It’s very strange coming off a holiday right into a Friday.
Traditionally volume on a day like today is anemic but we actually had a pretty strong volume day (comparatively) on Wednesday, the strongest in the past week, which is a good way to break those 50 dmas we discussed in our Big Chart Review but, so far – this is only EXACTLY what we expected to happen for the week so we took the money and ran (and covered) long before the close on Wednesday. We went bottom fishing on Monday’s dip but, 5% later at 8,800, we decided not to be greedy and tightened up our shorts, effectively rebalancing to a more neutral stance by shifting the profits from the run up into more short-side bets.
The idea was to be well covered into the weekend as our worry is that this weekend’s reading of annual reviews is going to be downright depressing as well as the very distinct possibility that the entire "rally" may have been nothing more than window dressing. Our two speculative (unhedged) downside plays from Wednesday were the SKF $120s, now $4.35 (at $7.30, we like the naked sell of the $100 puts much better) and the USO Feb $32 puts, which finished about where we picked them at $3.40 as the 14% run in oil on Wednesday after a 2M barrel inventory build was downright ridiculous.
Fortunately, the rally was not led by the energy sector despite the big run in crude. This indicated to us that no one was buying the sudden move from $38 to $43, with most of that action coming off Russia’s dispute with the Ukraine over natural gas prices. While the TV pundits are quick to paint worst-case scenarios involving Russia cutting off Europe’s supply of natural gas for the winter, the fact is they, like us, have Trillions of cubic feet in storage and Russia, in the end, is a motivated seller who needs money. GM stopped making Hummers – did the price skyrocket? BA isn’t shipping Dreamliners – will they now get a premium? Banks aren’t lending money – are interest rates skyrocketing? Why is it that investors believe that supply and demand works anywhere BUT in the energy market?
Not only do you have this ridiculous posturing by oil and gas producers to try to make massive production cutbacks due to low demand seem like it’s bullish for energy, but you have the media treating the conflict between Israel and Hammas as if it were the Iran/Iraq war. Neither Israel or Hammas produce ANY oil at all, no oil is near where bombs are falling and this "crisis" has been going on for 40 years and will likely go on for 40 more. Also, let’s not forget that the dollar is down 10% from where it was in mid-November, when oil was $55 a barrel and, should war escalate or should Russia come further unglued, the dollar will most likely assert itself in a flight to safety, knocking all commodity prices (including stocks) back down sharply.
The trick to playing a choppy market is picking the counter-trends. You can be 50% bullish and 50% bearish and, if you pick well, you can be right on both sides! On Tuesday at 11:38, for the first time since our bottom call in November, I suggested a long play on FXI, with the 2010 $20s at $10.65 (now $11.35). If we are going to have an international turnaround, we can expect it to be led by China, who are in better fiscal shape than Brazil, Russia or India and have already committed to massive stimulus packages of their own. China, if you’ll remember, was sitting on about $1.5Tn in US currency and, typically, when the markets crash – they guy with a lot of cash on the sides tends to come out quite well.
China is indeed flying this morning as the Hang Seng came back from their break to post a 4.5% gain on the day, finishing just over the 15,000 line. Both the Shanghai and the Nikkei were closed so, to some extent, we can assume that the lack of other options drove traders to China, which does look cheap, after having to sit on their hands while watching the US markets post two strong sessions (the Nikkei had a half day Tuesday, well ahead of the US open that day). Also sparking the China rally was China’s State Council approving the issuance of 3G phone licenses, a long-anticipated event that sent the Telco sector almost limit up for the day. India’s Central Bank also caught rate-cut fever and made several moves to push money into the sysetem.
Europe was off to the races this morning with 1.5% gains in early trading. Looking at the 5-day charts of the DAX, CAC or FTSE could give one the impression that we are in some sort of rally despite mean old Russia turning off the heat in the winter. Mining (coal instead of gas) and banking are leading the EU markets higher in the first trading day of 2009 despite some very bad manufacturing numbers that show a record low since the EU was founded. Belarus is the next country to need a bailout and the IMF is lending that breakaway republic $2.5Bn to tide them over until a miracle happens. To help repay the loans, Belarus announced they will devalue their currency (also Rubles) by 20%. Russia just gave Belarus $2Bn in November so this could turn into a very expensive monthly habit (have I mentioned I like gold lately?).
After the strong week we had we would be thrilled to limp into the weekend holding our gains but, as our members are well aware, hope is not a strategy so we are well covered for a pullback – just in case. We’re waiting for next week before placing any major bets and we are expecting an Obama rally into the inauguration. How early it starts and if it sustains after the event are the real questions as we start the new year.