Wheee – Down we go again!
We held our levels yesterday and we dared to remain bullish into the close and we're going to be punished for it this morning as the IMF tells us there may be $4Tn in toxic bank debts out there, only $1.3Tn of which have been written off to date. That knocked 100 points off the pre-markets as of 7am and we'll see where we actually open as the rumor of a statement from the IMF that won't be released until the 21st is, so far, the only bearish news we have this morning… .
Our plan was to stay bullish this morning and move more bearish ahead of tonight's earnings release. Yesterday's close was so strong (fake, but strong) that we expected some follow-through back to test last week's highs, less than a point away from yesterday's close. Fortunately, we went bullish in my 2:52 Alert, 50 points below the close and I laid our a mattress plan for members in comments so, hopefully we can ride out this storm without too much damage. I will remind everyone here and now that FXP calls are a great play if the US markets pull back as the Hang Seng barely budged this morning but was rejected at 15,000 into the close so a big US sell-off will almost certainly spark one in Asia tonight.
Now we'll be watching yesterday's lows of Dow 7,870, S&P 822, Nasdaq 1,580, NYSE 5,175 and Russell 440 but there is no change in our expectations of the inevitable retest of last week's support levels of Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420 once earnings get started. Our QIDs should serve us well today as should our short sale of FAZ puts as the financials pull back (sending FAZ higher) – all these were mentioned as the plays we were making in yesterday's morning post, so don't act all surprised today that they're paying off. Hedging with ultras is great fun when you use them sparingly but our bread and butter protection remains the DIA puts (also discussed yesterday morning). We covered those to go bullish into the close but it was by selling DIA $80 puts for $2.37 as we really felt 7,750 would hold at any rate and we wanted to collect the premiums while we can with just 8 trading days left to expiration. See comments for our adjustment strategy on this one!
We'll be watching for that breakout line in FAZ as this is a bank-driven turn-down this morning and we should be opening above David Fry's breakout level at $17.15 and that may put us in the mood to get a little more aggressive with this play. Our put selling was a conservative way to cover a financial downturn but, as we head into earnings season – it's hard to say no to the spread of the July $17.50s at $6.05, selling the May $22.50 calls for $3. That puts you into a $5 spread for net $3.05, with a 60% upside if the financials fall apart and pretty cheap protection through July if they don't. By the way, both FAS and FAZ are AWFUL long-term investments as a buy and hold. Here is a chart (thanks Raul) that shows how much money the two funds have lost since their inception (they should be neutral in theory).
As I mentioned, Asia traded generally flat this morning, other than Bombay, which jumped 1.8% and the Baltic Dry Index "only" fell 1.3% today. Australia lowered their rates a quarter point to 3%, the lowest level in 49 years but still higher than most economies. The BOJ already has a 0.1% rate and they held that steady and the bank widened the range of acceptable collateral for its money-market operations, a bid to get more funds to struggling banks and businesses. The move is expected to benefit regional banks, the major buyers of local government debt, and could encourage them to loan to smaller local businesses that haven't benefited from previous BOJ steps to buy highly rated corporate bonds and commercial paper.
EU markets are pacing the US down about 1.5% as of 9 am and, aside from the IMF rumor, the big news is that the EU's GDP fell a greater than expected 1.6% in Q4, not something we want to hear just ahead of earnings. "Worryingly, it is far from inconceivable that euro-zone GDP contraction was even deeper in the first quarter of 2008, given largely dire data and survey evidence," said Howard Archer, chief U.K. and European economist at IHS Global Insight. The fourth-quarter figures showed exports were 6.7% weaker than the third quarter as the credit crisis hit demand in the euro zone's main trading partners, while imports dropped 4.7%. Also hitting Europe hard is a report that Producer Prices are falling as are retail sales.
We can only keep an eye on our levels this morning to see what sticks but the news out of Europe means it would be foolish, rather than brave, to head bullishly into earnings. If we can hold on and shake off the bad news, then we can probably get a little more confident in our floor but we're not going to try to guess this, we'll just play the hand we're dealt this time around as earnings gives us a chance to take a peak at what cards everyone is holding and that can be a very good thing as we set up to trade the rest of 2009.
