Wheeee, yesterday was fun wasn’t it?
While we did go into the weekend bearish, it’s still actually depressing to see the market fall apart. We love the market, that’s why we’re traders, to see it BROKEN like this is very sad. Our futures look a tiny bit better this morning but I’m watching the FTSE, just like we were yesterday and that does NOT look good (7:30). As I said in yesterday’s morning post, the FTSE is the ONLY major index holding the 50% line (3,377) and the way the Dow fell through 7,011 yesterday, it’s more likely that the FTSE will follow us down to oblivion than every other index in the World retakes their 50% line.
The bears want a capitulation event and yesterday may have finally been it. The S&P just barely hung on to the 700 line yesterday, which is widely regarded as being the death cross for US markets. As I said yesterday morning, we’re not going to be impressed with any "rally" that doesn’t take the Dow back over 7,000 (and how pathetic is that anyway?), which is now almost 5% away. In our new alert system, I was able to send out watch levels right at the bell and none of them held, which kept us nicely bearish all day. While we were hoping to have a reason to stay bullish, at 10:07 I sent the third alert of the morning, calling for covers with a mattress layer on the long DIA puts as well as a new play on QID July $57s at $14 (now $16.80). We like those because we’ve been expecting the Nasdaq to pull back and we were able to cover those with March $65 calls at $6, leaving us in a no-premium spread. There are always lots of high-premium covers to sell against the longer QID calls to work off the premium.
While we did a little (very little) bottom fishing, I warned members early in the morning: "Everything can drop lower, value has no meaning here." Overall, every attempt to get bullish was slapped down and at 12:01 I was just fed up and sent out the following alert:
- NYSE hits 5% rule very soon at 4,380. From there we expect a bounce to about 4,425 – not getting that bounce and holding it is DOOM!
- Next to watch would be Russell at 369, need a bounce back to where we are now at 373 and must hold that or DOOM!
- S&P would be next lemming. Right at 700 and needing to get back to 706 or DOOM!
- Qs, on the other hand, need to save us by getting back over 27, Nas 1,340 (-2.5%) and staying there while the other indexes get back over -4%. Won’t be good but it won’t be doom.
- Meanwhile, my DIA put sale just triggered. Obviously back to naked puts at DOOM levels!
Yes, it was not a pretty day! Notice on the NYSE that’s exactly what happened over the next 3 hours, and the Russell, the S&P bounced off 706, failed our morning watch level and finished the day at 700 while the Nas went on to test 1,340 twice in the 2 o’clock hour and failed there. As I always say, I don’t MAKE the markets do these things – I can only tell you what’s going to happen!
I did send out one last alert to members at 3:49, just one line: "There goes S&P 700 – 60% bearish may not be enough at this point! Must now close over 706 or still bearish into morning." This is exceptionally sad as we are even expecting government intervention in the form of Geithner’s TALF announcement but we’re no longer sure it’s going to work (but we did grab some FAS, just in case and shorted the SKF). As I said to members, at this point I’d rather get stung to the upside than wake up to yet another day of this nonsense. All we need to do to get bullish is cover our long puts with the appropriate DIA front-month puts and that’s our plan in the morning but we’ll be watching our Doom levels very closely to set our stops. As of yesterday’s close, we can pick up $4 for the $70 puts and we’re hoping we have a reason to sell them this morning – for our country’s sake!
So there is a plan of some sort this morning to bail out our banking system. The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.
These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.
Under the Fed’s program to jump-start consumer lending, known as the Term Asset-Backed Lending Facility (TALF), investors, including many hedge funds, will get access to cheap loans from the Fed to purchase securities backed by consumer debt like car loans and credit-card receivables. The Treasury has agreed to provide up to $200 billion of capital to the TALF, and the Fed will lend up to $2 trillion through the program. Sounds like a lot of money but it’s also very convoluted and subject to debate. Unfortunately all of these programs face the wrath of the opposition party, now known as the Republican’ts, who have talking points for any and every program to pronounce it a disaster before it’s even rolled out.
We’ll have to wait and see what is officially announced but it doesn’t look like we’re in any danger of being blown out of our bearish positions at the open although we should get a bounce back to our watch levels and can hopefully build from there. 6,800 on the Dow is exactly 20% down from 8,500 and 6,920 is 20% off our mid-point of 8,650, which is looking very far away at this point. The good news is we’ve had strong volume on the move down one can hope that those who wanted to get out of the markets are finally out at this point but hope is not a strategy and we’ll continue to watch our levels.
Asian markets turned lower this morning with the Hang Seng dropping 2%, Shanghai off 0.7% and the Nikkei off 0.7% as well. In order to prevent layoffs, South Koreans are accepting across the board wage cuts – better that everyone get a little less than some people get none at all. I wonder if that would work in this country? Last week, leaders of major industry groups, unions, civic groups and government ministries struck a "grand bargain for social unity." Under the plan, which isn’t legally binding, employers won’t fire workers, unions will accept wage freezes or cuts, and the government will provide tax breaks to companies that preserve jobs. "We find it’s getting more serious than the [1997-98] period," said Kang Choong-ho, a spokesman for the Federation of Korean Trade Unions. "This time we thought we must keep jobs and yield what we can, sharing the pain."
Europe is trading slightly down ahead of our open, with the FTSE now down "just" 1%. Bayer gave a very miserable outlook for 2009 and Munich Re posted a 76% drop in Q4 profits but at least there were profits. Overall, the EU manufacturing sector is very weak as we wait for the ECB and BOE policy decisions later this week.
We’ll be keeping a close eye on our levels and I do like FAS (closed at $3.97) as an upside momentum play if the TALF catches on as it can easily hit $5 or even $6 on a good run so buying it just above $4 with a stop at $4 is a fairly low risk way to play for a good run in (as opposed to on) the banks. Let’s watch our levels and be very careful out there, we are still in our roller coaster model and if $200Bn in additional stimulus can’t give us a proper lift, the next leg down may find new lows for us.