Tuesday – Topping Out or Just Pinning the Fed?
by Phil - January 24th, 2012 8:26 am
Tough call today.
The Dollar bounced off 79.75 this morning, nothing to crow about for Dollar bulls as the Euro remains just over the critical $1.30 mark and the Pound is solidly over $1.55 for the moment.
You could say it's a bearish sign that the Dow and the NYSE stopped dead at our breakout levels but that's to be expected on a first attempt at breaking out – even if they have already attempted the same move back in late October, when the Dow was 5% lower in it's test and the NYSE was testing the same line (7,866).
Our broadest market index is the one that's holding everyone back as what little volume there has been in this rally has been fairly narrowly focused on certain leaders. Now a pessimist might say that this is a reflection of the blatant manipulation of the indexes in which certain Banksters place buys on stocks that have disproportionate positive effects on the junior indexes in order to fool retail traders into believing there is a rally while the Banksters drive the VIX down to multi-year lows, dump all their stocks on the bagholders and prepare to cash in by crashing the markets on a major event like tomorrow's FOMC Rate Decision which is, in fact, very unlikely to have any language specific to the QE3 that has been promised by the MSM since Thanksgiving.
An optimist would say – well, you can read almost any MSM site for that. It's lonely at the top of the range when you are bearish, one by one the other bears capitulate and soon you are there all by yourself with your shorts – your lovely, lovely, cheap shorts! The Dow shot up yesterday to just over the 12,749 breakout line we have as the tippy top of the range on our Big Chart so of course I called for DIA puts in Member Chat. The DIA Feb $123 puts, which came in around .75 and finished the day not much higher at .78 after topping out at .95. Ranges usually hold – if you're not going to have conviction at the very top of a range to short – when will you? For one thing – you have a very good stop line to watch!
As noted by Dave Fry in his SPY chart, the bulls have engineered their golden cross…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggFriday the 13th’s Follow-Through Failure Forecast
by Phil - January 13th, 2012 8:05 am
Happy Friday the 13th!
Will the market's luck change today or will we break through the mirror at 1,297 on the S&P which could spell 7 years of bad luck for the bears (or maybe 7 weeks).
Surly Trader has a chart (see Phil's Favorites) that says only 9% of the S&Ps sales come from Europe, which means we really shouldn't care so much what they do but he also has a frightening chart of the Baltic Dry Index, which has fallen off a cliff since mid December and that matches up with this terrifying collapse in Rail Traffic that started earlier and also isn't finished.
The last time intermodal traffic dipped to this level, we were in denial that we were in a Recession and indeed the Dow continued to march from 11,500 in January of 2008 all the way to just above 13,000 in May before it began the long march to 6,600.
Of course, a pessimist may say that by the time traffic had dropped this badly, it was December and the Dow ars already at 8,000 or an even bigger pessimist may point out that, since these are year over year comparisons, that we've never even recovered the original 20% drop and now we're down again and worst than we were at the time.
But I don't like to be a pessimist so I'll just quote David Fry, who titled yesterday's post: "Bulls Blind to Bad Data Once Again," noting:
In the eurozone today ECB president Draghi decided the best defense is a good offense and cleverly spun a yarn that his policies are working. Draghi further states that “interest rates will remain low for an extended period”…where have we heard this before? This statement caused the euro to rally about 1% on the day perhaps squeezing some shorts.
…
Wednesday Wheeeee – We Love it When a Plan Comes Together!
by Phil - January 11th, 2012 8:21 am
Once again, we're done with our day before you get up.
In my 5am note to Members, I said: "I see nothing in the news to justify this pre-market "recovery" and I hate to sound like a broken record but I like shorting oil (/CL) if we get below that $102 line with tight stops and the Dow (/YM) is right at 12,400, which is a great spot to short. RUT (/TF) is at 762 and below 760 (same as yesterday) will confirm a downturn but 12,400 is a great line so why wait?" By 6:26, I was able to follow it up with:
And wheeeeeeeeeeeeeeeeeeeeeeeee! There go the Futures!
It's 7:07 and we're still going down, with oil at $101.24 (up $760 per contract) and the Dow at 12,340 (up $300 per contract) and, as Dennis said: "Good enough for steak and eggs for me!" Roro got up late but still caught the Dow at 6:16 and that was right on the nose for the oil drop as well as we hit it right on the nose this morning and now we're done and waiting for the next good set-up.
Of course we scale in and scale out of positions as there's no need to get greedy in the Futures, where a single remaining contract catching a $1 move down in oil (now $101.25 again) pays $1,000. This week, we have even stationed our own Craigzooka in New Zealand, where it's tomorrow – which makes it much easier to bet on today's action as he can tell us what happened already! Not that today was all that hard to predict, right? My comment to Members LAST Wednesday was:
It’s been a pretty reliable bet that they tank the markets into the longer-term note auctions because it scares people into T-Bills and keeps the rates low. From this line-up, it seems to me they intend to jack us up on Friday and then zap us on Tuesday as Esther George releases something hawkish ahead of the 3-year and it’s no coincidence that Plosser, by far the biggest Hawk, is given the floor at 12:30 on Wednesday – just 30 minutes before the critical 10-year auction. Coincidence? Surely you cannot be that naive!
So that's how we've been playing the past 7 days and it culminated in pressing our…
Tempting Tuesday – Again
by Phil - January 10th, 2012 8:21 am
Well here we go again.
Once again it's Tuesday and once again it's a primary and once again we are meant to believe everything is right in America as the Futures take the markets back to levels not seen since last August. As we discussed last week and as noted by David Fry this morning:
Throughout the week Fed governors will be making speeches: Dennis Lockhart (2 speeches), Charles Evans (2 speeches), Esther George, John Williams, Charles Plosser and Jeffrey Lacker. This is part of their transparency mission and/or a campaign to pump-up investor confidence. You choose.
Yesterday we made our breakfast money shorting the Dow off the 12,350 line and today we already had a double dip at the Dow off the 12,450 line but, on the whole, it would have been easier to drink the Kool-Aid and go long.
Unfortunately, I'm a Fundamental Investor and not a TA guy so, impressive as this run may seem, it doesn't match up with the data and, so far, it's neither matching up with Q4 earnings or Q1 outlooks. We HOPE the Fed will go for QE3 (Friday's Fed speak indicated that and more today) and we HOPE Europe is fixed and we HOPE China doesn't implode – is this a sound investing premise? Let's see how things have been going in the last Quarter:
Up 15% in all of our indexes and led by the Transports, which are up 21% – even with oil up 25% over the same period which once again proves our theory that trucks and airplanes must poop oil when they run – which explains the non-inverse correlation between Transports and Fuel Costs that those of us who took Econ 101 may be familiar with.
The most interesting thing about the above chart set is the uniformity of the moves up in the majors but I think it's the NYSE and the Russell which PROVE beyond a shadow of a doubt, that this market is traded by robots. Look at those two charts – they are practically tick by tick matching – even to the point where the Russell is almost exactly 1/10th of the NYSE. Sure, you could assume some similarities in two broad indexes but this is 6 full months of daily moves that are in lockstep. That's just not natural on the order of…
Monday Market Movement – Strap in for a Wild Week!
by Phil - January 9th, 2012 7:33 am
This chart from the NYTimes pretty much says it all:
The average annual inflation-adjusted return for the S&P 500 has been in decline since the late 90s, the decline only paused in the 00s and that fooled us into thinking it was a recovery but we only stopped getting worse for a while. Meanwhile, real personal income has been in decline since Nixon lifted the gold standard in the early 70s and that, like our real GDP adjusted for inflation, should certainly not be the "envy of the World" – even if we assume it still is.
$20Tn was pumped into our $60Tn Global Economy since the 2008 crisis and that is not including "stealth" stimulus like the estimated $8Tn handed out by our own Fed to their Bankster buddies as well as tens of Trillions handed our around the World by other Central Banks.
Like the late 70s, my expectation is that we will see a bottoming of real stock returns over the next few years as the inflation train pulls into the station. The markets will do great on the surface but, underneath, they are not going to be able to keep up with the massive inflation that is likely to begin as the flood of money being used to "fix" the global banking system begins leaking out into the Global Economy.
Speaking of fixing the global economy – Merkozy are holding a press conference this morning to craft a "master plan" for rescuing the euro over the next three months. The two leaders gather in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area.
The German and French leaders have sponsored a plan to install new guidelines by March. A crisis that began in Greece more than two years ago has moved to the euro area’s core, and leaders are struggling to persuade investors they can contain the risk and assure the euro’s survival. “They urgently need to formulate and clearly communicate a vision for a sound and stable euro area that deserves the name fiscal compact,” said Thomas Harjes, senior European economist at Barclays Capital.
Meanwhile, the Euro fell to an 11-year low against the Yen and a 16-month low against the Dollar this morning ahead…
Thursday Foolishness – More of the Same with One Trade
by Phil - January 5th, 2012 8:13 am
Our day is done, how’s yours?
That’s right, we already did our 3am trade where we caught the dead top of oil (and the dead bottom of the Dollar), where my 2:59 am comment to Members in Chat was:
Dollar at session low of 80.40 at 3am and oil back at yesterday’s high at $103.70 so oil (/CL) makes a nice short below $103.75 here but DANGEROUS pre-market trading as Iran could spout off at any moment and the trading is VERY THIN.
So that brings us back to the good old Dow (/YM) futures at 12,350 and they are just over that line at 12,351 but that’s the short of the moment as long as the Dollar is over 80.40 .
For the next hour, I did a blow by blow on the oil trade in Member Chat on the way down to $102.70 – a nice $1,000 per contract worm gotten by the early birds, where we took the money and ran ahead of likely morning manipulation back up to $103.50, where we can short it again on inventories (11am). The Dow slipped to 12,300 and paid a solid $250 per contract as well, paying for over 100 Egg Mcmuffins this morning by itself. If you want to see how we make decisions along the way down – it’s well worth going over this morning’s comments – there was also some good discussion of other topics this morning, including my pick for the best wide-screen TV.
We’re still just messing around with hit and run plays, waiting to see how the week pans out and next week we’ll be waiting to see how earnings pan out as well as what we expect will be a pretty major market pullback leading into the 10-year auctions next Wednesday at 1pm. Clearly the Fed freaked out and jumped in yesterday when TLT hit $118 so we are fairly comfortable with our prediction of a…
Will We Hold It Wednesday – Nasdaq 2,603 Edition
by Phil - December 28th, 2011 6:53 am
Watch the Nasdaq.
That’s the index we need to catch up to the Dow now that the S&P is halfway to goal at 1,297 (from our Must Hold line at 1,235). The Dow is in La La Land, led by MCD (up 31%), IBM (up 26%), PFE (up 24%), HD (up 20%) and KFT (up 20%) while this year’s Dogs of the Dow are BAC (down 59%), AA (down 43%), HPQ (down 39%) and JPM (down 22%).
While the losers may seem to outweigh the winners, that’s not how it works as the Dow is price-weighted so BAC dropping from $14 to $5.50 "only" costs the Dow about 68 points (roughly 8 points for each Dollar), IBMs rise from $145 to $185 added a whopping 320 points.
So a 26% rise in one component and a 59% drop in another nets out to a gain of 252 points! At the beginning of the year, they had roughly the same market cap ($150Bn) but IBM has gained $70Bn and BAC has lost $100Bn which, of course, translates into a net gain of 2% on the entire Dow – BECAUSE IT IS THE STUPIDEST INDEX ON EARTH!
Our Members, of course, know this. I wrote "DJIA: The Most Useless, Overused Tool on the Planet" back in 2006, when GM was still part of the Dow so no need to rehash it all here other than to mention the fact that a 30-component index has made 5 substitutions in the 5 years since I wrote that article only serve to highlight how ridiculous it is to use the Dow to draw long-term conclusions. The Dow is manipulated because it’s easy to and Uncle Rupert sits with the other Masters of the Universe to decide how to use this headline tool to make things look as good as possible in the US markets.
That’s why CSCO and TRV replaced C and GM in June of 2009. C was at $28.80 and is down a bit, GM went BK from $45 (which would have been a 360-point loss in the Dow) while CSCO was disappointing but essentially flat and TRV is up $20, adding another 160 points so a 520-point swing (5%) on those substitutions alone. In September of 2008, AIG ($135 at the time) was swapped for KFT ($32). KFT is just $37.70 but AIG was…
Will We Hold It Wednesday – For 500 BILLION Euros – We’d Better!
by Phil - December 21st, 2011 7:44 am
500 Billion Euros – Muhahaha!
This is, as they say in the Euro-zone, a good start. Money was offered and 523 banks requested a total of 489Bn Euros ($641Bn) in funding from the ECB at the delicious rate of 1% for three years.
We already discussed the merits of this program in Member chat this morning and Pharmboy and I will be debating the issue on National television very soon if this keeps up as it’s a shame to waste such a good debate.
Despite my bullish take on $641Bn being handed out to people who can lever it 10:1, this morning we shorted the run in the Dow Futures (/YM) to 12,100 and got a little dip to 12,070 but the big winner was, as usual, oil – which got all full of itself and ran up to $98.50, where we caught multiple rides down with the last hitting $97.50 so, as is often the case, the Egg McMuffins are paid for.
After the announcement of the "Longer-Term Refinancing Operation" (LTRO) – it did finally occur to some people that dropping that kind of money bomb on the EU might, somehow, devalue the Euros that are currently in circulation. Some theory about "supply and demand" which you may have hear of… Well, it seems the people who took Econ 101 were of the opinion that $1.32 was a bit much for the Euro under the circumstances (5am) and by 6am it was back down to $1.305 – a pretty crazy drop for a currency in an hour in any of the other 100 years of currency trading but, in 2011, we call just another it Wednesday morning.
So we’re done with our event-driven bearish bet on the futures and now we can go back to being bullish until and unless our levels fail to hold on our Big Chart.
Unlike those voodoo moving averages, our Big Chart lines are fixed according to our 5% rule and these are the same lines we used to predict the market since early 2009 and the only reason we move the lines is to adjust for major changes in Dollar valuation, which the market is priced in.
Other than that, we are rock-solid on target to finish at our 1,250 goal for the S&P, which is (after taking into account the net 4% drop in the Dollar) almost exactly…
Wednesday Weakness – Can We Survive Without QE3?
by Phil - December 14th, 2011 8:01 am
WTF?
Do Ben Bernanke and I live on different planets? "For a lot of people," he said during a speech at Fort Bliss, "I know it doesn’t feel like the recession ever ended." For what people exactly, Dr. Bernanke, does it seem like it did end? Study after study after study show that, if you are not lucky enough to be in the top 10% of our society (and certainly not a shade of Johnson’s "Great Society" anymore) then you are pretty much f*cked – and, no, there’s not a nicer way to put it.
Bernanke seems to love the Great Depression so much he is Hell-bent on replicating it here so he can study it in greater detail. I suppose he has some sort of academic detachment regarding the untold suffering he is causing the American people but, who can blame him? He just got a great rate when he refinanced his $850,000 home.
Fortunately, we had complete confidence in Bernanke’s incompetence (see yesterday’s "To QE3 or not to QE3 – That Sets Direction") and, of course, we took advantage of yet another chance to short oil futures (/CL) off the $101 and then the $100 lines on the way down. We were HOPING (not a valid investing strategy) that we’d get some QE3 but, as I warned Members in the morning: "If not – well, Hell hath no fury like a market disappointed."
Clearly, as you can see from David Fry’s SPY chart – I was not overselling the point. Bernanke and the Fed are of the opinion that 10% unemployment is within their mandate of "promoting full employment" and don’t see the need to take action? Let’s have a little review of how good the Fed Chairman has been as a prognosticator for our economy as he enters his 7th year at the Fed:
Drivin’ that train, high on cocaine
Casey Jones you better watch your speed
Trouble ahead, trouble behind
and you know that notion just crossed my mind
Trouble with you is the trouble with me…
Easy Money Monday – Robbing Peter to Pay Portugal
by Phil - December 12th, 2011 8:27 am
That was easy!
Who’d have thought Europe’s problems could be over just like that? Certainly not us, as I was quite skeptical Friday Morning (see yesterday’s Stock World Weekly for the Executive Summary of the Week’s Events). As I noted in Friday morning’s post, we had ended the day on Thursday very bullish – too bullish I decided on Friday morning and I called for cashing out into the weekend at the end of the morning post. In the morning Alert to Members, I repeated:
When in doubt, sell half and, in this case, I want to get back to more cash by the day’s end in the White Christmas Portfolio as the WCP is too bullish and I’m just not in the mood to risk it so we’re not going to be too brave if the "rally" stops or even slows down.
The markets were very kind to us, heading higher all day long and giving us great exits. Heading into the close, we got a bit more bearish and, aside from existing hedges like our EDZ spread (mentioned as our key hedge in last week’s Stock World Weekly), we added DXD (ultra-short Dow) Jan $15 calls at $1.25 but we offset those with short FCX Feb $33 puts at $1.25 in our virtual White Christmas Portfolio, with 10 of those contracts on each side netting a free spread with unlimited upside (with the downside being owning FCX cheaply). As I pointed out to Members, DXD was $18.50 just 3 weeks ago.
At 3:26, just before the close, we added the SQQQ (ultra-short Nasdaq) Jan $16/19 bull call spread for $1.50, which I pointed out had a nice 100% potential upside all by itself but you could also, for example, offset it with things you REALLY want to own if they get cheap – like shorting a GOOG Jan $500 put ($1.20) or an AAPL Jan $320 put ($1.25) or a MSFT 2013 $20 put ($1.10) – the idea is to just thing of what stock you REALLY want to be jumping in and buying if the market throws a 20% off sale. If there’s nothing, then you should be thrilled with the 100% potential gain on the raw spread.
But THAT wasn’t the easy money (I’m not so egotistical that I would guarantee we open lower when it’s…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(