Will It Happen Wednesday?

Wednesdays have been wild lately.

Last Wednesday was flatish but July 16th was a 477 point move top to bottom with a big 278-point gain.  July 9th took us from 11,115 to 11,505 (390) as we finished down 234 on that day.  July 2nd gave us a 330-point swing from 11,504 down to 11,215 as we closed down 167 points while June was generally calmer, with "just" 200 point swings on your average Wednesday.  So we start today at 11,397, kind of in the middle of the range for the month and in some real need of a move that takes us well over 11,600 and puts us on the road back to 13,000.

We have our housing bill, we have oil struggling to hold $120, we have the SEC restricting the short-selling of 19 major financial stocks (woo-hoo for our financial plays!), we have not too disaterous financial earnings, we have a dollar finally breaking over 73 and about to test the 50 dma at 74.35 (which can send gold tumbling below $900 along with copper and other metals), we have a Fed that may finally fight inflation rather than fuel it next week and we're finally cracking down on political corruption – if we can't get a boost off of this, then I can't imagine what's going to work.

On David Fry's chart we can see that, last time we broke up through this range on the S&P, we were on our way to a 30% run-up that took us to our all-time highs.  Back in mid-2006 we had oil falling from $79.86 in July to $51.03 in January, a 36% decrease that was a huge stimulus for the economy.  35% off our $145 high would take us to $95 and most of oil's 2006 drop came by September at $60, down 25% – which would be just under my $110 target price so let's hope we stay this course! 

Looking back at my articles of the time I see the same concerns over the value of the dollar, the deficit, housing, inflation, Iran/Korea nukes, the price of oil – even the problems brewing at the banks.  That was the famous "wall of worry" we climbed in 2006-2007.  Well, we are plenty worried now and S&P 1,300 looks like quite a wall ahead – I think climbing that is going to make the bears plenty worried indeed but, like 2006, we must get a break in commodity prices that quietly redeposit dollars back into the hands of consumers.

Last year I pointed out that investors had their head in the sand as we ran the market up to record levels and ignored the MASSIVE problems that were brewing all around us and this time I believe we have swung the other way and are now over-reacting to the very same problems we ignored in the last cycle.  So Goldilocks – to recap:  S&P 1,500 is too hot, S&P 1,200 is too cold but S&P 1,400 should be just right and we've got a long way to go before we get there. 

To that end, we're starting to play with the SSO's, the S&P ultra-longs that have been knocked down 35% from their highs last year.  We want to work into a butterfly but our first move is to buy the long leg of the Dec $59s, last trading at $6.90 and, if you have margin for it, you can sell the short put leg of the butterfly, the Aug $60 puts at $2.40 before we cover as the upside momentum slows by selling Aug $59 calls and buying Dec $60 puts.  This play needs to be managed (rolled) if the S&P really takes off but if we get a good entry on our first two legs we can have a very favorable spread.

Another butterfly play we looked at was the UYG's, the ultra-long finanicals but those are going to open up $1 from yesterday's close so I think we'll just take some of the long calls we planned (Dec $20s at $4.90) to offset any over-coverage we have from callers we sold on our financial holdings.   The extension of the short-selling restrictions should give that whole sector an added boost.

Asia got a boost of around 2% following our upbeat market yesterday.   Financials led the way in Tokyo and Nintendo jumped 34%, which is no surprise to anyone walking into my kids' playroom.  Strong US sales indicate a not-quite-dead consumer, much like AAPL, when people really want something, they still buy it.  DCM bucked the bad telco trend with huge earnings, another good sign for the global economy.  Europe is also up over a point in early trading despite a poll showing very weak economic sentiment.  That's a strong indication that the US markets are back in charge so it's all up to us to pull this one out!

It's oil, oil, oil today with the inventory report at 10:35 today and I'm already hearing notes from GS digging their heels in and telling their people to hold that $120 line.  I doubt there is much hope of that if we get another net build as the traders have already shorted as many barrels as they can for delivery and, with the markets picking up, it's hard to drive new money into the very tired looking energy sector.  They've tried Iran, hurricanes and Rent-A-Rebel already this week, now GS is telling people demand is stronger than we think and even that is not getting oil back in the green pre-market.

I said last night we need gains here, not consolidation – let's hope we get it!