What an exciting week this has been.
A nice 10% up move in the markets and yesterday the Nasdaq closed green for the year but we'll have to see if it lasts today. We went short into the close, 60% bearish as two days in a row of pumped-up closes was just too much to…. bare. After a near 25% run off the bottom, a 5% correction would be good and healthy and we'll be looking to hold the same levels we set on the way up on this pullback – those would be: Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420, roughly 15% off the bottoms with 5% rule adjustments.
Our dollar adjusted breakout levels remain Dow 8,000, S&P 847, Nas 1,585, NYSE 5,321 and Russell 456 but be aware that the dollar swings wildly almost every day and I am far too lazy to keep adjusting those levels so roughly there is what we're looking for. I already sent out an alert to members this morning pointing out that the dollar was being forced up at the EU open and it seems to be more manipulation aimed at supporting US equity charts for another day as the declining dollar boosts the relative value of the stocks – I'm not sure it will last as it's very expensive to keep the dollar down.
They have literally thrown everything but the kitchen sink at the markets this week to get a 10% gain into the end of quarter (IF they can hold it together that long) but, what next? For the first time in a very long time I've called for raising cash as we're heading into some very volatile earnings and I'm really not expecting us to break our upper levels, now just 2% away, without considerable effort. Balance is usually fine but sometimes the flexibility of cash is a big help!
I'm not bearish per se – I still think the market should settle down back around our old 8,650 range after earnings but it will probably be a wild ride getting there. While the economy is better than you may think (see very cool chart) – charts do still rule. If we can't break our top levels by next Wednesday, we're much more likely to see AT LEAST a 50% retrace of our gains off the bottom. That's why I like a little more cash here, huge drops can blow our your hedges so better to have cash on the side to take advantage of the market's mood swings.
We grabbed QQQQ puts yesterday as well as QID calls as the Nasdaq was clearly running out of control. We also shorted GOOG at they got near resistance, a play that netted better than 30% on the day but not for the feint of heart! Shorting CHK and EOG was a no-brainer with natural gas plummeting 10% to finish below $4 yesterday after a surprise 3Bcf build in inventories vs. a decline of 49Bcf expected. Since this is the end of major gas usage for the winter (spring is in the air) and we are 3 months ahead of air conditioning and pool heating season, it's going to be very rough for the gas producers to put up a value proposition for investors at these prices.
We had great value propositions last week and, even early Monday, we still had a chance to hit our Buy List but, since then, we have just gone along for the ride. Now we have a week of fantastic gains we can take out the puts we sold where appropriate, leaving us set up to sell another set at a higher strike on the way back down. I said to members yesterday, we have to use a gas and brakes model for riding out these chops – covering and uncovering our longer positions to take advantage of these huge range moves. Simply buying back the puts we sold lowers our downside delta considerably and reduces our need for long put coverage enabling us to have – CASH! Cash is good, especially with the dollar back on the march once they stop manipulating it lower and they've already lost control of it in Europe, now down to $1.34 per Euro, down from $1.36 just a couple of hours ago when I sent out the alert saying it seemed manipulated the other way.
Asian markets traded fairly flat this morning – some would say incredibly flat as the Hang Seng closed up 0.07% and the Nikkei closed down 0.11% but the Nikkei had a wild ride getting there, blowing a plus 200-point opening rally to peg yesterday's close. I'm sure it's not manipulated…. Certainly the random actions of millions of traders making billions of transactions just so happened to flatline 2 markets this morning (end sarcasm font). All of Asia flatlined except the Shanghai Composite, which was up a point and the Baltic Dry Index (which was a clear signal that a rally was coming as it came off the floor) fell yet another 1.5% to crash into the 50 dma at 1,682 – a full 26% off the March 10th high.
It's very strange that the Shipping index would move opposite the market, almost as if fundamentals didn't matter and the marekt was being manipulated but, nah – I'm sure everything is just fine… China is not fine and the WSJ has a good article about the implosion of the expansion bubble as tens of thousands of plants are closed almost as fast as they were opened over the past few years. "Can they build enough roads to offset the fact that they aren't building as many factories?" asks Ben Simpfendorfer, an economist in Hong Kong for Royal Bank of Scotland. He calculates that a drop of 15%, say, in spending on business equipment would cut 1.6 percentage points off China's 2009 growth rate.
Also not in the "fine" camp is Europe, where the UK's Q4 GDP fell 1.6% and the BOE's Chief Economist, Spencer Dale said that the British economy’s short-term prospects are “bleak.” NONETHELESS, the FTSE is holding (surprise) flat today as we move into the end of the 1st Quarter although they too have given up all of a morning rally already. EU Industrial Orders missed "fine" by a mile as they fell 34% for January, the worst drop ever recorded and what is the most not fine about this is that you cannot find this story in the WSJ or hear about it on CNBC – almost as the Corporate MSM were trying to pretend it isn't happening so you keep BUYBUYBUYing while the big boys are actually SELLSELLSELLing to you, the bag-holder.
The goal of yesterday's move into the close was to make sure that the news would be filled with news that the Nasdaq is now positive for the year, nothing more. If they were going to legitimately take the Nasdaq positive for the year, couldn't the news have waited until next week, as this week (up 10%) had already accomplished most of it's goals? That's what really turned us bearish yesterday, the frenzied and irrational nature of the buying and I slept well last night after watching Mad Money when CNBS's pimpmaster-in-chief, Jim Cramer, spent the first 12 minutes of his show telling his minions to buy tech now – possibly the single best sign in the markets that a rally is overdone…
We bought our tech during the "tech wreck" speeches of November and early March but 1,600 from 1,300 on the Nasdaq was good enough in December for us to get out and it was good enough yesterday as well. If it's a real rally, we'll let Cramer and Co. form a base around 1,700 and THEN we'll be happy to climb on their backs and buy back in. Advising people to jump into tech now, AFTER a 25% run 13 sessions, is simply a new definition of irresponsible so shame on Cramer…
Did ANY of the media you listened to since yesterday's close mention that the Financials have been flatlining since Monday's close? They led us here but have faltered once they hit "goal." Goal for the financials was up 60% off the floor at $6 on the XLF but, as I mentioned in yesterday's post, 60% of $6 is about $3.50 but $3.50 is ONLY about 10% of the $32 drop from the top. So an 80% drop followed by a 10% retrace – not even the 5% rule people! While we've been scared to short the financials directly, we have been selling FAZ puts on the dips as, long-term, we can always use them for protection if we do get stuck with them. Financials are another wave we caught at the dead bottom so they are not so appealing to us here, up 60% in 3 weeks, even though they are still historically low.
For the Dow, we fell from 14,198 to 6,469 (7,729 points), that is about the entire current value of the market AFTER it gained 1,455 points off the bottom (22.5%). 22.5% may seem impressive but 1,545 would be a 20% retrace of the drop AND, per our 5% rule, we don't count spikes so the Dow double topped at 14,000 and fell to about 7,200 – just 6,800 points but let's call it 50% to 7,000. That means that a 20% rise off the non-spike bottom would be 8,400 and we still a bit far from there to be doing a victory dance just yet.
We've done very well all week keeping our emotions in check and letting our levels be our guide so that plan will not change. We got in-line Personal Spending numbers for February at 0.2% and January was revised up from 0.6% to 1%, which means February growth slowed considerably but – shhhhhh! Personal income was down 0.2%, way down from January's 100% revision from 0.2% growth to 0.4% growth, which indicates Americans are buying less and going deeper into debt to do it but – shhhh! We'll see how the Michigan consumers feel about all this when we get their March Sentiment Poll at 10 am and anything over 60 could boost the markets considerably.
If this rally is window dressing, our levels will not hold. Many funds close their books on the last Friday of the Quarter so, if they want to book profits, this afternoon may be a good time to get out of Dodge. Earnings beign in earnest next Thursday, when we get reports from KMX, MON, RAD, CHINA, MU and RIMM, who have suddenly turned into everybody's tech darling this week along with AMZN, who just announced this morning that they will be shutting down 3 distribution centers and should gap down all the way back to Monday's open, 7.5% off the week's high. If the rally persists, I still like them as the move is really nothing more than an efficiency decision affecting 210 employees, not the catastrophe the AMZN bears would have you think…
Be very careful out there, we're planning on going into the weekend at least 55% bearish, more so if we stay high but I doubt it…