Wacky Wednesday Morning

Can we overcome bad news today?

The "big" news this morning is BAC may need $34B but Mish warned us, in our Phil's Favorites section, over a week ago that BAC would need at least that much and BAC already fell and recovered off that news.  If we are going to get a pullback,  it will be more of a "Ghostbusters" kind of sell off.  There's a scene in Ghostbusters where Manhattan WILL be destroyed and the demon tells the ghostbusters to "choose the form of the destructor" and whatever they think of will come down and tear down the city (they went with the marshmallow man).  The markets are like that when they get overbought – SOMETHING is going to bring them down, it's just a question of what people will choose to fixate on that day.

Note added at 8:30 – Of course that logic goes both ways and when the market wants to break higher, it will fixate on some bit of good news like the ADP report, which is sending us way up ahead of the open.

While we may not be, according to David Fry's chart, as overbought as we were in early January, when the Dow fell from 9,015 on Jan 6th to 6,547 on March 9th (down 27%), we are way more overbought than we were on Feb 9th, when the Dow was still "way up" at 8,270 right before dropping a quick  20% in 30 days.  So here we are up at 8,400 and looking just a little toppy so whether it's BAC or some other stress test or the jobs numbers or the flu or whatever – something will "cause" the market to pull back.  It's not about the pullback really, pullbacks  are healthy, it's going to be about how we handle the pullback, what levels we hold and how we recover. 

We UNcovered our long puts in the 9:50 Alert to Members yesterday and had no reason to worry the rest of the day as sunny words from Bernanke (shown here saying "If future inflation were a twinkie, it would be a twinkie the size of a school bus") and a better than expected ISM report DID NOT lift the markets over our watch levels.  We had the mandatory stick save at 2:30 and that lifted the Dow from 8,366 all the way back to 8,410 closing nearly flat for the day but we found no reason to change our stance and I actually went a little more bearish than that into the close.  Our plan is to play for a sell-off ahead of the Thursday evening stress test results and, hopefully, move back to some bullish bets for Friday.  It all depends though, if we DON'T get a big sell-off, then we're not going to be in the mood to bet higher on Thursday afternoon.

As of 8 am, our futures were stick saved off a 100-point drop but we'll have to see if we survive the ADP report, which is expected to come in at "just" 645,000 jobs lost in April.  Other than oil inventories, that's our funamental for the day and the earnings continue to look strong.  We did have huge misses from CTX and PHM last night but CTX "only" lost $3.26 per $11.60 share.  They missed the estimates of a $1.27 loss by close to 200% but it's so much better than last year's Q1 loss of $7.34 that AP was able to run the headline (and I wish I was making this up): "Pulte, Centex narrow quarterly losses."  I'm sorry bears but this is like betting black when every single slot on the roulette wheel is painted red – this is a pointless game shorting the market when every single spin is a positive one!

Even BAC is having a pre-market relief rally already as they may ONLY have to raise $34Bn against their $69Bn market cap which will ONLY dilute current shareholders by 1/3 so party on boys!  We will see a lot of crazy financial sector moves ahead of the stress tests but if BAC is any indication, I may not ever get the pullback I'm looking for.  One frustrated bear weighing in on the subject is Nouriel Roubini, who is alredy crying foul as he thinks the suppositions built into the tests in no way account for the levels of losses anticipated by the IMF and other outside estimates of the US economy.  Our members were scoffing in chat yesterday as Ben testified that unemployment would average 8.5% this year (it's there now and 650,000 more people are losing their jobs this week).  It doesn't take too many flawed assumptions to make a test way too optimistic.  Imagine if your heart doctor had a 20% fudge factor on your blood pressure – you wouldn't know you had heart trouble until you woke up on the operating table…

8:15 Update:  Wow, NOW we have an excuse to rally!  The ADP report showed "only" 491,000 jobs lost last month – far better than expected.  March was also revised down to "just" 701,000 lost jobs from the previously shocking 742,000.  Sorry again bears but now it's up to the bulls to show us if they really have what it takes to break our levels and you have little to say about it.  I certainly did not see that coming and was picking out bearish plays yesterday and even took some short plays into the close so I am really empathizing with the perma-bears this morning.  It's entirely my fault as I went with my brain despite the fact that we were holding our levels into the close.  Hopefully I'll be able to roll up and cover without too much damage but it serves me right for thinking!

All the thinking was positive in China as the Hang Seng gained yet another 2.5% on the day, up 404 to 16,834, 48% off their March lows.  The Nikkei is still closed but the futures are pegging that market up 500 points from Friday's close and we'll see if they hold that 5% gain at tomorrow's open.  The IMF downgraded Asia's growth forecast to 1.3% for the year but that didn't stop a massive bank rally from lifting the region nor did it stop oil from breaking over $55 in pre-market trading.

Europe was drifting at their open but perked right up on the ADP report as well with markets there trading up about 2%.   The fact that Euro-Zone Retail Sales posted a record drop in March or that inflation fell to the lowest level in 38 years (since no one is buying anything) doesn't seem to be bothering anybody because it puts a rate cut back on the table.  Airbus announced they will cut back A380 production due to the "global economic crisis" and TOT logged a 36% drop in net profit due to lower oil prices AND lower demand but none of this seems to be phasing anybody.

This is usually the part where I advocate switching off our brains and going with the flow but I just can't.  We have the results of a stress test tomorrow and while I think our economy is far from dead, I sure don't think it's ready to dance and I am just going to need a few days to accept a new reality.  Yes my target for the end of this month was 8,650 for the Dow but, as I said yesterday, I really wanted to build a base to get there so it may take me a few days to completely give up on the need for a pullback.  Meanwhile, it's wise to cash out into this rally as we are hitting a 5% up move in 2 days and coming into both stress test results and Non-Farm Payrolls on Friday morning.

We need to be prepared for anything on Friday and nothing prepares you like having cash on the side.