Testy Tuesday Morning

We ignored the low-volume sell-off and did a little bottom fishing yesterday.

I picked hedged entries on QLD, WMI and DPS that we were never worried about but we also took a shot with UWM $17s at $1.85, just looking for a quick move to $2.20+, as the market sell-off seemed a bit overdone considering only 2Bn shares were traded on the S&P, about 55% below the 90-day average, which is already fairly slow.  We’re not going to try to be heroes, those UWMs come off the table with a nice profit into the morning "rally."  Seeing a low-volume move like that tells us that a single buy program can quickly reverse the whole thing and there’s been a very observable pattern of buyers stepping in in the afternoon and giving us a "stick save" into the close, which is what we counted on yesterday. 

The low levels we held were in the lower end of our range: Dow 8,400, S&P 860, Nasdaq 1,500, NYSE 5,500, Russell 460, SOX 200 and 3,300 on the Dow Transports.  None of these levels are "good" and they are well below our "must hold" levels we set in our last Big Chart Review in order to get genuinely bullish but we expected the Dow to test the 40% line if the other indexes couldn’t break theirs and that’s right where we are.  Now we have our second test of 8,413 under our belt it is time for the indexes to put up or fall down, even in thin, low-volume environment.

Generally, we’ve been patient and looking to revisit the 8,200 mark before diving in but we’re getting a little more confident in our floor and our hedged entries are giving us 20% downside protection which takes us all the way to Dow 7,000 and things are just simply not THAT bad.  Nonetheless, I would encourage you to read my much gloomier outlook from the last Big Chart Review when I was downright bearish with the Dow at 8,824.  At the time my overriding reason was "we just got about as much stimulus as we’re likely to get between now and inauguration day" and our roller coaster physics have since taken over.  Now we are heading into the new year and we can expect investors to look ahead to the next round of stimulus – perhaps they will begin placing some early bets.

It broke my heart yesterday to see money herded back into energy and other commodities while REITs led us lower with a 5.6% loss in the DJR.  It will be tragic if DJR can’t retake the 50 dma at 140 as they broke a very nice uptrend and we’re prepared to give them a pass on the low-volume move but not for long.  We’ll be looking for the S&P to break back over 873 and hold it tomorrow in order not to get too negative into the holiday.  Friday is unlikely to be much of a trading day but next week we’ll be crossing our fingers for another run at 900 and anything less than getting back to our previous Big Chart levels by the 9th (just 7 trading days ahead of a new administration) will be very disappointing:

Overall, this is not a pretty picture but we have some recovery in Europe, not so much as the index levels have improved but because the 50 dma has come down…  We love low expectations – we can beat those!  The NYSE and the Russell have the best chance of retaking the 50 dma in our markets but we do need the Asian markets to cheer up and get away from the 60% off line as China is a weight that is dragging the global markets down (as are the SOX!).

Speaking of low expectations – don’t forget we slam right into earnings as we ring in the New Year so forgive me if I wait and see a bit before making my 2009 predictions.  Obviously, I think the fear level is irrational and many fine companies are undervalued but I won’t be feeling too confident about that until we see some numbers and we remain neutral but happy enough to pick up some bargains as they present themselves for the moment.

Asia was mixed this morning with the Hang Seng and Shanghai off about a point while the Nikkei and the BSE were both up over a point on a shortened session.  The Nikkei finishes 2008 with a 42% loss for the year and 52% off the 2007 high point.  Sharp announced they expect to take a $476M loss for the quarter and three Chinese steel companies are merging.

In Europe, the DAX is well ahead, up 2.25% while the CAC and FTSE are both up 1.25% 30 minutes before the US open.  Energy stocks and auto stocks are leading Europe higher on news of the GMAC funding (more stimulus) and the IMF endorsed Obama’s stimulus plan, so it will be interesting to see if our markets attract some foreign investment this week.  Germany got some good news with a 1% rise in Retail Sales for December but they seemed to be unique in Europe.

As I mentioned above, the big news for the US markets is GMAC getting $6Bn in government aid and it doesn’t stop there as a treasury official said the new program "didn’t have a specific dollar limit."  We are in F at $2.15 but we wouldn’t touch GM with a 10-foot pole…  You need a longer pole than that to touch housing as the latest Case-Shiller Index shows yet another record decline for October with home prices now down 19% in 10 major metropolitan areas and 18% off on a wider scale. "The bear market continues; home prices are back to their March 2004 levels," said David M. Blitzer, chairman of S&P’s index committee. He added that both composite indexes and 14 of the 20 metropolitan areas are reporting new record declines. As of October, the 10-city index is down 25% from its mid-2006 peak and the 20-city is down 23%, Blitzer said.

It will take us until February to see if the lower interest rates are helping us to find a housing bottom in December as this is a very laggy report so we’ll be keeping our ears to the ground for earlier signs of a turn-around.  So far, nothing is evident so let’s continue to be very careful out there!