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Wednesday, July 24, 2024

Thrilling Thursday Morning – Jobless Recovery Edition

As I mentioned yesterday, the ADP numbers were not good.

Now it’s one thing to see something happen and quite another to do something about it.  One of the reasons we like to be in cash is we get to wait for the market to do something silly so we can bet against it.  Yesterday was a gift as the Dow climbed all the way to 8,577 at 10:30 and we gave it a few minutes for the Crude Inventories, which were a disappointment for the oil bulls and our first Trade Alert of the day went out to Members at 10:35 saying: "OIH $95 puts are a good deal at $1.58."  These trades don’t happen in a vacuum – we had been watching OIH all week and decided it was a safer short than USO, which also sold off nicely but the OIH was no slouch with the $95 puts finishing the day at $2.30 (up 45%).

Just a few minutes later, at 10:43, we were able to take advantage of the DIA $84 puts at .84, which finished the day at $1.08 (up 28%) and we were able to get back to cash while speculating on TOT $55 puts at $1.20 and BG $60 puts for $1.30 into today as we expected some downside follow-through to grip Europe, who were overly complacent yesterday.  I wanted to mention this as I hear from many traders who are getting hit hard because they feel the need to stay "invested" for fear of missing something and the only thing you are missing in this market by not having a cash position is a good night’s sleep.  Having cash allows us to pick our spots, make money and get back out to cash.  We’re not day-traders but we sure as hell take our profits if we hit our goals in a day! 

We’re still waiting for the market to pick a real direction but there are some things we do know and one of them is that oil is massively over-priced.  AAA just released a report stating that the peak for gasoline prices has already passed and estimates that auto trips will be down 2.6% this summer.  As I keep saying, people simply CAN’T afford to pay these pumped-up prices, no matter how much speculators wish it to be otherwise.  Clearly the dumb money is following Goldman et al into the commodity game – just like last year and MarketWatch reports that passive investors (that’s YOU through your pension fund!) have increased their crude holdings by 600M barrels in June and that’s up more than 30% from the end of last year.  This sheep-like move into commodities has pushed crude futures up 60% with a 41% increase in Q2 alone, proving once and for all that the greater fool theory can go on much longer than one would think.

The entire US Strategic Petroleum Reserve is 720M barrels and these idiots bought 600M barrels hoping for an emergency so large that it will spur demand for 600M more barrels than that.  "Institutional investors such as country funds and pension funds are basically pushing prices where they shouldn’t go," said Steve Briese, author of "The Commitments of Traders Bible." MarketWatch used a supplement to the CFTC’s Commitments of Traders report to calculate index traders’ holdings in oil positions.   On Tuesday, Rep. Peter DeFazio, D-Ore., introduced a bill that would give the CFTC new authority to prohibit "excessive speculation" – this could get interesting as over 90% of all outstanding crude contracts are now held by speculators, seems a little excessive doesn’t it?

Speaking of excessive speculation:  Most Asian stocks fell about a point this morning but the Shanghai keeps going and going, finishing up 1.7% at a 13-month high.  China did have a good manufacturing report but shouldn’t they with a stimulus program that amounts to 20% of their GDP?  Financial and property stocks led the declines in Hong Kong indicating China’s "recovery" is a VERY localized phenomena.  "Irrational exuberance .. describes the recent market sentiment. Everyone knows stocks are already expensive, but people still buy and sell quickly because they’re convinced they won’t get burned," said Guoyuan Securities strategist Simon Wang.  Also helping exporters was the dollar recovering to 97 Yen.

Europe is down about a point ahead of the US jobless claims as the ECB keeps rates unchanged at 1% although Sweden’s Central Bank cut rates in half, from 0.5% to 0.25%.  "The weak development of the economy requires a somewhat more expansionary monetary policy," the Riksbank said in a statement. "The repo rate is expected to remain at this low level over the coming year."   Even more accommodating than Sweden was our friend Jean-Claude Trichet who injected a record $625Bn into Euro-zone money markets last week.  It was the central bank’s first-ever offer of one-year funds and the largest amount it has ever dispersed in a single shot.  Oh yeah, everything MUST be fine…  

Also hitting Europe hard is the highest jobless rate since the EU was formed 16 years ago with 9.5% of the citizens out of work in May, up from an upwardly revised 9.3% in April.  15M people are out of work in Europe, that would be the entire population of Austria and Iceland combined!  The European Commission’s latest forecast looks for unemployment to continue to rise all the way to 11.5% in 2010.  Oh yes, it must be time to buy more oil…  Producer Prices fell 0.2% in May and that’s down 5.8% from last year, also a record-breaking decline.  Spanish unemployment led the zone at 18.7% while the Netherlands (where drugs are legal) had just a 3.2% rate so maybe California is onto something with their moves towards legalizing pot!

Non-Farm Payrolls fell 467,000, which is way worse than the 350K job losses expected yet right in-line with the ADP report so no real surprise.  Unemployment climbs to 9.5% from 9.4% last month.  June hourly earnings were unchanged and weekly jobless claims came in at 614,000, about in-line with expectations.  We are still waiting on May Factory Orders at 10:30.  All this has knocked US indexes down about 1% in pre-market trading and now we’ll see what they can hold onto ahead of the holiday weekend. 

In yesterday’s morning level watch for Members, I had posted the downside levels to look for and we’ll see how we handle the test this morning of Dow 8,400, S&P 913, Nasdaq 1,826, NYSE 5,865 and Russell 507.  If there is any real strength at all to the markets then those levels should provide good support, below there is a move back to retest June lows at Dow 8,250, S&P 888, Nasdaq 1,750, NYSE 5,700 and Russell 488.  I’m very confident about our short plays and we’ll be looking for an opportuntity to play off our levels on the indexes, more likely looking for a breakdown than a bounce up but we’ll take either.  As I said in yesterday’s comments, down is the easier play this week and it sure is nice to be in cash so we can enjoy the weekend!

Have a great holiday,

– Phil



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