Once again we are attacking the 40% lines.
In the first Member Alert of the morning yesterday I said: "The real breakouts are our 40% lines and they have been impassable so far: Dow 8,412, S&P 945, Nas 1,716, NYSE 6,232 and Russell 513. Those are going to be our key points and it will be the Nas that has to break up and hold it first." That led us to make a winning play on the Qs but we should have held it longer as they raced even higher into the close. Today we'll be watching the May highs (if we can get there at all), to see if we're just making a double top for the month at Dow 8,657 (8th), Nas 1,773 (7th), S&P 930 (8th), NYSE 6,003 (8th) and Russell 512 (8th). Notice the Nasdaq led us higher and fell off as the others topped out the next day so that's a pattern we'll watch out for after getting our Nasdaq leadership yesterday.
It was the Russell's failure to take out our 514 target that led us to correctly go short on the last run but we were clearly looking overbought at the time. That is not the case so far and it's very hard to tell on this very low volume move ahead of the holiday. Our main plays yesterday were bearish ones as we initiated put positions on the Dow and MOS, looking to scale into both this morning as we get the pre-market pump we expected. The dollar continues to stay below the 200 dma at 82.60, despite being propped up against the Yen last night but it's been holding that line in a way that's worrying the bears and good economic news from the US could snap our rally by strengthening the dollar – it's a very fine line we're walking here to keep hope alive.
Keep in mind I had called May 5th "Toppy Tuesday Morning" and I was 3 days early at the time, which is why we're scaling into our puts carefully this time – allowing the market to give us better entries along the way. I was going to do a Big Chart Review this morning but there's no point – it's pretty much the same chart as we had two weeks ago – we're just revisiting those 40% lines again. Actually, we're still pretty far below where we were two weeks ago, needing 3 on the S&P, 32 on the Nasdaq, 12 on the Russell, 131 on the Transports and 21 on the SOX JUST TO GET BACK TO WHERE WE WERE. The Dow is 77 points ahead and the NYSE is up 66 points and both have about 150 points to go to get back to the highs they made just days later.
So, our goals are set and all we have to do is switch off our brains and ignore all the bad news (just like we did earlier in the month) as we follow the sheeple right up to the edge of that cliff (again). Last time, we had a lot of bullish positions to cash out and didn't have a lot of downside bets on the turn. This time we're a little better prepared and will be able to take full advantage of a market plunge but we're not going to make the mistake of getting too far in front of it, especially as we still have about 2.5% more room to rally before we get a real top test.
Asia is leading the way this week with the Hang Seng adding another 500 points this morning (3%) and that is a very nice 1,114 gain in 2 weeks. The Shanghai Composite gained another point and finished at 307, up from 298 on the 5th and the Nikkei is up 313 points over the same time but needed to gain 251 points yesterday to make it. India pulled back half a point after their 17% gain yesterday and the Sensex is up a whopping 2,171 in two weeks BUT, that just happens to be the 17% they gained yesterday. To summarize – pretty much all of Asia's gains for the last two weeks came in the first two days of this week. Still feeling great about this "rally"???
As David Fry said in last night's post: "One has to bow to the coordinated efforts to boost banks by Goldman Sachs among others… The Street has a lot of IPOs (some small followed by an AIG subsidiary attempt) and secondary offerings to sell you and they need to prop things up to get it done. Goldman Sachs putting out buy recommendations on BAC when there are secondary issues within the industry is transparent since they know what will lift one will lift all. Da Boyz are playing with risk-free money from government injections and they know how to get things going. It’s hard to play against the house especially with volume still light."
Europe got off to a good start this morning, up over 1% although, as I said to Members this morning, if the rally is going to die, it's going to die in US trading, not overseas. German consumer confidence was up but they must be as out of touch as US consumers, 60% of whom believe their homes are worth the same or more than they were 12 months ago. It is very funny/tragic that these polls form the basis for economic forecasts as this style of piling flawed conjecture on top of questionable statistics is what leads to "leading economists" being wrong 90% of the time and off 50% on a regular basis with 100% misses taken in stride as "just another day at the office" for "leading economists." In other EU news, Bank of Ireland's Governor resigned as earnings collapsed 96%, retailers Marks and Spenser and Burberry had poor earnings and poor outlook, VOD's profits dropped in half despite drastic cost cuts (layoffs), Norway fell into an official recession, $60 oil will not be enough to save Russia from collapse and UK CPI figures indicate that the economy over there is contracting sharply with Retail Prices falling the most in more than 60 years (after WWII).
Speaking of economics, Housing Starts came in lower than expected, down 12.8% from last month, when it was down 8.5% from the month before. Only 458,000 annualized units are being built in the USA, about 10,000 per state and down 80% from the highs of 2006. On a go forward basis, just 494,000 Building Permits (down 3.3% from March) were filed so your kid probably has a better chance of becomming a doctor than earning a living in construction this decade. This compares to a 2% INCREASE that was expected by "leading economists" and the noodnicks on CNBC are getting dizzy trying to spin this 1000% miss as a positive. Housing starts are down 54% from last April, which was down 50% from the previous April. The XHB is also down 50% from last April but last May they fell off a cliff in when the housing data showed that they had dropped 50% from the prior April. What economists don't know (as it is VERY complicated) is that if builders aren't building any houses then they probably aren't making any money….
The other big concern in the real world is the same one I was worried about last week as local banks are now estimated to need over $100Bn to bring their Tier 1 Capital Ratios in line with the stress tested banks. Even in the Government's "best case" scenario, 185 of 940 banks were below the critical 4% line. Should the economy worsen to the "more adverse" scenario, a SHOCKING 634 banks fall below the line – dramatically illustrated in this interacive chart. Flip the button from "baseline" to "more adverse" a couple of times and you'll see why we are keying on financial shorts this week!
So please be careful out there, the housing data has already torpedoed the futures but tomorrow we have Fed Minutes, which are always good for a big move one way or the other. We continue to remain mainly in cash but playing for a drop unless another index breaks that 40% line at which point we will be forced to add some plays to the bull side despite our concerns.
