Testy Tuesday Morning

Fed minutes come out at 2pm.

Keep that in mind today as it's very unlikely they lowered the rates to zero following the 12/16 meeting where they chatted about how nicely the economic outlook is improving.  The last Fed minutes were released on 10/29 and we spiked down but recovered in our election rally that took us to 9,600 on Nov 4th, after which we plunged to 7,500.  Now we are in our inauguration rally and we are expecting to see roughly the same high – we just hope they aren't followed by the same lows after the excitement wears out!

David Fry's monthly chart of the DIA gives us a good view of where we are in the big picture.  Note the extremely low RSI and the bottomish-looking MACD but we haven't turned up the moving averages yet and that makes this a very dangerous time when we could still get another bottom test before we make a real move.  Looking at the volume in 2002, when we turned the last bear market, you can see that we are far from putting in a high-volume reversal that can give us more confidence.  First things first this morning though – we got half the dip we expected in yesterday's choppy session and got the famous "stick save" into the close but, overall, it was not the kind of day you want to see following a $750Bn bailout announcement that includes tax cuts. 

During member chat, I noted that 8,900 was holding up suspiciously well and, sure enough, right at 3:30 somebody punched the buy button and the market jumped 60 points into the close.  Now we have to watch the same levels as yesterday for a break out but we may have to flip short if we run up to our opening levels (see yesterday's post) but can't break them ahead of the Fed as that could be the catalyst that sends us lower.  Also, we may see oil pull back sharply off $50 if they are rejected there, especially with yet another build in inventories expected in tomorrow's report.

This morning I posted an update on our very successful (up over 30% from our hedged entries) list of "Stocks to Buy at the Bottom" from Dec 1st and we'll be adding many more entries as earnings season begins to take shape and we get an idea of where to put our sidelined cash.  One addition to the list is going to be the XHB (homebuilders), which may actually be putting in a real bottom and Obama's tax plan will allow companies to use their tax losses to offset taxable income for the past 5 years.  This will also be an excuse to "rebate" tens of billions to the financials and they should get a pop too but the homebuilders, who took Billions in write-offs last year, will be proportionately looking at huge paydays.  We've already been bottom fishing HOV as a long-term naked hold but now I like XHB at $12.80, selling the Feb $12 puts and calls for $2.35 which puts you in for net $10.45 if called away at $12 on Feb 20th (14% profit) or having another round of the stock put to you, giving you an average entry of $11.23 (a 13% discount).  This is not as sexy as our more volatile selections but its a solid bet on a long-term recovery in the sector.

Asia was fairly flat in morning trading, not knowing what to make of yesterday's US trading.  Japanese exporters kept the Nikkei positive while the Hang Seng dropped a bit but coal and banks led the Shanghai up 3.25%.  Europe is up quite nicely ahead of the US open, which also looks pretty good in pre-markets.  European indexes are up about 2%, as Germany agrees on a stimulus package and they got good news on EU inflation, which was low enough to allow for further rate cuts.  So keep in mind that this is just another round of massive global stimulus keeping the markets afloat. 

Chrysler reported sales were off 53% in December but no one seemed to care and F (another naked gamble we took at $2) had a very nice day yesterday as their sales "only" fell 32% but, as you can see from the chart, we did seem to find some sort of bottom in November.  We're very please with TM, another one we hold long-term, who made a significant recovery with their "December to Remember" sale and should have no trouble holding $65 long-term, making them a great trading vehicle for us to sell options against.

We are, of course, not happy with an energy-led rally and we're still looking for some real signs of rotation – we'll see how well our XHBs do this week as well as the copper plays of RTP and FCX we jumped on yesterday as our first trade in member chat which we should probably cover into whatever rally we have today. 

We get Factory Orders (expected down 2%) along with ISM Services, which are going to be awful (37 expected) so that will be our first test of the day but then we have to wait on the Fed and see how willing the markets are to shake off what is very likely to be a very disturbing read.  Natural gas stocks are also flying as the Russia situation continues and MacWorld goes off today and we'll see if AAPL can justify it's run back over $95.  We remain directionally agnostic and stick to watching our levels as we still haven't had the volume to confirm any trend but a good day today could pave the way for volume buyers to come back in.