We're going to be testing a lot of levels today.
Yesterday was very unpleasant but we got a little more bullish in the afternoon and looked at a few tentative bullish plays but the late afternoon action had us deciding that the FXPs (ultra-short FXI) would make a good cover, as they were big movers last week when we selected them on the put side. Those should work all right as the Hang Seng did drop 759 points this morning and if US markets turn up, that's the end of that trade but, if we follow through to the dark side, then we have to remember that the Hang Seng was over 2,500 points lower last Thursday.
We're more concerned about our local indices today. I'll put up a Big Chart Review this evening, hopefully we won't be in the same place we were last Tuesday night, but that is about where we're starting this morning. The Dow is right at the 11,000 line, a nice improvement off the bottom at 10,500 but we were at 11,400 on Friday and we do not want to retrace more than 50% so there is little room to the downside there. Watching the S&P priced to Euros gave us a solid indication we were going down earlier in the day and that index has a long way to go to correct itself, anything less than yesterday's open at 1,240 will keep us squarely in a downtrend and slipping below the 1,200 line would be very not good (it's a technical term).
The Nasdaq, as Trader Mike mentions in the above chart, gave up it's ill-gotten gains of Friday and we are well below that very critical 42.40 line on the Qs (David Fry's chart, left), which is the 5-year moving average and spells doom for the markets if it begins to firm up as a ceiling. If the SOX cannot turn things around, then I don't see the Nasdaq sustaining a rally. One way to play that trade long-term is the SMH 2010 $25s at $3.83, which can be rolled down to the $22.50s for $1 if we head lower and, looking at the 10-year chart of the index, you can see why being in the $22.50s for net $4.83 may not be so bad IF we actually find a bottom. Of course any bullish bet is very risky at the moment and they are really bets that our government, in its infinite wisdom, will steer us through this crisis in the near future.
That is not a sentiment shared by the rest of the world apparently as Stocks, Bonds and the Dollar all went down together yesterday – a clear indication that money was physically being pulled out of the country, not too surprising as I had mentioned in the morning post that LEH's actions and Gordon Brown's statement were causing an International confidence crisis in the US markets. Hedge fund money (such as is left) is stuck on the sidelines until next week and retail investors have fled, not exactly rocket fuel for a rally…
I said last week that if we lost the Russell, then there's no hope and the Russell came to rest right back at the 50 dma at 720 yesterday and there is jut 4 points down before they cross back below the 200 dma and that is certainly not something we want to see today. If the unshortable financials keep trending down then we know we're still in trouble and the dollar is right on the 76 line and, failing that, may test back down to 72. Despite the downward dollar move, oil was ridiculously overdone yesterday and it was a nice opportunity to go short again in the afternoon. Gold looked a little toppy too at $910 but, with a $700Bn bail-out package looming, it's not a good idea to bet against it.
Barry Ritholz is betting against Bernanke and Paulson and has 10 scathing questions for Congress to ask them at today's testimony. The SEC is also under fire as they scramble to ammend the emergency rules placed against short-selling after the disruptive effects on the market were felt yesterday and Friday. One reason the VIX is staying very high is that put buying is highly elevated as it's currently the best way to cover positions so that usually reliable measure is very skewed by the new rules.
I mentioned the Hang Seng dropped 4% this morning, closing at the day's low in an ugly session. Anything red in the US markets today is likely to send them lower tonight. The Property sector fell 8% and airlines fell sharply as oil prices went through the roof in a trading session that has already prompted a CFTC review so I won't even bother talking about the criminals at the Nasdaq, who canceled over 300M contracts scheduled for October delivery, leaving just 23M barrels on order (1/2 of capacity), which shorts our inventory 4M barrels a week next month.
The Shanghai held up better, down just 1.6%, which is not much of a pullback after gaining 18% in two days prior. A lot of China's losses can be traced back to the contaminated milk scandal and overall the performance was pretty strong. The Nikkei actually went up 1.4%, as I mentioned in yesterday's post, the Japanese banks are cash-rich and sentiment is warming up as they begin to pick up US assets at (hopefully) bargain prices.
Europe was not happy with what they saw in the US yesterday and those markets are trading down across the board ahead of our open. The FTSE headed into their afternoon down very sharply (2.7%) and they need to hold that critical 5,066 line that represents a 25% drop from the top. The DAX is coasting along the 6,050 line with 6,088 being the 25% level there while the CAC is already 32% off its highs at 4,136, which is another 2.2% down today.
Iraq has signed another big deal for it's energy assets. After the first major oil deal went to China National Petroleum last month and US citizens were understandably outraged, it's not too surprising that nothing at all has changed and the second major deal also goes to a foreign company, this time RDS.A takes a multi-billion dollar stake in Iraqi natural gas. The joint venture will process and market natural gas that is released as a byproduct of oil production. Iraq burns off nearly 800 million cubic feet a day of this gas in its southern oil fields, because it lacks the infrastructure to utilize it. Capturing it "should create an important and reliable supply of domestic energy, reduce greenhouse-gas emissions, and create significant value for Iraq," Shell said. This is great news for McCain Fundraisers, John Oliver and Peter Madigan, who are both Shell lobbyists in their spare time.
The big news today is testimony from Paulson and Bernanke and I'm not expecting any real fireworks in the Q&A session as it's likely Congress will be walking on eggshells, well aware that it would be a pretty bad time to spook the markets – if they can actually be spooked more than they already are. Of course I wish Paulson had shown more restraint in his own rhetoric… He will be reading this morning: "The market turmoil we are experiencing today poses great risk to US taxpayers. When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened." So happy Tuesday to you!
Bernanks does not paint a rosier picture, saying: "Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."
I would not be surprised to see a little panic selling around the testimony but that may be good if it moves us into the "acceptance" stage of grieving for the death of capitalism in America as Paulson moves this country as far towards Socialism as it has ever been in its history but, like the man says – we have no choice.
