5% Thursday – Is the Dow Busted?

We knew yesterday was going to be tough.

As expected, we touched the 7.5% levels I laid out in the morning post almost to the penny and, despite strong volume, we could not close the deal and I nailed it at 10:11 with my alert to members which said: "XLE and OIH cautious into oil report and now I REALLY don’t like the rejection off the 7.5% rule so 1/2 covers on rolled up long DIA puts with stops on the other 1/2 putters at 6,950 on the Dow."  Note how the Dow dipped to 6,947 on that drop, rose back to 6,983, which was 4 points shy of our Dow watch level, and then began falling in earnest.  Despite the "save" in the afternoon, we went into the close fairly neutral to the 5% line but very deflated as we lost the momentum from Tuesday entirely.

Today we'll see if those 5% lines can hold up in what's looking to be a rough morning and we are only 1/2 covered on our long puts so it will be very easy to flip back to 60% bearish if we don't.  For those of you too lazy to click on the link, we'll be watching Dow 6,825, S&P 706, Nasdaq 1,344, NYSE 4,410 and Russell 362.    From a technical standpoint, holding up there will still be bullish but it won't feel bullish if that's all we can pull off for the week will it?

I pointed out to members yesterday that with AA at $6, C at $1.50, GM at $2 and GE at $8.50 – the Dow's price weighting means that entire group could double and add just 150 points to the Dow.  With a relationship of about 8 Dow points to each $1 in component stock price, AXP would have to double to get 80 Dow points and doubles from PFE, MSFT, KFT, JPM, INTC, HD, DIS or DD would have little impact as well as all are under $20 so they could all double along with our 4 micro-Dow components and we'd still be under 9,000.  Just like UYG, XLF and XHB – is the Dow now a broken index?  I've been saying so since 2006.  When the value of a number of components in an index slips below a certain level, the index begins to lose it's value as a reliable indicator as it is no longer capable of climbing without some spectacular internal gains.  This feeds a cycle of negative sentiment as "nothing seems to help" the index get back on track. 

We're playing RIMM off this (hopefully) bottom but, as David Fry notes in his chart, perhaps it's time to switch horsemen as we are not getting much gas from the usual suspects.  To some extent, GOOG, AAPL, RIMM and AMZN are attacked by hedge funds looking to keep the Nasdaq down while they accumulate shares in the broader index without triggering larger sell programs.  That's why, on a blah-looking day like yesterday, you can still have Up Volume at 4.2Bn shares with Down Volume at 2.5Bn shares.  You would think an imbalance like that would cause a major rally right?  Not if you don't buy the big boys…  As I said above, you can double up 15% of the Dow and you would barely move the index 1%.  By not letting the index move while they accumulate, hedge funds keep out mutual funds and other index buyers that would compete for shares if the broader indexes took off.

Speaking of taking off, it's 8:30 now and we got the expected 654,000 job losses for the week but Retail Sales, ex-auto, were WAY better than expected with a 0.7% gain vs. the 0.1% drop that was expected by "experts."  Clearly they didn't ask me because we have been playing retail up throught the CC companies and just yesterday morning, we discussed today's report and I said to members: "We already got reports from individual retailers and it’s my bad for not repeating this every time (but I get so bored).  WMT was up and other stores were down but WMT is like 20 times the total volume of the other stores so their up 2% wipes out the down 10% of everybody else from a total spending standpoint.  Also, the consumer credit report showed a lot more than expected activity which is a couple of indicators that consumers are still out there."  Why are "experts" unable to read this data and draw a proper conclusion?  That I do not know…

The shoppers have certainly dropped in Asia with a sharp downturn in Chinese exports and Japan's Q4 GDP fell -12.1%, which spooked the pre-markets and sent the Nikkei down 2.5% this morning.  Of course this is silly as the preliminary GDP was -12.7% so this is old news and not even as bad as expected.  Even in Japan, consumer spending was off 0.4%, it was corporate spending that shrank 5.4% that killed the economy, a combination of fear and lack of credit – both things that can be reversed a lot faster than a major downturn in consumer spending.   Both the Hang Seng and Shanghai were flat in today's trading with the Hang Seng working very hard to hold that 12,000 line.

Europe is off about a point, which an improvement off the open but we need them to hold their lines as well, which is FTSE 3,733, CAC 2,500 and DAX 3,900 – only the CAC is holding the line (well above at 2,670) and it's going to be hard to motivate investors while the EU debates further stimulus (not looking good) and we await the G20 meeting on April 2nd but the Treasurers are getting together this weekend though it's doubtful any policy statements will come out of that.

There's enough positives on the table to hope for another green day but we'll have our technical hat on and let our levels be our guide.  We're still not going to be making many bullish plays into the weekend but we'll be happy to flip a little more bullish as we hold the 5% levels and take another run at the 7.5% lines.

Be careful out there!