Finally a week we wish would continue!
We popped our levels nicely yesterday and the day could not have gone more according to plan as we got the sell-off we expected early on but held all of our 5% levels and then plowed through the 7.5% levels getting near the 10% marks into the close. It only took until 9:53 when I fired out the all clear with a member alert, saying: "Transports with a big pullback this morning, SOX too but I like this for a bottom call."
We went with full covers on our puts, flipping the virtual portfolio bullish but I did chicken out a little early, turning a little more cautious at 1:03 and calling for 1/2 covers and a roll up on our long puts (we ended the day full covered, pretty bullish) as 2.5% gains for the day seemed like enough but we rallied on for another point. Into the weekend, we will see what sticks but, as noted, on a long-term perspective from the 5% rule, we expect a 20% retrace of the drop to the 60% lines. While that is 12% of the drop, since we are only left with 40% of the original values it takes a 30% move just to have the bounce! So it's very possible we can keep going for quite a while and still be in a bearish trend.
The Dow, for example, fell 7,740 from it's high of 14,200, bottoming out at 55% off. A 20% retrace from there would be 1,548 points, taking us back to 8,000 without being overall bullish. On the shorter trend, we are down from 9,000 at the beginning of the year with 6,750 being the 25% off mark. The 20% retrace there is up 450 points to 7,200 and that is going to be our real test for this leg of the rally before we consider a return to 8,000. On the S&P that number is 726 and we blew through that. The retrace off the drop from 1,550 goes all the way to 850 for the S&P so a long way to go before we are out of that downtrend.
Rounding out, we are through 1,370 on the Nasday with 1,600 the bullish target. NYSE beat 4,550 on the way, hopefully to 5,520 and the Russell (which was our long favorite) blew past 380 and needs 450 to impress. So what we are looking for at the moment is a possible retest of the lower breakouts (the 20% bounce off January's open). Dow 7,200 is the one we must make to confirm the others otherwise we'll look for downside holds at 726 on the S&P, 1,370 on the Nasdaq, 4,550 on the NYSE and 380 on the Russell before we bet on the rest of the uptrend.
We'll skip from there to the most important thing that happened today. Chinese Premier Wen Jiabao expressed concern over the outlook for the U.S. government debt China holds, urging Washington to take effective policies to restore the American economy to health. He said market expectations last week of another stimulus package were based on "rumors and misunderstandings," and that China’s existing four trillion yuan investment program addresses "both short term and long term needs." But he noted that the U.S. remains the world’s largest economy, and said that China is closely watching the effects of policies taken by U.S. President Barack Obama. "We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. I do in fact have some worries," Mr. Wen said in response to a question. He called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets."
Hey, my dollar is signed by Hank Paulson – what more guarantee of trust can he ask for? This was bound to come up sooner or later as China is already our top creditor with $1.5Tn of US Debt and another Trillion or so of our currency sitting around. Just this past month we sold $120Bn more with plans to sell that much every month and possibly more spending programs on the horizon. When you lend a guy a lot of money ($1.5Bn is almost a year's "salary" for Uncle Sam), don't you get concerned when a week later he is running around borrowing more money from everyone else he knows? THAT'S US!
That caused me to make a very rare 5:16 am buy call in member chat (oh yes, this is a 24/7 operation!) when I said: "Well this is strange, gold is DOWN to $920 after Wen’s statement. I cannot connect those dots but I can buy 15 gold futures which pay $50 per 0.1 move and see what happens…" My gold logic is that there are at least $11Tn physical dollars in circulation alone (probably $100Tn in dollar-denominated assets) yet there is only 158,000 tons of gold in the world, about $6Tn worth. Then there’s $300Tn worth of things denominated in other worthless currencies that are backed by nothing other than something like Tim Geithner’s signature (you probably have Paulson dollars on you right now).
So in Timmy we trust until someone like Wen calls this into question and says to the US: "Hey, you know that $1.5Tn I lent you for 3%? What exactly are you guaranteeing that with?" If you think about it, the question doesn’t even make sense because we all know it’s total BS but he pulled the trigger today so the genie is out of the bottle. What if Wen dumps 10% of his holdings? Well that’s $150Bn and the US already auctions off $100Bn a month so he’s putting 2 months of heavy selling pressure on Treasuries. TBT is another way to play this, a 2x ultra-short on the 20-year notes, a nice offset for those of you who hold a lot of them. June $43s are $6 and there are plenty of good calls to sell but I'd wait until the weekend as I'm sure the repercussions of Wen's statement will be discussed in detail then.
Wen's dis on the dollar had the desired effect on the Asian markets as the Hang Seng jumped 4% and the Nikkei ran up to the 5% rule. India also added 5% and our new favorite market, Australia, added 2.3% to a huge week with EWA up over 10% from my decision that they were my favorite foreign market. The Shanghai did not gain as Chairman Wen closed his remarks without any specific additional stimulus. "People will be a bit scared going into tonight," said Ric Klusman, senior institutional trader at Aequs Securities. "Whether we keep going up early next week, I'm doubtful, although I do think we are looking a lot healthier."
Europe's leaders also decided to give the US a spanking by REJECTING Obama's call for more global stimulus. In Berlin Thursday, with German Chancellor Angela Merkel at his side, French President Nicolas Sarkozy explicitly rejected Mr. Obama's push for more global fiscal stimulus, declaring, "the problem is not about spending more, but putting in place a system of regulation so that the economic and financial catastrophe that the world is seeing does not reproduce itself."
The emergence Thursday of a nine-page communique from France detailing 12 different proposals on tax havens and regulations underscored what the French and German governments have been saying publicly. Ms. Merkel said Germany and France were united in their conviction that the G-20 summit must fulfill their pledges to remake global capitalism. "If Obama simply says I am dropping in for a day or two with a long shopping list, I think the honeymoon really will be over," says Timothy Garton Ash, professor of European history at Oxford University.
So this is not bullish into the weekend folks! We're going to be taking off 1/2 the put covers right off the bat and keeping S&P 750 as our stop level for the rest as I can't see any reason NOT to take profits into the weekend. We'll plan on being a bit bearish into the close. We'll see what the damages are today and we'll be watching the same levels going down as we did going up – hopefully we can hold on into the weekend and post a nice chart for the week, we'll do a Big Chart Review over the weekend.
Have a good one!
20/20/Texas – So how do you see the government being ineffective at stimulating the economy AND $50-$60 oil at the same time? That’s the logic that escapse me because just $15 more per day is $500Bn global dollars a year from consumers – I can’t see where it would come from. People losing jobs, families cancelling trips, businesses cutting down on air travel, people conserving energy plus the danger of Obama releasing the SPR at a critical juncture means I would not be putting a lot of money on $60 oil unless the economy is rockin’ again.
Phil, this is where we differ.. as usual. You trust the government, I don’t. hee hee
Can we make a friendly $55 dollar wager on oil being $55 by Oct 1st (or before). I’m willing to put my money where my mouth is… 🙂
Want some of that action?
Phil, recommendation for new DIA hedge? Sorry…haven’t had chance to read through all the comments today yet, but will be back in 30 minutes for the final hour. Thanks!
[…] next week or we are very likely to retest the lows once again.” I had laid out the logic in last Friday’s Member Chat and you can read part of that commentary in Thursday’s post and you really should unless you […]