Another great week for our levels!
In last weekend’s wrap-up we were very pleased that the Dow stayed right in the lower end of our range, from 8,200 to 8,650. This week we tested the upper end of the range from 8,650 to 9,100 and the two weeks, taken together make a great case for 8,650 being our mid-point and looking at the chart illustrates why the VIX is falling so fast – while it still may FEEL volatile during the day, we’re actually moving into a tighter range…
Looking at a longer-range chart, we need to break over 9,100 early this week and get up to 9,500 to flatten the declining 50 dma so that’s what we’ll be looking for this expiration week. It’s going to take some more stimulus to get there, we have a possible package for the auto industry and a Fed cut on Tuesday as well as possible action by global central banks. There is an international fall-out to the Madoff scandal as EU banks have disclosed Billions in exposure to this ponzi scheme. There are many articles on the scandal under "Phil’s Favorites" so I won’t go over it here but the repercussions are what we will be concerned about next week.
Monday started off with a bang as Obama discussed the New, New Deal – a $500Bn or so infrastructure project to keep Americans busy next year. That was all the market needed to take off on Monday but we were more than a little skeptical as we’ve seen manic Monday’s before and they seldom follow through. With all the stimulus flying around we discussed the need to learn the word "Quadrillion" as we’ll be using it soon enough the way the World governments are tossing money around. We were totally incredulous that gold could still be under $750 so we kept on buying and that worked out very well this week! As I said on Monday morning: "Trillion here, a Trillion there and before you know it we’re up to a thousand Trillion and you have to know what to call it" and THAT is why we like gold.
Nonetheless, I pointed out that the MSCI index was now trading at $1.17 per dollar in net assets, the lowest level since 1995 with 39% of the stocks trading below shareholder equity. The economy may be really, really bad but we are starting to feel better about finding a bottom. Since we had our morning stimulus we set high goals to get bullish for the day and the Dow failed to hold 9,000 while we hit the other levels I set (S&P 900, Nas 1,550, NYSE 5,600 and Russell 480) almost on the button at the day’s close. It’s good to know where we’re going to close at the beginning of a day with 800 points of up and down market movement!
Monday night we did a Big Chart Review and I explained the fallacy of using low-volume moves as indicators of future direction. We had gotten bearish into the close as I upped our target levles during the intra-day session to compensate for the rally in the energy sector, which I did not see as a positive for the broader market. I pointed out that only the Dow was over the 40% line off it’s 2007 highs and that’s right about what it bounced off on Friday at 8,413.
You could tell I was bearish on Tuesday morning as my opening remark was "Can we hold our ill-gotten gains today?" We’re getting very good at spotting BS rallies so Tuesday’s quick sell-off at the open didn’t surprise us one bit. I called for that to reverse but we raised our levels even higher and quickly went negative when they weren’t made in the morning "rally." I said in the morning post: "We get Pending Home Sales at 10 today, a shocking budget report tomorrow along with Wholesale Inventories at 10 and Thursday we have the PPI and Retail Sales Friday, so let’s try to get through that before we get all bullish." That pretty much sums up the rest of the week… I mentioned the DIA puts and the QID calls, both of which were huge winners from Tuesday through Friday mornings as I predicted we would test 850 on the S&P (Friday’s low was 853 and the S&P had closed at 907 on Monday).
After Tuesday was a little worse than we thought it would be, I called a "Which Way Wednesday," noting we had overshot our downside targets in Tuesday’s session. I called for a move back up in the morning and the UWM $17s flew from $2 to $2.75 before we went bearish in the morning but the FXP Jan $30s from the prior day made a great new play for that morning but we barely got out even Friday from our entry on Tuesday as we were taken by surprise by the China rally. Still, with the bailout turning questionable and growing concerns over Russia’s solvency, we went 60:40 bearish for the first time in ages with the Dow over 8,800 and that index missed my closing prediction by just 3 points.
Thursday morning we focused on our levels as I laid our my bearish technicals as there was a lot of bad news to chew on and clearly the auto makers were not going to get what they really wanted for Christmas ($34Bn) and once it became clear that they may not even get the $14Bn consellation prize – the markets went down fast, almost exactly hitting my 8,541 target on the Dow that I predicted in the morning.
Friday the Madoff scandal threw us, otherwise we would have come out of the gate buying, as we held all of our lower levels and quickly turned back up. As I had said in the morning post "don’t forget we have the last Fed Statement of 2008 at 2:15 on Tuesday so it is VERY possible that we have a pre-cut rally starting with a check being written to the auto industry this morning – that would be our "best case… as long as we confirm the bottom, this roller coaster is good for another run up the hill I think." We came 250 points off that bottom and I called our levels on the turn at 9:44 as the Treasury and the White House quickly overrode the Senate, as I predicted they would, and indicated TARP money would be made available to the Big 3.
So we got bullish but not too bullish on Friday morning and we didn’t have the time we would have liked to bottom fish before the market took off on us. We are into the weekend 50:50 but with some ultra longs (UWM, QLD, UYG) as part of the bullish 50 – just in case things do take off into the anticipated Fed cut. We’re looking for big things this week, 9,100 by Tuesday and 9,500 by the week’s end in order to get bullish, otherwise we’ll likely be riding this puppy back down into the holidays as the stimulus spigot begins to run dry and gravity takes its toll.
