I WAS really excited about yesterday's rally.
Meredith Whitney gave us the catalyst for the bear squeeze we expected But THEN I saw Cramer last night. Nothing scares me more than watching Cramer's bandwagon do a 180 degree turn and head my way as he's been wrong and wrong and wrong and then wrong for months now. Still, I'm going to try to ignore that noise and keep a level head, dealing with facts rather than fads to figure out which way thing will be going. We were happily buying last week while Cramer was herding his sheeple out of the market and we'll be enjoying the free ride as he stampedes the masses back in, especially during expiration week but we'd rather see some honest, uptrending consolidation based on earnings than going back to early May's roller coaster model that hurt so many investors on both sides.
We are, of course, thrilled with the move so far, as you can see from the new buy list that I put up over the weekend. We cashed in our FXPs right at the top and went long on the DIA $83 calls at .40 as our 2nd trade of the day (the first was a long on GOOG into earnings). Those calls finished at $1 (up 150% and we are done, of course) and we also went long on GLD while it was still low in our 10:31 Alert and I put up a hedged play on TNK but that was it. We did all our buying last week, when things were cheap and we just spent the rest of the day waiting to see if we would make our target levels.
As I said in yesterday's morning post, we were looking for 1,750 to hold on the Nasdaq as our primary indicator that we were going to hold our 33% pullback levels on the broader index so it's not really rocket science to see where that DIA trade came from as we timed it for right when the Nasdaq crossed back over the line after the morning dip. Having a trading premise is always helpful and, in the 9:32 level watch to Members I had said: "Without $60 oil the best we can really hope for today is to claw back to our middle set of figures. Earnings can take us up over the higher numbers as the market rotates out of commodities (if they see that other stocks look "safe"). So that’s the outlook for the week (so far)."
The levels we were looking to hold and break over were:
- Dow 8,100, 8,300, 8,500 to break H&S pattern
- S&P 870, 900 and 930 to break pattern.
- Nas 1,750, 1,775 and 1,825
- NYSE 5,600, 5,800 and 6,000
- Russell 475, 490 and 510
As it turned out, the Dow finished right at 8,331, S&P 901, Nasdaq 1,793, NYSE 5,761 and Russell 493 so just the NYSE holding us back at the moment but the Dow was over by about what the NYSE missed so we can call it a wash for now. I did amend my Dow target at 3:01, saying to members: "Speaking of volume, 142M just coming into 3pm, very stickable and we’re going to need it to prevent a sell-off here. Another 100 points would be very nice though but I’m thinking we run into trouble at last Monday’s high of 8,325." That prediction worked out just fine into the close and at 3:58 we decided we could expect a follow-through move of up to 1.25% today so a test of 8,400 will be today's hopeful target for the Dow.
As we expected, Asia gave us a good pop this morning with the Hang Seng up 3.66% (we expected 4% so a bit of a miss actually), quickly erasing last week's losses. The Shanghai was up 2% but was never really down and the Nikkei was stopped dead by the 2.5% rule, also not an encouraging sign after comming off such an awful week. India popped 3.75%, Australia gained 3.23% but the Baltic Dry Index flatlined at 2,975 and that's not a very good indicator that the rally is real. Auto makers were higher in Tokyo after the Nikkei reported they were stepping up production capacity in China amid brisk local demand, with Nissan Motor surging 7.3% and Honda Motor up 2.7%, while Toyota Motor rose 3.6%. Brokerage stocks also jumped in the broad market rebound, with Nomura Holdings soaring 6.9%. "I think it is quite clear the worst is over, but the recovery will be tenuous," said Selena Ling of OCBC.
Europe is up about a point and they outperformed us yesterday and were boosted by gains in the financial sector but Germany's ZEW Business Sentiment Index fell to 39.5 in June from 44.8 vs. 47.4 expected. Industrial Production in the Euro-Zone was also weak in June, up 0.5% vs 1.4% expected there. Barry Knapp of BCS raised his S&P forecast significantly and outlook for earnings season has been raised in the EU but until the EU indexes get past the 5% rule and hold it, this is just a technical bounce off the 33% retrace that we expected. “The key point is that the capital markets have normalized,” Knapp wrote in a note. “The broad improvement in capital markets implies that the recovery is very much alive.”
8:30 Update: Our June PPI report came in much hotter than "experts" had anticipated. This time they were off by 100% as prices jumped 1.8% in June vs. 0.9% expected by people who obviously don't have cars. Crude goods led the advance, of course, rising 4.6% and energy costs overall were up 6.6% for the month after climbing 2.9% in May. Even the core PPI was up 0.5%, that's a 6% annual inflation rate so you'd better be doing better than that with your "cash" or you are falling behind my friend! This is why we got back into gold yesterday as $910 did seem cheap ahead of PPI and tomorrow's CPI. Overall, this is nothing to panic over as long as the commodity bubble continues to abate, halfway through July, that's looking good but don't count GS out just yet – they can still force their $85 oil target if they want to.
We also got Retail Sales this morning and those were up a better than expected 0.6% but, again, gas sales skew the numbers and without that increase, retail sales rose just 0.3%. In fact, retail sales excluding autos and gas fell 0.2% in June! Adding insult to injury, Chain Store Sales for the first week of July fell 1.7% from last month and 5.7% from the first week of July last year. As I mentioned with last week's retail numbers, we are comping to numbers when everyone had stimulus checks so it's not a fair comparison but the weak holiday weekend numbers indicate people are not heading back to the malls just yet and that's a big worry with only 150 shopping days until Christmas.
Goldman Sachs did not disappoint with $3.44Bn in profits, which was really amazing as they paid out $6.66Bn (I'm not kidding, that's the number!) in compensation. Still despite paying out 1/2 of net revenue in salary and bonuses, investors love the $5 per share net earnings but maybe not enough to break $150 as much of this is baked in. We sold July puts, which will be wiped out, against August puts, which may come back if they can't break out here so it will be fun to watch.
JNJ also had good earnings, off just 5% from last year's stimulated totals at $1.15 per share vs. $1.11 per share expected. The company reaffirmed the full-year forecast and consumer sales were strong so that's a good thing. DELL warned on Q2 earnings last night so GS was wrong with that upgrade and we were wrong to play them in the $5KP and should be happy to salvage a dime on the $13 calls, we'll follow up on that later. Also in our $5KP, we need to watch SGR closely, who came back nicely yesterday but didn't hit our $2.50 target yet on the $22.50 calls but I have hopes for this morning.
So we need to see a 1.25% move in our indexes hold for the day or we may be back to making bearish bets. We'll be watching the 5% lines in Europe as early indicators but, as I said to members yesterday – I'm very glad we picked up a lot of stocks last week but I am also very glad they are well-hedged entries as we should be happy to make small gains that keep us ahead of inflation. It's still going to be a bumpy ride out there and we are still not committing too much until we see more data.
