Ring around the rosy,
A pocket full of posies;
ashes, ashes
we all fall down!
Happy Pandemic Day!
That's right, the World Health Organization has declared the first Global pandemic since 1968. You may be aware that the above nursery rhyme alludes to the Bubonic Plague that struck England in the 17th century and was used to help children remember the stages (and be warned): A rose-colored rash was a sign of the plague; posies -that were believed to purify the air and were to be kept in your pockets; ashes were what was left after they burned the bodies of plague victims. Pretty grim stuff…
As of Thursday, the WHO reported 28,774 confirmed cases of H1N1 in 74 countries, including 144 deaths. While the new flu strain has spread rapidly, fewer than 1% of reported H1N1 cases have resulted in deaths. The most recent pandemic in 1968 killed about one million people, according to some estimates. The most lethal flu pandemic of the past 100 years, in 1918, is believed to have killed tens of millions of people. The original great plague, known as "The Black Death," wiped out about 1/4 of the World's population in 1400…
A sharp jump in cases in Australia, where more than 1,300 people have been diagnosed, contributed to the decision to raise the alert level. In Hong Kong, the government on Thursday ordered the closure of all nurseries, kindergartens and primary schools for two weeks after a dozen students at one school tested positive for swine flu. The U.S. has confirmed more than 13,000 cases, including more than 1,000 hospitalizations and 27 deaths. While many states are seeing a decrease in cases, they are rising in the northeastern part of the country.
While we weren't expecting it to be the flu (or the Spanish Inquisition for that matter) that would pop our little rally bubble, it's as good an excuse as any for the markets to let off a little steam. A global pandemic was only one of the "10 Things That Could Still Go Wrong With The Economy" featured in Clusterstock this morning. Cramer sees none of these things as he herds his sheeple into BAC right AFTER they make a 10% gain on the day in what is possibly his most irresponsible call of the week (hard to say, there's so many). Those poor suckers acted as an after-hours "stick save" for Jim's buddies, who couldn't quite make the exits fast enough into the close. Criminal Narrators Boosting Crude have been complaining all morning that the markets have hit an "invisible cieling" and I was joking with members this morning that perhaps they should sign up for our alert service because it's been pretty darn visible to us for weeks.
Try as I might, I could not get bearish this week. All through this "rally" we've had to switch off our brains and watch our levels and now our levels are still telling us no (as in "Your levels say no, but your media says BUYBUYBUY"). For the record, we would love to get on board Cramer's crazy train and throw all our money into the furnace in the hopes we get up to speed before it's all burned up but that "wall of worry" looks pretty steep and that train is burning money up REAL fast – Trillions in global stimulus so far just to bring the markets back to 40% off the highs and now "THEY" want us to put Trillions more in 50% off the bottom in order to get oil back to $85 so we (the citizens of the globe) can spend an extra $2Tn on food and energy next year. Gee, forgive us for being cautious!
We were actually more than cautious yesterday, deploying sideline cash for some bearish bets. At noon exactly I called a tentative top with a scale-in play on DIA saying to Members: "DIA $87 puts back at .73, I like them here with a DD at .57 if necessary and that will be good through tomorrow I think. Looking for 20% of course." We had already made a quick profit on those so a play like this is like revisiting an old friend. You can see on this chart the flurries of activity on the puts as we hit our strikes:
That one should be a nice winner today. Scaling into positions also allowed us to take up NYMEX futures shorts on oil at $73, now $71.25 (7:40) and a massive winner already as the oil futures pay $10 per penny per contract! We also grabbed some SPY $93 puts on the way up for a .70 average entry and those finished the day at .90 without giving us any trouble. Our old pals at POT got our short attention as they raced back to $119 and we did take one bullish play on a biotech but that was well-hedged. Our game plan for today was to expect another pumped-up open we could short more into but, so far, the pre-markets are pretty anemic – maybe we should check them for rashes!
Despite putting in a fresh high for the year, the Nikkei was anemic after gapping up 100 points at the open but did put in a 1.5% gain on the day. The Hang Seng also gapped open, up 350 points in the first hour of trading but gave back more than 250 of those points, almost finishing below Thursday's close but for a stick save that allowed them to finish the week on a "high" note. The Shanghai, however, was not so enthusiastic and fell 2% as fears that a fresh round of IPOs will further dilute an already saturated market. The Baltic Dry Index stabilized at 3,483 and we'll be watching that 3,500 line closely next week.
You would think China would be going gangbusters because the headline (and that's the only part you hear on CNBC) is that Industrial Output did rise by 8.9% in May (we had the rumor earlier in the week) and retail sales (which, in China, includes government spending) rose 15.2%. That sounds fantastic until you get this little tidbit: The money supply increased 25.74% and bank lending was up 13% from April and more than triple last year's pace. THAT'S A LOT OF STIMULATION! "Although recent economic data offer increasing evidence of a recovering Chinese economy, the external environment remains weak, spelling ever more dependence on domestic demand for growth," Morgan Stanley economists said in a note after the data were issued Friday.
Europe is trading off about half a point at 8:30 and our futures are looking the same on lackluster Import/Export numbers, down 17.6% year/year (not good for China or Europe). Unlike China, there isn't enough stimulus in the World (literally) to boost EU's Industrial Production, which fell 1.9% in April from March's number to new record lows – down 21.6% from last year. Now if I am getting the hang of the MSM message, that must mean it's time to buy more oil, right? This does not bode well for the Q2 GDP as estimates were for just a 0.6% drop in the first month of the new quarter. Energy production fell 1.1% for the month as the EU branch of OPEC cut their production in order to boost prices, choking the life out of the people the moment they showed signs of having a spare penny that could be spent on oil.
We have Michigan consumer sentiment at 10 am that can possibly be used to goose the markets and we have election day in Iran that could spark an oil market-moving report based on some kind of fear (maybe a riot, maybe rumors of a military coup) and OPEC issues their monthly report today, which is usually meaningless but oil bulls are going to be pulling out all the stops to hold $70 today. If oil does not hold $70, we should get a 5% drop in the energy sector and that will pull the markets down 2.5% at least so we'll be watching those lines as well as our upside breakouts of 946 on the S&P and 6.232 on the NYSE, which we hit to the penny yesterday before collapsing – not bad for a target number I made in March!
So it's going to be a fun day for us. We WANT to cash out our shorts and be mainly in cash for the weekend so let's stick to that plan. I really, really do want to take up more positions but today, I'm sure you see, I would still rather wait for the market to make up it's mind. Meanwhile, there is nothing better than having cash during expiration week. Go back to last expiration week and read our posts and comments from that weekend – we had fun and we made lots of profits, and that's what this site is all about!
Have a great weekend,
– Phil
