Monday Market Mayhem

It does not take much to turn this market.

In Friday morning's post I said: "a 5% correction would be good and healthy and we’ll be looking to hold the same levels we set on the way up on this pullback – those would be: Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420, roughly 15% off the bottoms with 5% rule adjustments." and we got 1/2 of that move on Friday (the 2.5% rule) and I reminded members over the weekend: "Don’t forget I was looking for something like a 5% pullback and "all" we got was 2.5% so far."

So let's not be all "shocked" that there's a pullback today.  It's the same pullback as we had on Friday, following through to where it belongs.  Timing-wise, it was to be expected as we run-up to the G20 and my catch-phrase prediction for this week was: "While Obama’s away, the bears may play" and it looks like the bears are bringing their "A" game this week, pressing hard before Obama is even airborne for his European tour.

The newsflow turned sharply negative this weekend as well but not much of it matters other than Rick Wagoner being forced to resign after the Administration rejects the automaker's latest plan (Chrysler's too).  While much is being made of this – it's actually a very positive thing as the government is playing hardball with GM debt-holders and the unions to wring concessions from them that will bring the turnaround plan in line.  Although they are tossing out the "B" word, the administration said it would provide the company sufficient working capital for 60 more days, during which a revamped GM board and top management has to put forward a much more rigorous restructuring plan than it submitted last month.

A GM bankruptcy is, unfortunately, one of the three things I have long said that could each knock 20% off our 8,650 midrange.  Even more unfortunately, our other two market killers – the bankruptcy of a major financial institution or the default of a less-than minor country – are both still firmly on the table as possibilities.  Speaking of countries that may default – Russia's economy is forecast to shrink another 4.5% this year.  “As the crisis continues to spread to the real economy around the world, initial expectations that Russia and other countries will recover fast are no longer likely,” the World Bank said in a report today. In November, it saw growth of 3 percent, based on oil prices of $75 a barrel and global expansion.  The only thing really shocking about this report is it took them 5 months to figure this out…

That's what negative newsflow is all about – Da Bears worked overtime this weekend to flood the MSM with everything but the kitchen sink to kill this rally, Including this very scary chart from the WSJ under the headline: "How A Modern Depression Might Look"  Also from the WSJ – they finally figured out my long-standing inflation premise so kudos to Murdoch's minions for catching up after 3 years!  We have a LOT of economic data to get through this week and I listed that out in the Weekend Reading post along with a chart that indicates we may be in the middle of a "Quadruple Evil Knievel Formation" that could take us all the way back to 6,550 but we'll be hoping our 5% pullback levels hold and a base gets formed around today's open that we can build off.

Asia's base had no legs this morning as the Nikkei fell right off the table with a 4.5% plunge, all the way back to 8,236, a 600-point pullback (33%) off a 1,800-point run (25%) from the March 10th low.  The Hang Seng fell 4.7% on the day and is back at 13,456, an 800-point pullback (30%) off a 2,700-point run (23%) from the 3/9 lows.  India also gave up 4.5% and Singapore gave up 4.8%. "The next two days will help show whether the rally into the end of the quarter is sustainable, or was merely a relief rally after a brutal downturn," said analysts at RBC Capital Markets. 

To some extent, I wonder if all this negative newsflow, GM, etc has been engineered by the G20 to make what is rumored to be as much as $2Tn in additional global stimulus more palatable to their citizenry.  The IMF has called for all nations to pledge 2% of their GDP to stimulus plans but, so far, only the US and China have met those goals.  This morning, Japan's Finance Minister said Japan is prepared to implement economic stimulus steps that will "far exceed" 2% of gross domestic product and I'm expecting language out of the G20 along the lines of "we will all hang together or we will all hang separately."

EU markets are hanging onto the 2.5% rule today, also neatly completing their own 5% pullback legs so we'll be watching that line very carefully today.  As with the rest of the planet, Banks and Auto companies are leading the indexes lower.  This should be an advantage to the US, as GM and F trade under $5 COMBINED and Chrysler is private so we literally have nothing to lose!  Economic Confidence in the EU is at the lowest since the Union was founded but, in the UK, the decline of housing prices has slowed considerably with mortgage approvals the highest since last May – a real sign that England's aggressive stimulus approach may actually be working. “The housing market isn’t about to start booming, but the intensity of the pain will probably recede,” said Amit Kara, an economist at UBS AG in London. “We may have reached a bottom in mortgage activity.”

We're pretty much in a watch and wait mode today, there are 4 new plays in the Weekend Reading post and we'll be looking to see if we hold our levels this morning.  There is nothing in the GM news that should surprise investors who have been paying attention over the past 20 years and the news of possible protests may be spooking EU investors, who are selling off the US futures hard this morning (down 2.5% at 8am) but it looks like an opportunity to us as we don't really care what the G20 says – we're going to follow-through with our plan to re-flate our own economy at all costs.  Those costs may come back to bite us down the road but, for now, we need to trade for today.

As it looks like we're hitting our pullback levels right out of the gate, we may want to double down on the half-covers on our long index puts, rather than roll them down to 2x a lower cover.  It depends where we open but we can use our levels as the on/off switch, covering 100% if 3 of our 5 indexes are above.  Europe opened at the the 5% mark and hten gained a point – we'd hate to miss out on fun like that and we can always go back to a more bearish stance by working our stops (also see weekend post).