unfortunately, what would have been rally-worthy earnings are still going to be tempered due to the fallout from the Madoff scandal, which is keeping most investors well on the sidelines until the issue is resolved. Word is that this too shall be bailed out by the government (it's "just" another $50Bn), who have already stepped in to sort through the mess. The financials are all about confidence and to say that ours is shot is quite the understatement these days.
Financial confidence also weighed down the Nikkei this morning as the 225 gave up 1% in a low-volume, wait-and-see sort of session ahead of the Fed. Banks were generally dragged down in order of their perceived exposure to Madoff or connected funds. Also hit hard across Asia were the SOX along with LCD and other component suppliers as ratings were cut for the industry. Steel stocks tumbled on news that TM was cutting production and hitting it's suppliers for a reprice – something I've been expecting for quite some time as steel manufacturers would rather sell at cost than shut down the furnaces if it can be avoided. The Hang Seng held up with a small gain as did the Shanghai, both about half a point but losing significant steam. If we fail to hold 8,650 today we are certainly going to go back into our FXP puts as a hedge against a China pullback with the March $30s at $14 looking like a good hedge and we may even be able to sell a December (the $40s are $2) if we get a bit of a bounce but we're not expecting to need it as we're looking for at least a 1.25% gain over 8,650, 900 and 1,550 on the Fed cut but it will take holding 2.5% to make us happy.
Cramer was ranting about the evils of the Ultra ETFs and boy is he right! Still, for us option traders, it's very much like telling the guy with an Uzi at a paintball game that his weapon gives him an advantage – we'll stop using them when you ban them but not before! Cramer also had some great facts and figures that prove what we already knew – that short sellers destroyed the banking sector with a manipulative takedown that had no basis in reality. If Congress got a hold of these numbers, there’d be an immediate investigation, Cramer said. Because “this is a true scandal, and it came close to wrecking our financial system.”
Europe is up about a point now that we have gotten past our GS news (and our BBY wasn't bad either) but the UK lowered fees to the banks so a little stimulus is added to the numbers. It's Madoff, Madoff, Madoff in Europe and it's going to be very hard to get something going until we resolve this issue.
Last week, I said I wanted 9,100 by today's close in order to move 60:40 bullish and I don't think we're going to make it so we're going to really be eyeing today's move more from the perspective of do we go 60:40 bearish instead. Not holding our key levels will make that decision for us but we can expect the usual wild ride into the 2pm statement. GE also makes a statement this afternoon after the close with some mid-quarter guidance, which may actually be a statement that they will no longer offer guidance so be ready for anything!
