Watch Out Wednesday

Today cannot be a good day unless the Dow gains 400 points. This is not likely as the Nikkei lost 400 points last night although Europe is taking things fairly well so far this morning. India’s economy is growing at a 9.3% pace, 30% better than expected and we’ve already gotten good numbers from Japan and China looks like it’s growing around 10% as well. India’s growth is largely in the service sector, as anyone with a telephone knows, but China does put pressure on commodities, especially oil. We need to get used to rising commodity prices as the falling dollar is here to stay as the rest of the world is growing faster than we are. Fed policies of fighting inflation by keeping the economy in check may have made sense when the US was the world’s greatest economy by a mile but 20 years of persuing that agenda have pulled us back into the pack with many contenders nipping at our heels. As we discussed last night, the S&P will be the one to watch today but anything less than a full reversal of yesterday’s losses will only confirm the alarming downtrend we have been seeing. The SOX are just destroying any chance of a Nasdaq recovery and all 30 Dow components were losers yesterday so at this point all we can do is keep in cash and just cheer for a quick wipeout, maybe another 10% down, so we can get back to bargain hunting. http://stockcharts.com/gallery/?%24sox Gold is at a serious inflection point, hovering below it’s dollar adjusted 50 dma of $675. If it breaks through there it should fly past $700 again to test $730. If it is rejected there, we may be seeing $580 again. Oil took a turn down in Europe today, erasing yesterday’s BS gains as traders run in fear of today’s inventory report which will almost certainly show a build despite the holiday driving weekend. The dollar is down 7% from April and oil is at $72, which seems high but 93% of $73 is $68 so we are actually back near the top of the channel we’ve been in all year, not breaking higher as it looks on a chart. http://stockcharts.com/gallery/?%24wtic Again, I am still the only person in America who adjusts for the dollar but trust me, I’m right and everyone else is wrong – so oil, on the above chart, is really at $68 on a global currency basis, coming off a double top at $70 and the uptrending 200 dma is actually turning down if you adjust April-May for the falling dollar. The OPEC President is obviously a reader as he summed up “irrational” oil pricing today saying: “It’s a downstream problem having to do with geopolitical concerns and refining capacity.” This means we are possibly heading into a violent correction in oil prices and that Chavez is right to call for cutbacks now before they find themselves in a real mess. Just like there was no end in sight for the housing market, the oil sector could face the same sort of correction but I think we may have to make it through hurricane season first. The majors will probably yo-yo a bit as the conversions were unfavorable last quarter but turned favorable this quarter (so far). This conversion also affects the overall markets as the dollar is down 10% since November and the Dow is at 11,094 which adjusts to 10,980, right back at last year’s high, which we hit in March ’05, just before crashing down to 10,000. Be very careful out there! ===================================== This is another day I will mainly sit out as I expect the oil sector to take down the indexes after the inventory report. Anything less than 1M builds across the board will keep me away from shorting but I’m hoping for a shocking build on either gasoline or crude to drive the sector down. If the oil sector turns down and we still gain a percent on the averages, then I will get a little bullish but not unless/until. No commodity based rally will help us! Always follow the Valero Rule when trading oil and let’s target $71 as the oil break point today although I’d also like to see natural gas fall back below $6 as well. Don’t forget about the usual head fake right after the report – I will be looking for whichever one of these picks goes the furthest the wrong way this morning to jump in with puts. As a rule of thumb I am looking at oil at $68 on it’s way down from $70 so I am looking back to where companies were on Jan 31st, when we were in a similar situation. ===================================== These are oil puts I’m looking at: MDR (1/31=$52.50) $60 puts for .60. BHI (1/31=$78) $80 puts for $1.15. OII (1/31=$60) $70 puts for $1.20. BTU (1/31=$50) $57.50 puts for $1.45. CNX (1/31=$72.50) $80 puts for .90. SU (1/31=$82) $75 puts for $1.25. IMO (1/31=$35) $36.73 puts for .75. (recent 3:1 split) With 3 weeks to expiration I also like the spread of the XOM $62.50s for .40 and the $57.50 puts for .50 but $59.50 has been a very solid floor so far. ===================================== We talked about Google positions last night, I still like them… COST earnings were pretty good but a miss on earnings squeezed by high gas prices (what a surprise to anyone who didn’t read my 4/18 blog). If the Nasdaq is making a comeback GRMN should fly. It took a nice bounce off the 50 dma during last weeks slump and looks like it wants to retest it’s $101 high. I like the $100s for .70 but not if the stock drops below $92.50. CWTR got whacked with the retailers even though just last week they reported a 33% rise in Q1 profits (but they are restating 2005). I’m keeping my eye on this one to bottom out, maybe at the 200 dma of $22 but I’ll start buying a few Jul $22.50s if they go under $2.