Pre-markets are on fire!
After looking at all the bad news yesterday and writing about it in the morning post, it took us all of 12 minutes of trading to call a bottom in the 9:42 Alert where I made the first general call to hit the Buy List since I last updated the trades on March 18th. That day we were at 7,761 and, 2 weeks later, on our second test of 7,500 in 2 days, it seemed worth taking a chance on our hedged entries as we had some near and clearly defined breakdown levels where we could flip back to bearish if we had to.
In that same alert we flipped our DIA covers to bullish with a target to hold 7,550 (the same one we were watching all week) and this time we hit it and never looked back. We did make several cautious moves in the late afternoon – JUST IN CASE we had a massive reversal and we finished the day 55% bearish (meaning our long DIA puts are 1/2 covered) which we will happily flip to 60% bullish if this pre-market rally (up 2% at 6am) looks like it has legs. We don't mind taking a few hits on our DIA covers because the purpose of them is to let our long plays run and we surely wouldn't have been comfortable leaving a 300-point recovery on the table without downside protection.
The federal government is saying they will back the warranties of the Chrysler or GM vehicles. Well that’s great news for consumers — combine the efficiency of the federal government with the honesty of car mechanics… President Obama is giving GM 60 days to come up with strategy of viability for spending taxpayers’ money. GM should have said to him, “Hey — you first.” – Jay Leno
It was the Jobless Claims that made us nervous, yesterday's ADP report was TERRIBLE and we have claims ahead of the open at 8:30 along with earnings from CREL, KMX, MON, MOV, RAD and SCHN which we are weary of but what's trumping all market fundamentals is the hopes that mark to market accounting rules will be relaxed today and banks will be able to make up any numbers they want for their asset values so – Yay, I guess… Yesterday I said that the government's actions are like replacing the carpet and furniture in a basement with a leaking pipe but ignoring the leak. Changing the accounting rules is like redefining what "wet" is and declaring the problem solved if humidity is below 120%! Still – this is, above all else, a crisis of confidence and a little of that goes a long, long way when we are down so low.
Although we were very skeptical of the rally, my closing comment to members at 3:44 was: "Be careful bears – We are in a very good spot for FASB and the G20 to both make nice noises and then the 650,000 jobs lost in the morning can be spun as a good thing because it’s much better than that silly old ADP report and we could gap up 100 easy." Our overall game plan can be summed up by my earlier comment to members at 2:50: "I don’t think you should risk being too bearish. Perhaps a little bit of upside protection just in case, something like FAS that can really take off if we break way higher. I don’t see it but this is unrelenting and it’s very possible that they announce the rules tomorrow and the financials spike 10% as if it’s news and then Cramer hits the BUBUYBUY button on the financials tomorrow night and CNBC plays it every 20 minutes on Friday until the bears are left whimpering in a corner. THEN it will be time to short!" So we will go with the flow, until it's time to go against it – that's the plan…
We still have a bit more to go before we get out of those resistance lines on the S&P with 833 being last Thursday's high, which would be just over a 3% gain for the day so we'll be watching that line closely. The Dow topped out at 7,900, Nasdaq 1,580, NYSE 5,225 and Russell 444. Those were the levels we hit, keep in mind, ahead of an almost 10% pullback over the next two days and we will remain on guard for such an event until we are happily proven wrong by holding those levels for at least 48 hours. A large part of this morning's positive market move is a 1% drop in the dollar as China revalued the Yuan overnight. That shot the Yen all the way back to 100 and the Euro broke $1.33 and the Pound hit $1.46. This is the best kind of dollar drop as it lowers our export costs to China and Europe without raising our commodity prices too much.
Well, not all commodities, as oil is having a massive party this morning, driving up from $47.25 yesterday to $51.50 as of 6:15 despite a massive build in inventories yesterday of 2.8M barrels of oil, 2.2Mb of gasoline and 300K of distillates DESPITE imports being down 2.1Mb per week from last year and DESPITE refineries operating at 81.7%, 1.4% lower than last year (at 15Mbd that's another 1Mb per week off-line). There was, in fact, so much oil and products NOT being used in this country last week that we shipped 1.65Mb PER DAY OUT of the country. Tempting though it may be, we've stayed away from the oil trade lately as it is clearly going back to being manipulated nonsense.
The Baltic Dry Shipping Index fell yet another 2.5% today and I hate to bring these things up on a rally day but WHERE IS THE BEEF? If no one is using oil and no one is shipping anything – are we really having a rally because banks can now fiddle with their books again? So let's have fun as our stock market roller coaster races up the tracks to retest the highs but we'll take it all with a Lot's Wife-sized grain of salt until we see a proper break-out on good volume that holds – is that too much to ask for?
We couldn't ask for more from the Hang Seng, which jumped 7.41% (1,002 points), erasing all of last week's losses and popping them back to 14,521, a level last seen on Jan 7th and just about where they really broke down last October. The Nikkei gained 4.4% (367 points) and Bombay added 4.7% but the Shanghai was up a subdued 0.77%, still a 7-month high.
Europe is up about 3% as of 8am this morning as the ECB cuts their key rate to 1.25%, a bit less than was hoped for bet lower than what their recent rhetoric had indicated. At 1.25%, the deposit rates for overnight loans are right about zero, so 1% is probably the lowest the ECB can run without causing other problems. The ECB didn't provide a reason for its decision, but Mr. Trichet will brief the media at a press conference scheduled for 1230 GMT. The Euro jumped above $1.34 immediately following the smaller-than-expect cut, but fell back again as traders await Mr. Trichet's comments. We'll be watching last week's highs of the European indexes to hold today to give us a preview of our own close. The FTSE topped out at 4,000, DAX 4,250 and CAC 2,900 – all of those must hold if we are to be expected to hold our own breakout levels.
We shoudl be off to the races with yesterday's financial plays, especially FAS, which should be good for a huge pop. As I reminded members on Monday, when FAS again touched $5 (and posted free in our Tuesday morning post): "How many times will you see this ETF go from $5 to $7.50 before you start buying some at $5?" Today I will remind all of my readers – How many times will you see this ETF go to $7.50 and not take your profits off the table? The same can, of course be said for FAS's evil twin, FAZ, which will once again spike down to $17.50, where we can sell $20 puts for $6+ and we have many strategies for rolling this entry down the road to a point where we end up with great long-term protection for our financials.
As much as I hate to bring up reality on such an exciting morning, we have our jobs report and it's a new 25-year record at -669,000, about 12,000 better (worse?) than expected. This makes 9 consecutive weeks of over 600,000 pink slips being handed out and continuing unemployment is now 5.73M. That means tomorrow's unemployment figure will be a stunning 8.5%, the most since 1983 and the 4-week moving average rose to 656,750 from 650,250 with continuing claims the most since records were first kept in 1967. So party on Garth – just don't plan on doing it at work because no one is likely to be in the mood…
So let's enjoy our market roller coaster today but let's remember the harsh reality behind those jobs numbers. People are losing their jobs, they can't pay their mortgage, they get foreclosed on, they leave the community and there is less business so companies cut back and more people lose their jobs… It's the leaking pipe in the basement and we still haven't done anything to fix the actual source of the problem. At best, you can argue that more stimulus from the G20 and a change in mark to market regulations is like going to Home Depot and buying a pipe wrench – we're still a long way from actually stopping the leak!
What we are accomplishing is taking the worst-case scenario off the table. From our 8,650 base we said there are 3 things that could EACH knock 20% off the market. One is a GM bankruptcy. Although this is still a possibility, it is once again put off for 60 days and it looks like it will be a restructuring at worst, not a liquidation and that's not even good for 5% (432 points). Second is a major bank failure and that looks to be off the table entirely. Third is a minor country failure (like a Baltic State) and that is less of an issue with no more bank failures and a doubling of the IMF reserves so, unless things change considerably, we can look to be around 432 points below 8,650 or 8,218 so that's what we can consider a fair medium point for the market to be valued at (we'll call it 8,200). Applying our 5% rule to that puts the top of our range right back at good old 8,650 and the lower end 7,790 – pretty much right where we should be testing today. Isn't math fun?!?
So it all comes down to whether or not we feel that the FASB magic wand will really make the banks all better and that money will once again flow through the system and oil will stay over $50, which will stop Russia, Mexico and Venezuela from imploding and that currency traders will regain confidence in global FOREX and stop putting all their money into dollars which will keep our balance of trade from adding too much to our massive deficit as long as everyone keeps lining up at our Treasury auctions to keep buying low-interest dollar notes. As long as all that goes off without a hitch – everything will be fine!
Be careful out there!