Tuesday Morning

Don't forget we're still on vacation.

More than any other, the last weekend of summer tends to leave Wall Street traders lingering at the beach.  The same guys who tell their families they must rush home after Thanksgiving, don't seem to have that issue when they are hanging with their friends in the Hamptons and, on a weekend like this, who can blame them?

Even if the big guns show up with a plan, they are faced with a platoon of hung-over junior traders and it's a rare veteran who is willing to go to war with his troops at less than full speed.  So, despite the best intentions, the last day of summer +1 tends to be a day when not much gets done and that means we shouldn't expect a lot on the buy side.  As I said last week, program trading tends to blow these old chestnuts out the doors but it still takes a quorum of some sort to decide to pull the trigger so I'll stick with expecting drift today.

Drift, however, can be very telling.  If you want to see which way the current is flowing you don't look during a storm but you test your oar in calm waters feeling the pull of the undercurrent.  The way our plays drift on a fairly calm day can tell us more about them than 3 days of heavy chop.

Asia has had two days of drift, with the Nikkei dropping a mere 100 points in 2 days after running up 500 points in the 3 days prior, neatly completing a slow but steady 20% retracement for us.  The Hang Seng, which finished last week with a 1,000-point run, came back from their 20% retracement already and finished today just 100 points below Friday's close as well.

Over in Europe (where they have twice as many vacation days as we do but not yesterday), The FTSE, the CAC and the DAX all did very little ahead of our open.  What will those crazy Americans do?   The are all wondering… 

Well the joke is on them because we are as clueless as any of them!  We don't even know who the front-runner is to lead our country for the next 4 years, certainly we have no idea what the markets will do!  We are far from out of the woods over here.  More hedge funds are closing as the sub-prime fiasco is starting to drag down regular mortgage-holders and, in fact whole towns are being affected, as discussed in this excellent NY Times article: "Can the Mortgage Crisis Swallow a Town?"  If you've never considered the cascading ramifications of what could happen to YOU when "those people" get foreclosed on, I would urge you to read this!

We have a busy, busy economic calendar this week starting with construction spending and ISM today at 10:

As we expected, the hurricane was a big wiff and natural gas prices should take another hit today.  ZMan has an extensive run-down of this market but we concentrated our firepower on XOM puts last week so we'll see how they hold up in today's action.  As they are already well ahead, we're not looking to be heroes and we will adhere to Rule #2: "When in doubt, sell half."

We didn't really get a healthy test of $75 oil that I would have liked to see (fail, of course) but I think any failure below $73 is going to put some doubts into the traders who are still sitting on $4T worth of energy stocks that were only worth $1T just 4 years ago.  While demand is, in fact, up, so is supply and, as you can see from this demand graph, this is the week when it usually falls off a very steep cliff.

OPEC announced no cutbacks but no increases so we will see what happens but I still believe we are NOT going to break the markets back out with oil over $70, yet alone $75!

YHOO got a good call from BSC, recycling an old rumor, and APPL got some nice words as well and all this tells me is that the brokers are gearing up to rotate back into tech and they are testing the waters to see if people are ready to get behind the Nasdaq.  Holding 2,600 will be critical today so let's keep an eye on them and watch carefully to see which sector the analysts will be targeting to shake loose some cash.

It's going to be a fun week!