That was some exciting stuff yesterday wasn't it? The Dow gained 0.58% and the Nasdaq climbed another 0.44% – IN EUROS. As said at the top of yesterday's post, the dollar's move is the true story of the markets and what looks like a drop to you looks like a pop to our friends in Europe or Japan but not to China, who are pegged to our pathetic currency and see us for what we are, which explains why China's Dagong Global Credit Rating Co. Ltd cut the U.S. local and foreign currency long-term sovereign credit rating to A-plus from AA. That should send our beloved TBT flying and, as we expected, it ironically panicked people INTO the Dollar and that made our down move in the markets look like an up move abroad:
So, if we have another day like yesterday, where the dollar rises faster than the market drops, we will still be looking good to foreign investors who may begin demanding dollars to get involved in US equities and that will send our dollar up further and make our markets look stronger even as our own commodities drop and drag our markets (when priced in dollars) down with it. Meanwhile, we are thrilled to be in cash as our cash is getting more valuable than stocks or commodities by the minute but it's all about the 78 line on the Dollar today, just as I had said yesterday it was all about 77.
I also mentioned how the whole thing is MADNESS but we love it because it's a predictable madness. In the morning post I reiterated our standard short on the oil futures at $87.50 and we got a drop all the way to $85.50 in yesterday's trading but we took non-greedy exits before that as those contracts pay $5 per penny per contract! Also in the morning post I mentioned a trade idea for selling the PCLN Jan $450 calls short at $16 – those actually opened at $17.50 and finished the day at $15.50, which is why we love those trades. In the morning Alert to Members I had 2 more short trade ideas, one was the FCX Dec $100 puts at $2.75, following up on my copper comments from the morning post and those finished the day at $4.50 so a nice 63% gain on the day there and, following up on our oil call, we grabbed the USO Nov $37 puts at .41, which topped out at .75 and finished the day at .67, also up 63%.
See what I mean by predictable madness? Because it's a dollar move and because the commodities react to the dollar and because the bots drive everything in lock-step and because we are consistent in our option selection process, we are able to make exactly 63% on both oil and copper on day trades. I do apologize, by the way, for having so many day-trades lately but we made a call to cash out and I just don't think it's a very good time for long-term positions so we make these hit and run plays just to have a little fun with our sideline cash while we wait for the market to sort itself out. The reason our lists tend to do so well is because we only put them up when we're pretty damn sure of the direction – getting new Members NOT to trade every day is one of the hardest things I have to teach on our site…
My 10:40 comment to Members summed it up as I said: "Here comes the dollar and there goes the market. What a fun day this is!" It was fun because we were set up and ready for it. Just 20 minutes earlier we saw oil heading back up and I had said to Members: "We’re getting another whack at the $87.50 line in oil but give them a chance to go over." The oil futures just poked over that $87.50 line, giving us a clean entry on the way back down and a couple of lovely, sharp drops to widen our stops into the afternoon. As I said, crazy but predictable is how we like our markets.
These charts, by the way, are from the very excellent Day Trading Coach site, which does a great job of teaching the basics. I often say to Members, I'm not a day trader but I'm not adverse to taking profits in a day on a trade that works out quickly. If we make our picks based on fundamentals and scale into trades that we really don't mind sticking with long-term, it does take a lot of the stress out of day trading. As Ban said yesterday in chat:
Phil, I want to thank you for banging away at scaling into positions.
I feel better, sleep better, trade more relaxed and don’t panic (so much)when positions move against me because options allow for escape hatches I knew nothing about before signing onto this site.
This is not about making a commercial for PSW (you can subscribe here, though), this is about hammering home a concept that does work and WILL make you a better trader. It's easy to make good picks, especially in this silly market, but it's not easy to teach the discipline people need to manage their entries and exits and balance their virtual portfolios and set stops and teach them how to NOT BE GREEDY! That is our goal at PSW, we're really about teaching our Members to fish, something that hopefully feeds them for life….
Do we give fish out? Sure, in addition to the above trade ideas (which all came before 10:30) in yesterday's Member Chat we also had a long, hedged position on CIM, a very aggressive long combo on UUP (already a nice winner) and a long spread on TZA that came before the drop and is already a nice winner but that one isn't a day trade as it's hedged out. This is a big turn after pretty much sitting on our hands Monday but that's what watching and waiting is. You watch and wait and THEN ACT! A lot of people think watching and waiting is giving up but, as I tried to hammer home the point last week – it's all about getting ready.
Ready for what? Well, anything at this point. We've done a lot of boring posts lately on politics, inflation and global monetary policy so that we can all have a better background to jump on opportunities as well as weigh whether something like a downgrade from a Chinese ratings agency we've never heard of will have a short or long-term effect on us as well as what that effect will be. I know we are getting the message out the because even our future President, Sarah Palin, is now internalizing our lessons in her own talking points (see today's guest post by Sarah):
We shouldn’t be playing around with inflation. It’s not for nothing Reagan called it “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” The Fed’s pump priming addiction has got our small businesses running scared, and our allies worried. The German finance minister called the Fed’s proposals “clueless.” When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it’s time for Chairman Bernanke to cease and desist. We don’t want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It’s the only way we can get our economy back on the right track.
Woe unto us when Sarah Palin is the voice of reason in this country!
Dollar bears are getting nervous as the G20 approaches that this disparate group of global goof-balls will come up with some kind of reasonable compromise this weekend. This time it's Obama, not Geithner who will be attending and Obama tends to be a little better at getting consensus than Timmy, who has lost all credibility at this point (and that is being reflected in the recent Treasury auctions – Go TBT!). At 2pm we get the October Treasury Budget (yes, I know, in November – how pathetic) and that will hopefully indicate that we "only" needed to borrow $140Bn to cover America's losses last month vs the $176.4Bn we had to borrow in September to keep the lights on.
Of course, we just voted in the guys who say that collecting tax revenues is the worst way to balance your budget and I think the picture on the right says it all so I will move on from that lunacy and talk about the global markets (see title of this post in case you forgot the topic at this point).
Going back to our multi-chart, it's very important we hold those lines. With 30 minutes to go ahead of the bell, the dollar has been jammed back down from 78.06 to 77.77 and that has boosted the futures with oil making a run back to $87.50 ahead of inventories, as expected but we're not shorting them today until we get the inventory report as expectations are for a 1.4Mb build and that is going to be very easy to beat as we're in week 4 of a boycott by importers, who have been shorting us over 10Mb per week and that's making it look like oil is in demand. Another thing we'll be watching is refinery utilization numbers, which are getting down to just 2/3 capacity and we STILL have record high inventories. So we HOPE we get a big spike in oil today and THEN we take short positions – stay tuned in Member Chat and we'll have a play by play at 10:30.
Ireland is still boiling over this morning with LCH Clearnet (the World's 2nd largest fixed-income clearing house) telling customers it will be increasing margin requirements on Irish bonds. UBS AG said. "LCH has given its clients an early warning, an opportunity to get out," said Penn, a market analyst in London. "The spread has moved to a point where they probably need to be doing something." Of course Ireland is small potatoes (get it?) compared to what's going on in the US as Credit Swaps rose for the second day in a row yesterday as the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.7 basis points to a mid- price of 90.5 basis points. The WSJ is already reporting that several US Municipalities are following their homeowning former tax-payers and defaulting on their debts. Between 1970 and 2009 there have only been 54 municipal defaults in the US, it won't take many to send borrowing costs flying for local debt and I pointed out to Members on Monday what a massive amount of money is being borrowed by cities and towns each week.
Mark Fisher summed it up nicely yesterday, saying: "Parabolic moves have parabolic corrections… This is going to be the bubble of all bubbles. Pushing up equities doesn't create jobs; it's more likely to hurt the economy by pushing commodity prices to obscene levels."
Cash, caution, more cash and more caution, that's the way we're playing this one. If the Dollar breaks over 78 we may get a short squeeze to 80 and that would be a solid drop back to our 10% lines on the indexes and failing there won't be pretty, no matter how good our indexes may look priced in Euros or Yen.