Big test today!
The Dow failed to retake the upside of our band in multiple attempts yesterday but the NYSE held the critical 6,900 line which is our first real breakdown level to be tested. As I said to Members in yesterday's Morning Alert, if the NYSE blows it the next critical line is Russell 575 and the Russell is, in fact, our weakest index already as they have blown their 5% level (off the top) of 589 (our watch level from Monday's Post) and now must retake 600 before we can call them turning up.
None of our cover plays triggered but they are still valid and we'll be watching our trigger points this morning. We did place a bullish vertical bet on the Dow, just in case, as the bullish verticals don't suffer too much damage on a dip and we are still a bit bearish, even as we do test our 5% lines. The 5% rule (drop from the top) levels for this pullback are Dow 9,600, S&P 1,045, Nasdaq 2,066, NYSE 6,840 and Russell 589. Keep in mind that these are about 66% retraces off the last run from the 50 dma in early October and blowing those levels is a Fibonacci failure as well.
As I mentioned in Monday's post (aptly titled "Is Momentum Shifting?"), 595 on the Russell WAS the 50 dma already so be afraid, be VERY AFRAID, if they can't recover as the Russell is our "canary in the coal mine" for the markets (as I warned last week). Sorry to get all technical today but we only had our fundamental argument going for us for the past month so it is kind of exciting to see the technicals finally come together to prove us right!
As noted on Trader Mike's S&P Chart above, we are aproaching an oversold level, due to the sharp drop to the 5% move and we already have our bounce targets set for Members and we have our upside cover plays lined up so we can take a quick profit and then get the hell out if we fail to break through our bounce zone. Watching that stochastic indicator and how fast it moves from oversold to overbought will give us a good clue as to how real a move us is.
The movement was all down in Asia as the Nikkei blew 10,200 and finally stopped falling at 10,050 with a weak bounce to 10,075 into the close, down 1.4%. 10,075 is right about 2.5% off the top of the Nikkei at 10,350 so we are right on track with the Nikkei so far and a bounce test at 10,130 is the next expected move (and notice that's the gap down after lunch). The Hang Seng finished down another 408 points (1.8%) at the low of the day and yesterday was down 1.8% so we can assume that's the magic number for the Chinese trade-bots to kick in and hold each day. This is, of course, great for our FXP play! We have 700 more points to go before testing the Hang Seng's 50 dma at 21,000 while the Shanghai held it's ground after yesterday's 2.7% drop.
Shippers dragged down the Asian markets this morning as people finally noticed that all those trade reports actually indicated that nobody is actually shipping anything. We thought this was a given as we got bored pointing it out 2 months ago but it seems to be surprising everyone else.
Mitsui O.S.K. Lines dropped 2.2% and Kawasaki Kisen Kaisha slid 4.5% in Tokyo. STX Pan Ocean plunged 7.4% and Daewoo Shipbuilding lost 3.9% in Seoul, China Cosco Holdings gave up 3.8% in Hong Kong and Neptune Orient Lines fell 3.5% in Singapore trading. Although Chinese shares ended higher, trading volumes were thin on concerns that Friday's launch of ChiNext, the new Nasdaq-style board, would have a negative impact on liquidity. "I expect tens of billions of funds to channel into ChiNext. Many of these investors have higher risk appetite and make frequent trades. Their departure may have a sizable impact on the main board's trade volume," said Haitong Securities analyst Zhang Qi.
EU markets are trading off about 1.5% as of 8:30. SAP surprisingly lowered their outlook. "While we are seeing signs of stabilization in the general environment, the market remains difficult. Third quarter software and software-related service revenues came in lower than we expected mainly because of a particularly challenging environment in the emerging markets and Japan," CFO Werner Brandt said. Risk appetite in the major asset markets has been unwound for the last three trading sessions, and, with selling compounded by the biggest monthly drop in U.S. household confidence since Dec. '08, "we wonder if what is underway is the start of a more broad-based market reversal, or merely a temporary phase of profit-taking after a three-month rally," said Kenneth Broux, market economist at Lloyds Banking Group.
"It feels as if we are treading water until the release of the U.S. GDP figures. If we are to see the U.S. coming out of recession, it may give the whole market more of a feel-good factor, helping provide some impetus once again," said John Murphy, an analyst at ODL Securities.
That "feel-good factor" was the basis for taking the bullish leg of a Dow straddle yesterday as we are looking for a violent reaction to the GDP one way or another. Even if we don't get it, we are early enough in the month where it's not too high risk to play both sides, especially with the hedges we have in place. Into today's uncertainty we offset our slightly bearish virtual portfolio with the upside play and, if we move up today, we balance that with a play for a nice drop if GDP disappoints. Call us market agnostics at the moment – we don't care as long as something happens in either direction…
8:30 Update: Durable Goods orders did come in up 1%, which is better than expected by getting a cool reception nonetheless. There seems to have been a whisper that they would be up 1.5% vs the 0.5% originally projected and that is just stupid as there was no way we could match the July and August Cash for Clunkers numbers. Manufacturing seems to be expanding, helping lead the economy out of the recession. The Institute for Supply Management, a private research group, said its index of manufacturing activity showed the sector expanded a second month in a row in September, to 52.6. Readings above 50 point to expansion in manufacturing. Also good in this report – Orders for nondefense capital goods excluding aircraft rose by 2.0% in September, after decreasing 0.8% in August.
The bad news in the report is that September unfilled manufacturers' orders for durables, a sign of future demand, fell 0.4%. That's the 12th drop in a row. Manufacturers also kept cutting inventory, Wednesday's data showed. Manufacturers' inventories of durable goods fell in September by 1.0%. Excluding the transportation sector, orders for all other durables increased 0.9% in September. Demand ex-transportation had fallen 0.4% in August. So it's a mixed bag but certainly a positive and it should help boost that Q3 GDP number with 2.5% being the expected growth from Q2s miserable -0.7% performance.
We still have New Home Sales at 10 am and there we are expecting just 450,000 homes sold WITH the government stimulus (which they just extended, thank goodness) and that's just 25 homes per day per state. How many realtors is that going to feed. Realtors and mortgage brokers are a big part of this country's "phantom unemployed" – people who still technically have jobs but are making less than half of what they used to make in commissions. There are no reliable statistics to cover this but consider that we used to sell 2M new homes at an average of $260,000, which is $520Bn and a 6% commission on that was $31.2Bn in commissions for realtors alone. This year we are HOPING to sell 450,000 homes at a median price of $179,000 and that's just $80Bn worth of home sales and, even if the realtors still get 6%, that's just $4.8Bn in commissions – quite a pay cut don't you think?
Mortgage brokers and title insurance people are also part of that same package so that's 3 times that reduction ripples through the economy. There are appraisers and surveyors to consider before we even get to the obvious construction workers, home builders, movers and yes, even the poor banks – all technically "employed" but making far, far less money than they did 2 years ago. I know – YAWN – fundamentals… Please forgive me but sometimes I feel compelled to mention them…
So we wait patiently for the GDP report and try to disengage our brains and stick to the technicals as it's so tempting to bet the farm on the farm being foreclosed otherwise.
In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said. The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity. The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry (thanks, Between the Hedges).
Let's be very careful out there, what we're most worried about is what Pink Floyd called "a short, sharp shock" as some bit of data or earnings report can still send us flying off that cliff. We are not building a very exciting base here and all the big volume has been down. Until THAT trend breaks and we break back over our levels, it's the down side of the moon for the markets.
