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Monday, May 20, 2024

Monday Market Adjustments

We had a clear signal to stay cautiously bearish on Friday.

Despite the jobs rally, I had said in the morning post: "We’ll be paying special attention to the Russell, which tested the 33% line (off the top) at 574 on Tuesday.  We would consider a breakout over that level to be an extremely bullish sign for our indexes.  Our tip-off to get bearish at yesterday’s open was the failure of the QQQQs to break 40 so that will be our bull/bear signal for the day."  Despite the bullish-looking performance by the Dow and especially the Transports, who flew up 4% to lead the markets – the failure of the Russell to make a major breakout and the failure of the Qs to make a critical breakout at 40 (Nas 2,000) left us a bit less than bullish over the weekend

It will remain all about 574 and 40 this week (see David Fry chart) as our other levels (Dow 9,297, S&P 1,000, NYSE 6,438, Russell 562 and SOX 308) all seem to be well and truly broken.  2,017 is the proper mark on the Nasdaq so failing 2,000 is extra bad with a side of worry.  Still, as I also said Friday: "Not breaking our levels on this tremendously good jobs news would be a huge disappointment but it’s holding them that’s key."  The dollar is gathering strength this morning, also on the jobs news, and that's been very bullish for Asia (who export to us) this morning so keep that in mind as it does put some downward pressure on the US markets, which would make a breakout today even more impressive. 

In general, we took the advice of Yukio Takahashi of Mizuho securities who said: "The smart move is to take profits now."  Our $100K Virtual Portfolio was up $12,291 in cash and $6,690 in unrealized gains so our changes were protective, looking to cap big gains made on C and LYG by selling protective calls.  Having cash on the side is good as it lets us speculate a little.  Not all our speculation is to the downside, although we did take short plays with SRS Sept $10 calls, DIA Dec $95 puts and QID Sept $24 calls into Friday's rally, we also ran another Long Shot list for Members over the weekend as well as 5 very detailed Biotech long plays and a Pharma cover thanks to Pharmboy's Phavorite Phings, which is a must read for Members who missed it. 

I was just interviewed by AOL and they asked me what my favorite sector was for long-term investing and I said absolutely Health Care.  Despite the short-term noise over coverage, you simply can't fight the demographics that are coming down the line.  Even if the us passes "Health Care reform," the idea is to provide more coverage, not less.  Over the next 10 years, 50M Americans will move into the 65-75 year old bracket and if those people are ALL covered for their projected 20M heart operations, 10M diabetes treatments, 15M cancer therapies, 30M arthritis prescriptions, etc… then you can expect an uptick in the business of health care

My favorite ETF in that sector at the moment is IHI (equipment).  Although it has outpaced the overall XLV by 20% this year, if you look at the performance of a discovered company like ISRG (4.2% of the index and up 80% this year), who were a Fall favorite of ours – you can see  the potential of this ETF.  MDT (11.8%), TMO (7.5%), BSX (7.3%), STJ (7%) and SYK (6.1%) are all companies we play from time to time (and SYK is a great buy in it's own right at $40.21), so this ETF is perfect for a long-term tracker and still 25% below the 2008 highs.  You can give yourself a nice, discounted entry at $42.50 by selling the Feb $45 puts naked for $2.50.  If your margin is 50% it's a $2.50 return on net $20 (12.5%) over 6 months – not a bad way to initiate a position!  If we do break over our levels, the Feb $45s have just $2 in premium at $4.65.  If the ETF does make it over $47.50, then it will likely fill the gap at $53, which would make a nice 50% or better profit on the bull side. 

Aside from the dollar advance, Asia also got good news as Japanese machinery orders rose for the first time in four months in June, up 9.7% from May and way more than the 2.6% expected by clueless economists, who get paid to forecast these things.  Japan's account surplus also doubled from last year to 1.15 Trillion Yen, which sounds very impressive but is just $11.8Bn but it's very significant as it's the first gain since Feb 2008.  That lifted the NIkkei 1.1% to start the week but it was a sloppy close after a huge gap up.  “We shouldn’t be too optimistic about capital spending yet,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Companies are still burdened with excess labor and capacity and the outlook for the economy is uncertain.”    

Machine orders, an indicator of capital investment in the next three to six months, will fall 8.6 percent in the current quarter, the government said. June’s gain was mostly due to a purchase of equipment used to generate nuclear power. Without that, orders would have risen about 2 percent or 3 percent, said Shigeru Sugihara, head of statistics at the Cabinet Office.  More than $2 trillion in spending by governments worldwide has stabilized global demand, helping Japanese manufacturers such as Kubota Corp., which is selling more farming equipment in China. Japan’s factory production rose 8.3 percent last quarter, rebounding from a record 22.1 percent plunge in the previous period

Not surprising to us (as I had picked the FXI calls in Friday morning's post) was a 554-point snap-back on the Hang Seng.  China played the stimulus card last Friday but we're very disappointed that they couldn't crack the 21,000 mark, despite the "great" jobs news in the US. Property stocks held the Shanghai back and this week we face a critical test along the 370 line, wifh a possible fall to the 50 dma at 350 ahead if the US turns down today.  So we won't be hanging on the the FXI calls unless we break our US levels – things are truly all connected!  Also worrying in Asia is the Baltic Dry Index, which is going to test 2,750, a level it hasn't seen since May and a 35% pullback off the June highs.   Before all the commodity madness, the BDI used to play between 4,000 and 5,000 back in '06-'07 so let's say 5,000 would be fair given 2 years of inflation and growth.  Below 2,750 is HALF!  This does not support a global market breakout above the 33% lines so let's watch this carefully. 

Europe is down about a point ahead of our open (9:15) and there is literally nothing going on over there this morning that I have read about other than RBS and LYG falling.  RBS fell because bad-debt charges were up significantly and management warned that they saw little sign of improvement before 2011.  LYG fell on almost good news that they want to withdraw from the government's asset-protection "scheme" but they will need to raise about $3Bn to do it so there are fears of a dilutive offering. 

We will watch and wait today to see what the markets will do.  There is no earth-shaking news in the US this morning.  MCD had a very nice 4.3% sales growth in July so they should help the Dow somewhat but oil can be a drag if they start selling off, especially if they fail $70 and gold is already back below $950 (where we sold calls) so it will be interesting to say the least this morning

Be careful out there!



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