Wheee what a day!
Who said we placed a spread bet on the Dow moving 200 points one way or another in yesterday's morning post? Me, that's who. And how much did the Dow move yesterday? 199.89 points. OK, so I was wrong by .11 but our plays worked out just fine and we flipped bearish again as we flew up and we'll see if my streak continues this week. We would have gone more aggressivley bearish but we were worried about end of the month (and end of the year for many hedge funds) window dressing that would keep things going for one more day.
Everything went according to plan and we got the bounces we were looking for but the RUT failed to retake 589, which was our canary in the coal mine's breakdown level from last week. As I alerted members at 12:15, that and the Qs failing to hold 42 into the close, which failed to confirm the Nas move over our 2,088 watch level. We have our DIA puts, we have our SRS longs, we have our DXD longs (which are half price as our DDMs paid off yesterday) and we shorted SPG into the close as Cap noted they had a ridiculous run-up ahead of today's earnings.
As I said to members in the afternoon, my gut said to go more bearish but we allowed ourselves to be spooked by Mr Stick in the afternoon and ended up about 55% bearish with a 1/2 cover of our long DIA puts but we already made a quick 20% on the sale of short puts in the morning so it's a position we had a little slack in going into the close. Our logic is, even if we have another up day today, we're still going to want some pretty serious coverage into the weekend unless the Russell and the Qs can confirm this move up today.
Bulls should be spooked by the fact that a blow-out GDP report, showing an economy with a HUGE turnaround and the President crowing on TV about how great things are going could ONLY erase 1/2 the losses we suffered since last week. Another market move I hit on the head yesterday was my prediction that, after 3 consecutive 1.8% down days in a row, the Hang Seng would jump 3.6% this morning and we topped out with a 3.3% move up before falling back below the 2.5% rule at 21,752.
Do we have any brilliant charting systems or inside information that lets us know what will happen in a market across the globe 24 hours in advance? No, we simply start out with the assumption that the market is fixed and that the 3 consecutive 1.8% drops were falsely supported by the Government or GS or whoever – it doesn't matter – and then we look at our MMOs: Motive, Means and Opportunities – something we discussed this weekend in Member Chat when we looked at some of the various players who have interest in manipulating the stock market, what tools they have to do it with and what are the limitations of those tools.
Speaking of Member Chat, there is a very detailed discussion on using the Buy/Write strategy to build a hedged virtual portfolio as well as a series of disaster protection plays, following up on our August 24th article on the subject that is a must-read for Members and I'll see about turning it into a Members Only Post over the weekend as we have 7 new buy/write positions and the 4 April cover plays that will be great to work into over the next week.
So what does the move in the Hang Seng (and yesterday's US markets) tell us? Both markets ran up sharply on little volume and then failed into heavy volume. That tells us there are pumpers but those pumpers are beginning to get overwhelmed by sellers who are running screaming for the exits like that scene from "The Blob." The Nikkei similarly gapped up on no volume to just over 10,000 and made a scant 34 points of progress all day long during the actual session but painted a 143 point gain for the day despite the dollar falling back below 91 Yen near their close. Did something happen to stop Japanese traders from caring about the dollar or is it possible, like many government statistics, that you can't always trust the market to truly reflect what's going on.
Like Pumpkin Jack in "The Nightmare Before Christmas," you can dress a skeleton up in a Santa suit but you are not going to fool THAT many people if there's no meat on those bones. Overall, investors are a savvy bunch and they know when there is no Santa, especially if it's a Santa Clause rally that may be missing this year. The September Personal Spending numbers are in this morning and consumers cut back 0.5% this month while drawing a flat Personal Income. Both are better than expected but both are down from August and both are down sharply over the past two years with Personal Income averaging 11% less than it was in 2006. That's 11% less AND they are getting paid in dollars!!!
Fortunately for consumers, PCE Prices are also down 0.5% this month but commodities are keeping Core PCE up 0.1% as we continue to have the consumers die the death of 1,000 cutbacks in their lifestyle. Last week we talked about how consumers are so deep into the bottom of the barrel that food sales are off 5% this year – when people stop eating, especially Americans, you know you have a problem…
We get the Chicago PMI Report at 9:45 and that could be scary if they are still below 50 (contraction) while Michigan Consumer Sentiment is likely to miss the 70.3 expected by economists who obviously don't read the same Consumer Confidence reports we do. We also get the Employment Cost Index at 10 and that one is a mixed bag as our corporate masters love it when they don't have to pay us a living wage but then they wonder why no one is buying their stuff. Notice on the chart how benefits have been totally dismantled since 2004, that does not count as lower personal income, just 5% more costs that employees have to come up with out of pocket. Ah capitalism, you never cease to amaze me…
Speaking of capitalism, Q3 earnings have taken an ugly turn as we're seeing a lot of something we didn't see at all last quarter and that is downward guidance revisions. Just yesterday and this morning we had guide downs from AET, HSC, ULBI, WBSN, ELY, CALD, SCOR, CRAY, ERES, IN, MHK, RRR, TSRA, VAR, ALE and LNT. That's 16 in 2 days (and today isn't over) against 33 guide ups but last Quarter my BULLISH premise was "Show me the misses," when I pointed out that there were virtually no guide downs, indicating we had plenty of room to run at the time (April). This is not a ratio you would expect in a vibrant economy that is growing at a rate of 3.5% a year is it?
Also we still have misses, and plenty of them! This is something else we noted in chat as more and more of those small-cap companies (who can't quite cut costs as easily as their big S&P brothers) start reporting and we begin to see tiny little cracks forming in the glass floor that's holding up this market. Combine that with the 2:1 ratio of companies who are RAISING guidance for Q4 and, if we do have a bad Christmas, then we are heading for a disaster of near biblical proportions!
The return to GDP growth is encouraging but the recovery is still fragile, Treasury's Geithner said at a Q&A last night. "It was broad and strong and it wasn't just cash-for-clunkers and it wasn't just economic stimulus… but it's important to remember that it's very early." Geithner stressed that a robust recovery would have to be led by the private sector, saying the U.S. can't borrow-and-spend its way to health. (thanks, Seeking Alpha)
White House data due out this afternoon will show the government's economic stimulus programs created or saved about 650,000 jobs through Sept. 30 – a figure officials are prepared to tout as a significant success. The reports cover only $150B of the $339B in stimulus spending that occurred through that date. Yesterday, the White House lashed out (I, II) at an AP report saying it overstated stimulus jobs, and at an Edmunds.com note that took cash-for-clunkers to task. (again).
So it's going to be another fun day in the markets but be afraid, be very afraid if we can't hold our bounce levels, which are: Dow 9,696, S&P 1,056, Nasdaq 2,088, NYSE 6,912 and RUT 600
There is pretty much no way we're not going to be at least 55% bearish into the weekend and the more of a pump we get today (if any) the closer to 60% bearish we are likely to get. As we did yesterday, we'll be taking those quick-paying upside momentum plays that cover our bear sides as once we cash them out at the end of the day, we are right back to bearish without too much messing around.
Have a happy Halloween,
– Phil
