Which Way Wednesday?

This is going to be a short post as I ran a $109,729 virtual portfolio update for members this morning.

Yesterday was "Testy Tuesday" and the market certainly failed that test, breaking below our "must hold" levels early in the day and then just getting weaker and weaker.  As we already had our USO puts and our long DIA puts, we took some pot-shots on long plays, none of which are working so far of course and we took a quick stop out on Russell calls but stuck with a GOOG vertical, ABX longs, our AA spread, and DIA $84s at an average of .60 overnight.  Our big winner of the day was ICE puts, which we jumped on at 10:15 with the Aug $120 puts at $16.65, which is a synthetic short on the stock as they have little premium, those jumped almost 50% and finished the day at $23.85 but we got out at $24 after flipping to the Aug $95 puts at $6.20, which we got 1/2 out of at $7.20 already.  So all in all, a mixed day but that's what bottom fishing is, we take the easy money as the big guys fall and try to pick the winners for the possible bounce.

Asia is not looking at all bouncy this morning with the Nikkei diving to the 2.5% rule at 9,420, now down 6% off last weeks failure to break 10,000, which we knew would be trouble.  The dollar fell to 94 Yen and exporters did not like that one bit.  India also fell 2.8% and the Baltic Dry Index fell 4.7%, testing the 3,200 line.  The Shanghai was relatively subdued at -0.28% while the Hang Seng dropped less than a point to 17,721, also down 6% from June 30th's high of 18,900.  "These are knee-jerk reactions to the moves last night in the U.S., probably not unfounded," said Andrew Sullivan, a sales trader at Main First Securities in Hong Kong. "I suspect that the general trend is lower, and the fact that the Hang Seng Index didn't manage to regain the 18000-point level yesterday is probably a crucial thing."

Oil and commodity stocks were hit very hard in Asia as the drop in commodity prices seems much worse priced in strong Asian currencies.  Crude prices were likely to keep falling, said Citi Futures Perspectives analyst Tim Evans. "We simply lack any physical tightness that would cushion a decline."  Japan also got a very poor report on Core Machinery Orders, that were down 3% in May, a bit better than the 5.4% decline in April but still disappointing as "experts" had forecast a 1.8% increase despite all the other bad data we've been reporting on out of Japan (I guess they are not subscribers!).  Chinese President Hu Jintao left the G8 meeting to go home and deal with the escalating violence as riots are getting more intense in Urumqi.  Instability in China makes everyone nervous but, strangely, is doing nothing at all for gold as it falls below the $920 mark as the dollar maintains relative strength to the EU currencies, even while continuing to fall against the Yen and other Asian baskets.  

We have stayed away from gold for quite a while, even though we do like it as a long-term inflation hedge, and we'll be watching it around this level ($920) with great interest – especially as it lines up with $90 on GLD.  All commodity pricing is in quesition this week as policy makers on both sides of the Atlantic are looking to crack down on the oil speculation/manipulation that we at PSW have been bringing to your attention for 2 years.  While you may get bored hearing about it, that is precicely why the ICE play was so obvious yesterday as that exchange was founded by Goldman Sachs, Morgan Stanley and the usual suspects specifically to get around US commodity trading regulations and is going to be rendered pointless if the International law catches up with them. 

In an opinion piece submitted to The Wall Street Journal, meanwhile, U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy (who obviously ARE PSW subscribers) wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."  In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.  On Tuesday, Sen. Byron Dorgan (D., N.D.), a backer of an antispeculation bill last year, called the CFTC's action "a positive first step" to curbing "oil speculators looking for a quick buck at the expense of American consumers."

The U.K.'s Mr. Brown and France's Mr. Sarkozy called on the International Organization of Securities Commissions to look at improving transparency and supervision in oil-futures markets. An umbrella organization for global securities regulators, IOSCO helps to set global standards and advises national bodies on regulation. In March, it set out guidelines on how regulators can beef up supervision and enforcement of behavior in commodities markets.  This is sending oil plunging below the $62 mark, something I predicted last month when I wrote an article warning that oil speculation was reaching a frenzy and cautioning against investing in USO.  

Sadly, the energy and commodity sectors are dragging down the broader markets, including the Nasdaq and SOX, which were hit hard by the fall of solar and other alternate energy companies as the media bandwagon has reversed course from predicting $85 oil to predicting $50 or lower oil.  Failure of $62 to hold can lead to another leg down in the energy sector and it's happening too fast for rotation to save the broader indexes so the whole market is in danger of being dragged down by this much-needed correction in the commodity sector.  We consider this a good buying opportunity but we are going to be treading very lightly until things stabilize as you never know when a "black swan" event will come up.  Our strategy remains having plenty of cash on the side so we can take some opportunistic plays as they come along but not taking the markets too seriously in either direction.

Over in Europe, we have grave concerns as commodity pushers are tearing the markets down, even though the G8 statement shows "some signs of stabilization of our economies," something that would have given us a 2.5% UP move 2 weeks ago.  The G8 draft states that "the turning point in the economies will be strengthened when our measures will reach their full impact on economic activity and will contribute to improve confidence."  Hopefully it's not just wishful thinking but we think this (Dow 8,100, S&P 880) is a pretty good bottom.  What we need to see it the EU bottoming out and the FTSE has been worrying today as it fails to retake 4,200 – a level we really want to see held.  The DAX is also looking sad but at least holding 4,600, which is what we need while the CAC is also failing us below the 3,200 line.  Yesterday the EU markets gave us a good preview of the US finish, hopefully today they can inspire us to do a little better.

It is all about oil holding $62 today.  We don't care if oil goes to $20, as long as it does it slowly but we can't take this sudden panic out of the energy sector as it's pulling down technicals of sectors that actually BENEFIT from lower oil prices.  I am encouraged that pump-monkey Cramer has turned into dump-monkey Cramer as he suddenly gets religion and declares the oil markets to be a "total farce."  I spent much of last month warning people not to listen to Cramer as he herded his sheeple into the energy plays at what I was calling a ridiculous, manipulated top and seeing this joker jump on the opposite side after a more than 20% decline in the sector makes me think it may be time to flip bullish but first, let's let him stampede his followers out of the sector and push the bottom the same way he drove them in to push the top.  See, we can make money by watching Cramer – AND DOING THE OPPOSITE!

Today we have the simple goal of holding yesterday's lows.  There isn't much data other than crude inventories at 10:30, where we expect bad news to be baked in and a possible relief run back over $63 for oil (we are out of oil puts and waiting for a sign at $62).  Hopefully that will give OIH and XLE a small boost, which will allow the Dow to retake 8,250 and anything below 8,100 is going to be, in technical terms, BAD.  The S&P REALLY needs to hold that 880 line (see David Fry's chart above) and there is no or there, we flip bearish below that line.  The Nasdaq has been our leader and 1,750 is the critical line for them but no clear breakdown until they fail 1,700 so we will be shorting the Qs if the S&P breaks lower as they have a long way to fall.  NYSE is fine if they can hold 5,600 and the breakout of the range between there and 5,800 will probably set the market's direction for next week.  The Russell failed us yesterday as we gave them a bullish toss and we won't try them again unless they show us they can hold 480 but the longs there are still very attractive as the RUT can jump 20 points very quickly off that mark.

We continue to be mainly spectators but things are getting very exciting.  As I mentioned, we took the DIA $84 calls at an average of .70 in our $5,000 virtual portfolio so we are really pulling for a 100-point move up today.  We also have AA $7.50 calls with the $9 calls sold for a .71 net cost on the $1.50 spread and that too is a bullish play in our new virtual portfolio.  You don't get to make many mistakes with $5,000 and we'll see where we stand this evening after AA announces earnings but today, it's going to be $62 or BUST in the oil patch so let's be very careful out there!