Down and down we go – where we stop, who the Hell knows?
As you can see from Dave Fry's chart on the right, the Nasdaq is heading to the 20% correction line at 3,760 – back to the lows we tested in August's flash crash and, before that, back in October of 2014. Both times we quickly recovered and maybe this time is different but, for now, we're expecting a move back up (see yesterday's post) as we bounce off these technical levels. Of course, expecting a move back up doesn't make us bullish – just bounceish.
The problem the markets are having at the moment is we're not getting a proper sell-off because, pretty much every day, the HFT algorithms kick in and prop up the markets into the close. This prevents an all-out panic from sending the market even lower but it also prevents us having one of those big capitulation days where we finally find a floor.
It's loads of fun if you play the Futures for the quick in and out moves. Yesterday pre-market, for example, we picked a few longs that worked out into the open, then quickly stopped out at the markets turned lower but, on the EU close, we were able to come back in and again for the usual 2:30 pump job. As I often say:
We don't care IF the markets are manipulated as long as we understand HOW they are manipulated and are able to place our bets accordingly.
Oil had a nice $500 per contract run, back to $30.50, twice yesterday and this morning we like the Nikkei (/NKD Futures) at the 16,000 line to play for a bounce back to 16,300, which would pay $1,500 per contract if all goes well. If we keep tight stops below the 16,000 line – we risk very little against a nice, potential reward. Other bounce levels we are looking were detailed for our Members in yesterday's Live Chat Room as we called the usual "rally" at 3pm:
So, what are our damages at this point?
17,600 was must hold and 15,840 is -5% and we're close enough to still watch that line but it needs to be taken back quickly or we'll have to consider -10% a looming possibility. Obviously, 1% weak and 2% strong bounced over 15,840 are what we need for the week but, since it's a long fall – not at all impressive until we're up 2% from here (16,150).
1,850 is our Must Hold line and the S&P is our most important index so BIG TROUBLE if we can't get right back over there. Down from 2,035 (and we were higher) is a 10% drop so just a weak bounce would have to be 2% over 1,850 at 1,887 and, of course only 4% will impress and that's 1,925 by Friday or we should spend more time looking down than up.
4,600 was + 15% and we were +17.5% at 4,700. Now it's 800 points down so 150 for a bounce is 4,050, not 4,000 – even though that's the Must Hold and 4,200 is the + 5% line and that's how far we have to go just to stop worrying about Nasdaq weakness.
1,200 was only the Must Hold line and that and the NYSE failed and we should have gotten more bearish instead of "just not bullish". Still, we'd been burned by the Fed so many times on the bear side – it's nice just not to lose! Anyway, 1,020 was – 15% and 960 is the -20% line – hard to believe we can't bounce there and the bounce should be huge. +4% is weak, back to 1,000 and then 1,040 would be strong.
20,000 to 16,000 is 20% so same story as the RUT and Nas – we need a huge 4% move up just to have a weak bounce – 16,640 and 17,280 for a strong one but I see that 18,000 line and won't be happy until we're back over that and under 16,000 is DISASTER!
11,000 is the same line as the NYSE and the NYSE is at 9,155 so a bit less dire than the DAX so far. We'll see which one catches up to which. 8,800 is the -20% line on the DAX/NYSE and that makes 9,152 (where the NYSE is now) the weak bounce line and 9,500 would be strong.
Keep in mind these are Futures lines and don't quite match up with the headline numbers on the indexes. This morning we're at 15,841 on the Dow, 1,834 on the S&P, 3,928 on the Nasdaq and 956 on the Russell and, as I just noted, 16,000 on the Nikkei while the Dax is down another 1.4% at 8,850 – pathetic!
Panic is certainly in the air and we love that – especially as we are mainly in CASH!!! and just itching to do some bargain-hunting. While we have picked up a few discounted stocks already, we're mainly doing so by selling puts so we get an additional 15-20% off the current prices on our entries because that's how far we think the markets can still fall in a proper panic. Again, I don't THINK that's going to happen as I think the Central Banksters have one more round of QE/stimulus to fire off but I'm also not confident enough to move too much cash off the sidelines yet.
The news simply isn't that bad. Earnings are not that bad. We're down on fear (see yesterday's post) of oil collapsing the economy but oil is not sub-prime mortgages. Energy companies may not be profitable but they can still service their debts and there will likely be a wave of M&A consolidation to trim costs and they will, eventually, come out leaner and meaner and able to survive producting $40 oil on a regular basis.
Companies are forced to plan ahead and all you hear is the bad news from energy companies and banks that are writing down loans and assets and trimming forecasts but what you don't see is that, at $1.60/gallon for gas vs $2.20 last year, 200M Americans are saving $90Bn a year on gas alone and another $90Bn in other energy costs and that money is flowing slowly back into the economy along with another Trillion Dollars flowing through the rest of the World's consumers.
KO, for example, just reported a 3% uptick in Global Sales Volume, though currency issues knocked their net revenue down 4% and they project another 5% volume growth this year, driven by non-soda products like Vitamin Water (see my interview with CEO, Muhtar Kent: Pop Culture – My Interview with Coke CEO Muhtar Kent, when KO was first shifting towards a less-cola strategy). KO was a split-adjusted $30.50 at the time and our bullish bets have paid off big but we lost interest at $45, up 50% from our entry. Back at $40, we like them again!
Overall, outside of the energy sector (down 82.7% from last Q1), earnings have been coming in pretty good but everyone is giving cautious guidance and that's not helping at all. HOWEVER, we've been through a rough year and the worst of it should be over and, as you can see from this Thomson/Reuters chart, forward expectations for 2016 should have us crushing easy comps for the next year to come. Overall, even after energy's huge drag, S&P earnings are down 4.1% from last year with 2/3 of the 500 companies in that index reporting.
Should the S&P, then, be 10% below where we were in January, 2015? Well, to some extent, we were overvalued at the time: see August's "Thoughtful Thursday – Contemplating the S&P 500". The same logic that had us calling for shorts on the S&P at 2,095 on August 13th, has us calling for long positions now. It's about VALUE, not PRICE. All the charts can tell you is the PRICE of stocks but we invest in VALUE.
We're seeing a lot of value as we move towards the bottom on panic in Asia and Europe and they SHOULD be panicking because they have a lot of unresolved problems but we don't – the US economy is in pretty good shape and the contagion factor from Europe and Asia is likely to be fairly limited as we simply don't have the kind of exposure we had back in 2008.
That's not dogma – that's what we're seeing so far and we'll keep watching the data and watching earnings but tomorrow Janet Yellen is going to tell Congress what I just told you and we'll see those bounce lines and you'll wish you had some longs and you'll wonder why you let the Corporate Media talk you out of your positions.
Maybe next time.
