Warren speaks at 8:30 on CNBC.
What are the odds he says SELLSELLSELL? It would be a perfect bookend to a rally that started two weeks ago when CNBC's guest was Meredith Whitney, who's upgrade of the financials sparked off the biggest market rally in almost 20 years. After bailing out even on our $1.20 QID $29 calls yesterday morning (thank goodness!), we had the nerve to go for the QID $28 calls into the close for $1.15. We thought we hit that one out of the park with both AMZN and MSFT disappointing investors. After all, doesn't MSFT alone make up 7.9% of the Nasdaq? Little did we know they had Buffet on deck and we all know he can knock it out of the park anytime.
We were otherwise wishy-washy into the close. We broke out of our watch level on the NYSE and it was what we like to call a "Free Money Day" as the market headed up and up and up all the way into the close so it was hard to go bearish, even though we are now at the top of our expected range, with the Dow testing (and failing) our 9,100 5% rule. I'll be drawing up a new Big Chart Review this weekend but my statement to Members in our 3:42 alert was: "Japan is very likely to break 10,000 tomorrow and the HSI should move up too. Europe ran out of time or they would have gone higher so it's not likely we go down first thing tomorrow."
Even with the disappointing results from our tech leaders, both the Nikkei and the Hang Seng made good efforts with Japan finishing the week at 9,944 (up 151 points, 1.5%) and the Hang Seng just failing to hold 20,000 and up another 0.8% to finish the week with a neat 1,000-point gain (5%). As I said in yesterday's morning post: "the market's WANT to retrun to the 33% off (the highs) level." We did make it "through the roof" yesterday and today's question is going to be – can we hold it?
As you can see from Trader Mike's S&P chart, we have a rapidly rising trendline that is very exciting if we hold it but also means we have very little tolerance for failure. This is what I sometimes refer to as an "air pocket" forming under a market run – we simply haven't put in enough of a base to have reliable support to pull back to. If we fail the trendline at 960 (a level that itself seemed impossible two weeks ago), then there is no real support until 920, almost 5% below that.
Thepatternsite.com points out that what we have here is a "broadening top" formation, which is "a poor performer, especially in a bull market. The break even failure rate is high and the average rise is meager." This pattern is evident in all our major indexes and, as you can see from this Dow chart, the tops line up neatly with our 5% rule breakout levels, which is why, despite the fantastic move yesterday, we thought that it would be easier to play the market down than up into the close and for the weekend.
I've been saying all week, this is, so far, nothing more than a 5% zone move around our 8,650 mid-point and it's amazing to see how the target we predicted back in November for our recovery by Q2 earnings can be drawn so neatly with the 5% up target of 9,100 and the 5% down target of 8,200. We discussed this in detail in Wednesday's post, where I reiterated "My Rangeish Outlook" so I won't get into it again but I have come around to being a bit more bullish as earnings have come in strong and now we are HOPING (and hope is NOT a strategy!) that 8,650 holds up to form a bottom as we take the next leg down.
We had a variety of trade idea in Member Chat yesterday, going long on WFC, SO, SRS (which is an ultra-short on real estate), QID (ultra short Nasdaq) and LYG and taking short plays on AXP, IGT, AMZN and IGT. Amazingly, all 9 look good this morning. AMZN is being kind to us both ways as we took a bullish vertical earlier this week and they don't look like they will fall far enough to hurt that position (Sept $75 calls at net $7) but, despite our bullish outlook, we thought the run was way overdone yesterday and picked up a nice bearish backspread into earnings. I liked AMZN's report on the whole, they just couldn’t live up to those crazy expectations of the run-up. Sales were up 15% – who else is doing that in this economy? Even North America was up 13%. Also, $142M earnings (.32/share) were after being knocked down $51M on ToysRUs settlement so we will be back to buying on the dips on this one!
Another bearish backspread was posted live in Seeking Alpha's Stock Talk as part of our $5,000 Virtual Portfolio. That trade was a bearish idea for AXP where we bought 2 Oct $32.50 calls for $1.50 ($300) and sold 3 Aug $30 calls for $1.65 ($495) for a net credit of $195. That play should be a huge winner today and, if the market does move down, our other new $5KP position, 2 SRS $16 calls at $1.50, should also do very well on a market pullback. We don't want to get too bearish, we reviewed 20 stocks that had made huge advances during chat before settling on AXP to short ahead of earnings but I see the chartists flipping their story from "head and shoulders" to "parabolic breakout" and they are probably as wrong now as they were two weeks ago so we're playing it cool as we test our upper levels.
South Korea's GDP grew 2.3% in Q2, not only better than expected but the best quarterly growth since 2004! South Korea is very much an export economy and that answers the question we had as we watched the Baltic Dry Index fly up last month when I said "somebody, somewhere, must be shipping something." It turns out that South Korea has been shipping in mass quantities but who is the consumer? That remains to be seen…. On a year-over-year basis, the GDP is still down 2.5% but another quarter like this one and we are back to par. "Exports of goods rebounded significantly, while domestic demand began gaining momentum in the second quarter," Kim Myung-kee, a director-general at the central bank's Economic Statistics Department, said at a media briefing. Export volume jumped 14.7% on quarter, following a 3.4% decline in the first quarter.
Yes there's a lot of stimulus driving Asian economies and yes, I am very concerned that commodity pushers have been leading our "breakout" based on the same rising commodity costs that killed us in June. It's only a month later, you would think people would learn but they don't. We've learned to be patient as you don't miss much by waiting for the music to stop before grabbing a bearish seat for the ride down. BIDU posted nice numbers with Q2 earnings up 45% and they guided up. I think they would be flying like a rocket if it weren't for MSFT dragging down the Nasdaq and we we'll see if there are any interesting option opportunities there after the bell.
Europe is flatlining into the US open (9am), having given up a half-point gain in early trading. Spain's unemployment rate hit 17.92%, almost double the EU average of 9.5% but German buisiness confidence rose for the fourth straight month to 87.3, up 2% from last month and well above forecasts of 86.5. "It seems that the economy is gaining traction," Ifo president Hans-Werner Sinn said in a statement. Also, the flash reading of the euro zone's composite output index, a closely watched gauge of private sector activity, rose to a 10-month high of 46.8 in July from 44.6 in June. A reading below 50 still indicates output is contracting but better is better.. The breakdown showed that the purchasing managers' index for the manufacturing sector jumped to an 11-month high of 46.0 from of 42.6 in June, while the services business activity index rose to a nine-month high of 45.6 in July from 44.7 the previous month.
The UK's GDP shrank more than expected, down 0.8% for Q2. We get our report next week, if we miss like that – look out below! Meanwhile, Buffett was indeed bullish but nothing too market moving. I said to members yesterday that, if there is indeed a "THEY" who are manipulating the markets, they certainly want to make sure that the market goes into the weekend near the top so all the newspapers and magazines can catch "rally fever" and herd all the sheeple in from the sidelines with their beautiful, beautiful cash so "THEY" can begin to unload the 90% of shares that were NOT traded in this low volume rally right before they whipsaw another round of Cramer fans suckers.
