Wednesday Already!?!

Holy cow is this market getting predictable!

It's a very dangerous thing as we can get complacent in our positioning but we have been hitting our marks on the button for weeks.  We were looking to break 8,200, test 8,600 and hold 8,500 and we got a yes, yes, no on that in just 2 days., which means we expect to test 8,200 again this week.  Please note that these used to be predictions I would make for the month and we would do nothing for a whole week at a time with days of Dow up 30, down 25, up 47, down 31, up 62…  Really – I'm not kidding!  Once upon a time a 100-point move in the Dow used to be the headline in the newspapers.  Ah, memories…

Still, you do not have to day trade to trade this market, you just have to hedge.  Our discount entry system is a reliable way of giving yourself a 20% head start on stock entries and we can play the tops and bottoms of our ranges with simple index ETFs that give us both protection and profits on the market gyrations.  It may surprise you to note that, for all this fuss and bother, we are actualy only 100 points off where we finished the day on Friday, October 24th.  Fundamentally, this is terrible as the government has spent over $7Tn to give us that 100 points, but I think (as I did then) that we can at least begin to form a base here around 8,000 and there's plenty of ways to make money in a flat market.

As I said yesterday, it's like a roller coaster, a lot of up and down action but you end up stopping at the exact same place you started and that's just fine.  What's good about a roller coaster is the thrill of feeling like you are racing out of control but the knowledge that you will return to a comfortable place.  Things are a lot different when you have no idea what lies ahead.  At the end of yesterday's comments I laid out the entry logic for our hedged stock positions and that is key – the market is trading as though anything can happen, fear and panic are overtaking investors (and for good reason) but we can pick up positions with relatively high margins of safety and a long-range plan to make profits – even if the market falls another 50%. 

Obviously, if you feel the market is going to fall more than 50% more you shouldn't be buying stocks in the first place so we are gearing these trades for what passes as optimists these days.  Those of us who are betting against the demise of Western Civilization can take our pick of companies that have lost 50-75% of their price (not value) in the past 12 months.  Since we are hedging for an additional 20% decline and have plans to pick up another 10% before we get "stuck" with the stock, we are talking about net entries at 15-35% of last year's prices.  As long-term investors, we should be salivating over these deals! 

Nonetheless, we are still hedging the severe downside because never in my lifetime have I had to look at the papers every single morning wondering if something happened overnight that could cause a 10% drop in the markets (have I mentioned I like gold lately?).  My principal fears remain:  A major bank failure, a minor country failure or GM going bankrupt – all are still on the table.  Index ETFs are the single best way to control your virtual portfolio in this market.  In yesterday's morning post I called the exact top at 8,600 and picked the DIA Jan $85 puts and the DXD Jan $75 calls as downside plays at that mark.  It only took until 10:10 for us to hit the mark and just two minutes later we lost it.  The DXDs traded as low as $12.50 (I had guessed $12), now $13.85 and much better at the open while the DIAs came in at $6.50 and went as high as $7.75 (up 19%) before settling in at $7 at the day's end.  20% gains in a day are a great way to hedge your virtual portfolio!  The idea of timing our entries at inflection points is it lets us ride out the gain on the long side without giving it all back on the turn but, on the failure of 8,500, we re-covered the longs too, turning us back to a more bearish stance overall.

We never intended to be uncovered into the weekend, which starts this afternoon as tomorrow we're closed in the US and Friday is a half-day whose action we will likely ignore.  As I expected on Monday, transports are the best performers of the week but now we'll see how they hold up in a down move but the UXIs ran up to our resistance point at $20 so we have nothing to complain about as that was our first goal.  The April $15 UWMs, also selected on Monday, are up to $5.25, a 32% gain, so it is possible to make money in both directions in this choppy market as long as you are not greedy and that would have meant taking $5 and running and calling it an excellent 2-day gain!

China stepped up to the plate today with a 1.08-point cut to 5.58% (interest rates in China are traditionally divisible by nine), much bigger than previous cuts and, more importantly, they cut the reserve requirements for local banks by 2% to 14%.  The last time the PBOC made a move this large was back in the Asian financial crisis of 1997.  "Confidence is easily lost and really difficult to gain back, which I think they learned from watching the U.S. tumble," said Ken Peng, an economist with Citigroup. With local stock markets continuing to weaken even after China's Nov. 9 announcement of a four-trillion-yuan ($586 billion) stimulus program, he said, "I think they realize they needed more immediate action."

Two hours after the rate cut, China's cabinet said it was studying extra measures to help struggling companies in the steel, auto, petrochemical and textile industries; to increase key commodity reserves; and to expand insurance for the jobless.  The government will also push ahead with fuel-price and tax reforms to help boost consumption, the cabinet said. A fuel-price cut would be the first in two almost years. The government regulates energy prices to contain inflation, which fell to a 17- month low in October. “There is still ample room to cut rates in the future,'' said Peng Wensheng, head of China research at Barclays Capital in Hong Kong, who predicted a 54 basis point reduction in December.

The move got a positive reaction out of the Hang Seng, which went up 3.8% in a generally strong day (now up 10% since last Thursday) but the Shanghai barely budged at 197 and the Nikkei dropped a point, still mirroring the Dow at 8,213 along with the rest of Asia which was generally down.  The global Dow index (chart left) fell 1% back to 1,399 – pretty terrible considering all the work put in to keep it up on both sides of the planet this week!  China's move hurt the Yuan and the US moves hurt the dollar so the overiding trade in Asia was long Chinese exporters and short Japanese exporters, who are now saddled with the world's strongest currency (and where is the BOJ going to go with a 0.3% rate already?).

Europe is no help at all, down about 2.5% ahead of the US open with banks and oil majors leading the declines (good for our SKF calls and XOM puts!).  What is going to be key to watch, both in Europe and US trading, is whether or not we hold the 4% line, which represents a 50% retrace off last Wednesday's close IGNORING the spike down on Friday.  If we close up 2% for the week or lower, then the spike down becomes a real event and we will be forced to adjust our floor lower, which opens up a huge can of downside worms that we would really like to avoid.  So, in Europe we will be looking to hold that -2.5% line into the close with anything above that leaving us a little less gloomy going into the holiday.

In US trading, we don't have the cushion that Europe has so anything shy of a positive close will leave us down for the week but we were down 12% on the S&P on Friday so Down 2% will leave us up 10% from that bottom and we'll have to call that progress, so we'll watch the -2.5% rule on the Dow and the S&P as well, both of which have very good reasons to hold that line so anything below it, even on today's light volume, will be a disappointment.  On the Dow we are looking to hold 8,250 and on the S&P it will be 836 but 840 will make me much happier.   The Russell watch level will be 425 for the day and 5,250 should do it on the NYSE.  The Nasdaq and the SOX have been chronic underperformers in this market and we are never going to make progress without them and we really need tech to take leadership for the markets to begin a move higher.

The problem with this is Panasonic's bid to buy Sanyo, which was going to help consolidate the consumer electronics market, seems to be off the table as our friends at GS pulled out of the negotiations as Panasonic offered investors just $1.25 a share, 20% below Sanyo's current market value.  "We're no longer in talks with Panasonic on Sanyo," a Goldman Sachs spokeswoman said Wednesday. She declined to comment on the bank's future plans for its stake in Sanyo.  I don't consider this a bad thing as it's GS putting their money where their mouth is and saying they do not believe tech has 20% further to fall and that's about where we were last Friday so maybe, just maybe, this is a real bottom!

We better hope this is a bottom on our economic data.  October Durable Goods were down a massive 6.2% vs. -2.2% expected by clueless "experts" while an additional 529,000 people filed for unemployment last week.  Personal income climbed 0.3%, 200% more than "experts" expected – as I said at the last report, when you lay off a lot of workers, you end up having to pay the good ones a bit more on average but usually productivity makes up for it so no big deal.  The employees who do have jobs are still nervous and Personal Spending dropped a full point, double what was expected.  These are TERRIBLE numbers and I would be calling for another round of "duck and cover,"like the one I called for on Nov. 11th but the government has put $7.6 TRILLION to work and these are lagging reports so let's just watch our levels and not overreact to the headlines…

We still have the Chicago PMI to get past at 9:45 and "experts" believe it will improve over last month's awful 37.8 to 38.5 (anything below 50 is contraction) but I'm not seeing it in the Jobs and Durable Goods or Spending report so we will see but, again, this is a lagging indicator so it's more about checking investor sentiment than anything else.  The dollar is cliff diving, down nearly 5% this week thanks to the government's spending spree so take that into account when looking at oil prices, which need to hold $52.50 just to stay at what was $50 last week on a converted basis.  Of course that means the market needs to be up 5% as well and 5% over what we hope is a floor at 8,000 is, of course, 8,400 – still the most important number in the markets!

I doubt we'll be doing any bottom fishing today as the weekend looms large and the market is iffy at best.  We can expect volatile, light trading today and probably into the Fed's Beige Book next Wednesday – a long time from now so we'll just take a wait and see attitude and make sure we are well covered into the weekend, more so if we can't hold a loss of 2.5% on the day and 50/50 only if we can get over and hold the magic 8,400 mark (which must be confirmed by the other index levels).  27.50 was a reliable hold on the Qs, so let's watch that line (Nas 1,425) as our canary in a very deep, dark coal mine.

Have a very happy Thanksgiving,

– Phil