Are we at the top of our range or about to break higher?
Our lower breakout on the Dow has been 10,250 and that has held up very well for the past few weeks so we have to respect that but, at the same time, we seem very overbought and just needing some sort of correction to help us confirm the bottom of the channel is still supporting us (see Fallond chart). The other levels we were looking for in Monday's post were: S&P 1,100 (check), Nasdaq 2,187 (2,175), NYSE 7,200 (7,212) and Russell 600 (589).
As I said on Monday: "If we don’t get 3 of 5 of our indexes over, then there’s not going to be anything to get bullish about." Unfortunately, we didn't like the way we got there yesterday so we stayed bearish (60%) into the close but we sure are ready to run with the bulls by slapping on a couple of DIA covers and using 10,500 as our on/off switch to play the upside (which should coincide with the Nas and Rut breakouts).
As I noted to Members in yesterday's 9:43 Alert, our prior market tops were Dow 10,495, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605 so there is no excuse for any of our indexes not to make the grade if we're really heading higher. Today's fly in the ointment may be oil inventories at 10:30, as holiday driving and flying numbers were not that great so the anticipated drawdown of about 2M barrels may turn out to be a build, especially in gasoline as many families had subdued Thanksgivings at home this year (thankful to be employed, thankful to have 70% of their IRA left, thankful their house only lost 20% of it's value, thankful gas is still under $3…), which does not bode well for Christmas either.
Fundamentally, we think the economy still has serious issues and that the market is delusional at these levels but we don't fight the Fed or the big technicals so IF we do make our levels, THEN we will be some very reluctant bulls but bulls we will be.
I have, for quite some time, been saying this is very much like 1999 and we do expect a big sell-off in the near future as reality begins to take it's toll on the market but, in December of 1999, the Dow went from 11,000 to 11,500 on the 31st before giving it all back in the first 2 days of 2000. Everybody loves a party and we see no reason to miss out on the madness if we do break over 10,500 but we'll be the ones standing next to the exits, looking to beat the crowd out the door as soon as the stimulus booze runs out (or the data police come to break up the party).
Last Wednesday I pointed out how the theme of this rally in the markets is to have everyone pay more for less (like 20% less retail sales), especially on commodities, with gold being the stupidest thing out there. That didn't stop gold from going up another 2.5% since I wrote it and we filled our GLL Apr $11 calls at .50 as planned and yesterday we added the $10 calls as well at .70 as a play on gold going back to $1,000. If gold gets over $1,200, we will be making some shorter-term upside plays with GLD and UGL, using our GLLs as downside protection. While a 2.5% move up in gold may seem impressive, it's really not as commodity funds pulled in over $1Bn for the 2nd week in a row last week, down slightly from the record $1.34bn for the week that ended Nov 18th.
In just the past two weeks, commodity funds for the year went from $12.2Bn to $14.6Bn, an increase of just under 20% yet gold only went up 10% and oil actually lost 2%. Silver and copper made some gains but the overall CRB was relatively flat which indicates that investors are paying much, much more and getting much, much less for their money. So now we are at a point where it takes 20% off the entire year's inflows just to sustain a flatline for 2 weeks.
As I pointed out last Wednesday, there are 9,360 new suckers a day coming into the market but now 131,000 suckers (2 week's worth) have to come up with $1Bn ($7,500 each) just to keep us level. Since the first 10 months worth of suckers (2.8M) only contributed $12.2Bn each ($4,357 each) we can assume they will be looking to cash out with a double ($9,000 per sucker, 20% higher than here) so the question is do final bag-holders have enough money to cash out the early investors ($1.5Bn per week) or will this whole thing collapse into bloody carnage?
Asia pressed higher with the Hang Seng up another 0.8% to 22,289 and the Nikkei up 0.4% to 9,608, still at about the widest gap to the Dow ever and it's hard to see how the Dow can break 10,500 with the Nikkei below 10,000. Are industrial corporations in America really so much better to own than industrial corporations in Japan or are we, perhaps, delusional? Japan even announced ANOTHER $80Bn in stimulus, which knocked the Yen back over 87 to the dollar in overnight trading and all it could do is add 0.4% to the market – talk about getting less for more!
Europe is flatlining ahead of our open with the FTSE holding our 5,300 (our breakdown level is 5,250) and the DAX holding our breakout level of 5,750 on the button so today's close will be telling on those two indexes. Unlike Japan, the ECB will be pulling back some of the stimulus and that should hold up the Euro, which will make gold go down to a European investor, which may make them decide to sell it – you never know…
The ADP Employment Report showed 169,000 net job losses in Nov, about 19,000 worse than expected and October was revised up from 195,000 to 203,000 so not a pretty picture there. I mentioned we had crude inventories at 10:30 and we are already short on USO but the Big Kahuna today will be the Fed Beige book at 2pm and we will, of course be looking for a nice DIA strangle, probably starting with the DIA $103 puts this morning for about .90 and then maybe looking to pick up the $105 calls for about the same on a dip. Tomorrow is a big data day with Unemployment Numbers, Productivity and ISM Services and Friday we get Non-Farm Payrolls, which should be much worse than the -120,000 expected by "experts."
So we continue to tread carefully, ready to go bullish if the technicals force us to but we're not going to be at all surprised if this does, indeed, turn out to be nothing more than the top of our range.
