Testy Tuesday Morning

See, now that wasn't so bad was it?

Nothing wrong with a little sell-off and yesterday's sell-off was very little indeed, hardly a scratch on our long-running rally.  Now we'll see what kind of follow-through we get and what levels hold and what levels don't in our quest to regain the 40% off levels we've been chasing for 2 weeks.  As noted in David Fry's chart, the volume remains low and we are bouncing around this range on  the S&P, still more likely than ready to break out without more consolidation.  That was what we expected for May so we'll be very happy if things calm down around here.  

We still haven't taken out all of our 40% levels and those will remain our upside focus at:  Dow 8,412, S&P 945, Nas 1,716, NYSE 6,232 and Russell 513.  SPY has to clearly break over that top line in order to take out their 40% mark and that's a tall order so it's up to the Russell, who have yet to break 510 on this run and the NYSE, who could not take out the 6,000 mark on Friday to lead the way higher.  On the downside, our old break-up levels:  DIA 8,130, S&P 870, Nas 1,700, NYSE 5,500 and RUT 480 will now be our break-down levels with the Nas likely to lead the way lower if things fall apart.

The futures are currently (8:15 am) up half a point but oil is up to $59.85 and gold is up to $922 because the dollar has dropped another 2% against the Pound and the Euro while Japan furiously tries to keep the dollar over 97 Yen after it spiked down to test it right at 8 am.  The Pound is now $1.53 and the Euro just touched $1.37 so we are treading in very dangerously devalued waters this morning.  Asia had a mixed morning but the Shanghai jumped 2.25% and the Bombay Sensex drove up 4% with the Hang Seng flat and the Nikkei down 1.6% against the weak dollar (bad for exporters).  China's exports fell 22.6% in April and Imports fell 23% – we get our own Balance of Trade Report for March at 8:30 and we'll see how much of China's shortfall was our fault. 

Europe is flat with the banking sector down over concerns that the banks there may not be able to pass their own "stress tests" should the economy get worse.  Holding up the EU is signs of an economic bottom with Trichet, the OECD and an improved UK manufacturing report all showing signs of improvement this morning.  Bernanke also chimed in with happy talk, saying that he was "encouraged by U.S. banks’ plans to raise capital after government stress tests."   His apparent complacency against what the rest of the world still considers a serious situation is what led to the wholesale dumping of dollars overnight.  “Whether the objectives of the assessment program were achieved will only be known over time,” Bernanke said. “We hope that in two or three years we will be able to reflect on the banking system’s return to health with a sharply diminished reliance on government capital.”  Two or three years – that does not sound like a BUYBUYBUY premise does it?

Meanwhile, back in the real world.  Copper fell hard for the third straight day and blew the 200 dma at $212 as investors realized that China buying copper to stack it up in warehouses also wasn't a buying premise.  Copper was down 5.6% on the Shanghai futures and down 2.6% in London this morning. “Some of the copper recently imported has gone into speculative stockpiles, encouraged by the arbitrage and the recent credit expansion,” said Citigroup’s Heap. “This portion of offtake growth is not sustainable.”  Apparently, speculators have learned nothing from recent events.  Oil is up because copper is up so it's either the same old gang playing their games or just a whole new bunch of suckers lining up to get fleeced on the next drop.  We shorted the oil futures today as they hit $60 and will be shorting USO at the open ahead of tomorrow's inventory report. 

While many analysts are pointing to all the share offerings by banks, MSFT and now F as a sign that things must be getting better, it seems to me that all these people are calling a top as there is no need for any of them to make these sales NOW, as opposed to next month.  Clearly they are selling because, like GS, they think the price of the stock has exceeded the value and they are looking to cash in at the top – it would be irresponsible to do otherwise.  So continue to color me bearish up here until we do get a pullback that proves there's a bottom above 8,000, which I do think will hold but I want to see it hold before I go placing bets on 9,000. 

Depending on our open, I will be liking USO $34 puts for about $1 (we are already short the futures) and FSLR remains a favorite short at $195 and we can grab the $190 puts for $2.25 but out if oil gets over $60.  FAZ is still cheap and fun to play at $4.95, selling June $5 calls for $1.17 and $5 puts for $1.02 for a net entry of $2.76, an 81% gain if called away at $5 in June and an average entry on FAZ of $3.63, a 27% discount if the second round is put to you at $5.  It's a nice way to hedge your upside financial plays, especially if you are in hedged buy/write entries which will make 15-20% just for staying flat.

Still a little bearish but just day-trading around while we wait to see which way things break.