What an day yesterday was!
On the whole, it was a lot of work just to get back to Monday's open but what fun it was riding the market down 900 points for 3 days and 4 hours, only to have it all reversed in the next 180 minutes. Were we oversold then? Are we overbought now? Both David Fry and I thought the rally was, in David's words "too pat" where "every trading desk, hedge fund and not doubt the government had their fingers on the BUY button as soon as 8,000 on the DJIA was breeched." Ahead of Bush's speech yesterday afternoon, I had said to members: "Bush is speaking a little later so maybe the PPT is standing by to try to buff up the legacy a little… I liked what we saw on that run to 8,400 before – just because we got rejected there doesn’t mean they won’t go again."
We had been, as I mentioned in the morning post, taking our short side profits even as the Dow broke below our 8,200 target and we added another round of positive plays as we flipped 60/40 bullish at 8,400. That went, of course, amazingly well already but I quickly raised our goals and, as it stands now, we are not going to be happy with anything less than a test of 8,900 this morning and holding 8,800 is now a must otherwise we'll be upping our short-side positions ahead of what may be a disappointing G20 meeting.
The Big Chart served us well as our major indexes gave us a clear upturn signal as they bounced off the 50% lines on the NYSE (5,194) and the Russell (428). At 1:31 UWM, UYG, QLD, FXI and TIE were my 5 favorite bounce plays and they all played very well as a day trade! It wasn't hard to pick winners in the afternoon, even our play on C at $8.50 was a big winner just 2 hours later in this crazy market! We rolled up our protective puts into the close but didn't re-cover them as we did expect some pullback off the 1,000-point run.
If we consider that the NYSE bottomed out at the 50% level at 5,194 (call it 5,200) then we can expect a 1,100-point bounce off that level without calling the move bullish at all. That being the case, we are not in the least impressed with a move back to 5,700 and good old 6,232 remains the line in the sand for the NYSE that is likely to make or break the markets but first – let's see if we can hold 5,600! In Trader Mike's S&P chart, we see that we got a less-than-impressive move back to the descending trend line at 911. Lack of follow-through this morning will do little more than confirm the longer-term drop. Also, I will point out that the sharp pullback in the dollar into yesterday's close makes our S&P bounce even less impressive on the daily chart when converted to Euros as we failed to clear Wednesday's open – an indicator that has served us very well this year!
We certainly have our work cut out for us, we must retake the 40% lines on the Big Chart but first we need to get over the same "Must Hold" levels we needed to see our week end at. It's not greedy to look for a positive result in the week just because the market almost died. Rather than focus on a questionable rally, your virtual portfolio may be better served by focusing on the part where the market almost died – it still has to prove it's alive… Our Must Hold and (40%) levels are still: Dow 9,000 (8,413), S&P 925 (946), Nas 1,650 (1,717), NYSE 5,750 (6,232) and Russell 500 (514). We also have the Transports at 1,750 (1,868) and the SOX are just sad at the 60% off line at 215 but it would be a very bad sign if they can't hold that, just as the Transports failing 1,750 on Wednesday let us know it was time to get shorter.
As I have often said the past two weeks – I'm not so much bullish as bottomish. I think we have a defensible buy point at 8,200 on the Dow and, with our patented system of giving ourselves an additional 20% discount on our entires, we're in pretty good shape all the way to 7,500 and we are hedged for that as we have ultra-short ETF plays that will more than triple at those levels so even a 70/30 bullish virtual portfolio is well protected from a severe drop.
Thus we made no upside plays at all after our 1:25 grab of C at $8.50, when the Dow was still down at 8,050. In that same comment I advised cashing out the DXD and SSOs as it was simply greedy to look for bigger gains at that point, especially when we had exceeded our downside target already. The DXD Dec $65s I had mentioned in Tuesday morning's post when they were still $14.95 (we had gone for them Monday at $11.75) were sold at $29 at 1pm but fell back all the way to $13.40 just 3 hours later – that's the price of greed! Profits do not do you any good unless you take them off the table and this whipsaw market means you don't have all day to ponder your moves. It's very important to set a goal and stick to it or (our Rule #2) when in doubt, sell half.
On Monday morning we went bearish so let's say just 60/40 and not 70/30 bearish. If that DXD was your only play on the bear side and it moved up over 100%, then cashing it in gives you 120% of your total Monday virtual portfolio IN CASH. Even if the bullish 40% had dropped in half, your overall portflio would still be up 50% for the week. As we rebalanced to 60/40 bullish just a half hour later, it's very easy to add to the 20% on the bull side through DDs and rolls (assuming you haven't given up on the positions) while taking a new set of downside protections that have less upside delta than the deep in the money puts or shorts you just cashed in. That's simple virtual portfolio management and we'll be discussing it in more detail this weekend.
The Asian markets cashed in their winners today as the Hang Seng flat-lined along the 2.5% rule and the Nikkei also dropped back to that line, giving up half of it's 5% gap up by the day's end. The Shanghai once again beat the trend with a 3.5% gain, which in no way justified the 30% drop in the FXP and gives us another nice entry opportunity there with the March $60s back at $24.40 (the FXPs were at $80+ in the morning and Dec $85s can be sold to cover at $10). China is still moving up on rumors of another rate cut as well as a government bailout of the property sector. Still the actual economy is NOT GOOD and Hong Kong officially joined the recession club as softening global demand kills their export sector.
European markets have held up well this morning, up about 3% despite their own recessionary news but the US futures are off about 2% but meaningless until we see the open as volume finally came back in yesterday's move so we are not at the mercy of the pre-market traders. Bernanke made a speech this morning and indicated he "stands ready to take additional steps as conditions warrant" to calm roiled financial markets, suggesting liquidity measures and interest rate cuts remain on the table. While Mr. Bernanke pointed to "tentative improvements in credit market functioning," he also warned "markets remain under severe strain."
Also under severe strain are Retail Sales, which are showing a 2.8% decline in September but, ex-gasoline, it's just a 1.5% decline and again, I will ask you, does that really justify a 40% drop in the markets? Still 2.8% is a new record, beating the 2.65% decline of November 2001,which was also a nice interim market bottom – before the REALLY big drop that came the next Summer. Also, I will point out that if you exclude both gas sales AND auto sales – demand at all other retailers was down just 0.5%. Interestingly sales were UP 0.3% at restaurants and bars (no surprise) as well as health and personal care stores. Import prices were down 4.7% led, of course, by petroleum products, which fell 16.7% for the month BUT, still up 13.1% from last year. Excluding energy, Import Prices are still up 5% for the year. Have I mentioned I like gold lately?
We'll be happy to hold half of yesterday's gains today as NOK came in with some bad news ahead of the market and C announced 10,000 job cuts and JAVA is trimming 18% of its workforce. FRE lost $25.3Bn for the quarter and the fact that you can read that without throwing up shows you just how bad things have gotten in this country that we are used to such things. Don't forget you OWN FRE now and the $50Bn they and sister FNM lost this quarter translates out to $500 out of the pocket of each of 100M American taxpayers who are participating in this great social experiment. Don't forget to put another $500 aside for the auto makers as well because this sure ain't over yet!
Needless to say, let's be very careful out there.
