Options Trader: Tuesday Outlook

Are we there yet?

In our last Big Chart Review, on March 26th, I pointed out that we were still down 50% on most of our indexes and that we needed to get to 48% to consider it a proper rally. On Monday, the NYSE hit 48% on the nose, leaving only the SOX below that line in the US while the CAC still needs to cross that line to turn Europe bullish and, despite this morning’s 5% move in the Hang Seng, only the BSE has gotten back over the 50% off line in Asia so far.

As you can see from David Fry’s chart above, we have clearly made what looks like a "V" reversal and we are now heading into the second earnings season of the year - the first one did not end so well as we peaked out roughly at January options expiration day (April’s is Friday) and then double-topped in early February and fell off a very big cliff in a relentless, painful downturn that made us doubt whether America would even survive the crisis.

BUT EVERYTHING IS GREAT NOW! Yes, that’s right, it’s just 6 weeks later and we are in the midst of an epic rally that has taken the US markets nearly 30% off their lows despite the fact that 3.9M people lost their jobs during those 6 weeks and despite the fact that General Motors (GM) is, in fact, about to file for bankruptcy and despite the fact that there has been no real improvement in the economic data and despite the fact that the Fed, in last week’s Beige Book, actually downgraded their outlook for our economy. Yes, happy days are here again and anyone who tells you otherwise is just not a chart guy! Forget the low volume, forget the fact that Goldman Sachs (GS) traded more for their Principal account than the next 14 firms COMBINED - manipulation is OK - everybody’s doing it, even the government (which is staffed by former GS people, of course)…

This is insane folks! If a single firm is going to trade 1.4Bn shares a day, you would think they would actually be able to make MORE money than they did. Not to get off topic but what really amazed me about GS’s earnings is that they ditched the $1Bn they lost in December and no one seems to care. Last year, their Q1 was Dec, Jan and Feb but this year, as GS transitioned themselves into a bank, their Q1 changed to Jan, Feb and March. Since they were not a bank last Q, they reported Sept, Oct and Nov earnings in their last report and, in between, December was orphaned. I’m sure it was just one of those great accounting coincidences that all their negatives were shoved into December, allowing them to show a $1.66Bn gain for Q1, "blowing away" estimates with $3.39 a share in earnings. Perhaps that’s because the people doing the estimates didn’t realize they could simply ditch over $1Bn in losses which, if they had been included, would have given GS a 50% miss.

Sure we’re a LITTLE skeptical but, as I said last week - that’s no reason to sit out a rally. We made our first naked put plays in a while yesterday, shorting Baidu (BIDU) and First Solar (SLR) as they’ve both gotten a little ahead of themselves but, overall, we just haven’t found any good short plays in weeks. While it’s lots of fun to rally, rally, rally - let’s keep in mind we made a "V" reversal in November too as the S&P went from 725 back to 925 (27%) in, you guessed it, 6 weeks. This time we’ve come from 675 to yesterday’s close at 851 - just shy of 200 points and into the same fading volume pattern we had then, when Santa Claus was coming to town and GS was placing over half the trades in the market while former GS pump-monkey, Jim Cramer, told the sheeple to BUYBUYBUY, leaving them holding one hell of an expensive bag as the market plunged 35% from Jan 1 to March 9.

As we come into the April expiration period and with another month of earnings ahead of us, I am still very concerned that we still have a big correction in store. If you look at the weekly chart of the S&P and I were to tell you it’s a retailer or a homebuilder or a miner - would you buy it? Well, those three sectors make up 1/3 of the S&P and banks and oil companies are another 20%, with industrial companies like GM and and Health Care making up a good chunk of what’s left. We still have a long way to go before we break some horrible downtrends - keep that in mind. Also keep in mind that, while GS "beat" last night, clothing retailer Talbots (TLB) missed by almost 100%, losing $1.17 per $4.57 share vs. -.65 that was expected. Talbots has over 1,400 stores around the country and sold almost $2Bn in clothing last year but took in just $327.9M this quarter, down 23%. In the past 2 years the company has run up over $500M in liabilities, dropping their Net Tangible Assets from $515M in 2006 to $125M as of last Q. That’s what it takes to keep those 6,300 people employed.

That is the REAL economy, not Goldman Sachs pushing money around from bucket to bucket creating mountains of paper wealth and absolutely nothing of value. You can’t build an economy up on that sort of nonsense but, apparently, you can build one hell of a house of financial cards and that’s what this market is starting to look like - a relief bubble. We’re still going to play this game until the music stops but knowing the music is going to stop is an important element to winning the game. Yesterday we started hedging back in FAZ and even the QIDs are starting to get interesting down at $40. Here’s how our Big Chart looks as we come into what may be the home stretch for the great Q1 rally of ‘09:

Pretty exciting, isn’t it, especially if you ignore the fact that the Dow and the FTSE - our two best performing indexes - are still over 40% off their highs. Also, you might notice that the Dow and the FTSE also had the smallest bounce off the bottom, strong indicators that this area (40% off) is the "right" spot for the top of this move. 40% off our index highs would bring us to: Dow 8,412, S&P 945, Nas 1,716, NYSE 6,232 and Russell 513. That sounds good but it would represent a 75% move off the bottom for the SOX to 329 and a 52% move from the Transports to 1,868 - neither of those are anywhere close to that.

For the rest of the indexes, the NYSE has the farthest to go, needing to bounce 50% off their low while the Nasdaq and the Dow are within spitting distance (4% and 5%) so we’ll be watching for those to cross first in a "real" rally. At our last Big Chart Review, we had hit our Buy List the week before and I had said: "we’re just along for the ride." After 2 weeks of moving down and up 5% off those marks, we have turned a bit more bearish and have started going into our closes bearish, despite the "stick saves." If it’s a real rally - we won’t mind missing the fun as we move up 5% to challenge the 40% lines. I had said last week that 8,200 was the most I see us going now and I’ve had no reason to change that view after one week of earnings and, as I warned yesterday - this week, we have data too!

This morning’s data is the PPI Report at 8:30, which should be flat, along with Retail Sales which, for some reason, have high expectations of a 0.5% gain for March - this is something I’m not seeing after the Walmart (WMT) miss last week. Business inventories are supposed to go down 1.2% at 10am and we hear from CBSH, FAST, GWW and JNJ ahead of the bell, all carrying weight in different sectors. This evening we hear from ADTN, CSX and INTC but, at 11:30, Obama will make a major economic speech so we’ll see what kind of spin we can get off that this morning.

In more of that annoying real world action: Qantas expects earnings to fall 93% this year and will cut 1,750 jobs as "conditions continue to deteriorate," Shell (RDS.A) is "delaying or dropping some alternative energy projects in China as too costly given current low oil prices," HSBC (HBC) is selling their headquarters to raise money, Philips (PHG) missed with a $79M loss and lowered guidance and will cut 6,000 more jobs, General Growth Properties (GGP) is facing a dangerous end-game with bondholders that may force liquidations that will rock the commercial real estate market, Corporate Debt Defaults in Euope is on track to hit 15% this year - 35% more than expected - and the Hicks Sports Group, who own the Texas Rangers and Dallas Stars, have been declared in default by their creditors after missing their $10M quarterly payment on March 31st.

Now for the good news: JNJ beat estimates of a 3% lower quarter than last year by pulling off flat earnings despite a 7.2% decrease in sales. Total earnings were down 2.5% but the company bought back shares so the money was distributed among less shares, allowing them to show EPS the same as last year, when there were more shares. Hey, if GS can ignore a month with $1Bn in losses, then JNJ can throw a few shares under the rug! This is about as good as earnings will get for most companies, and if JNJ can break the 50 dma at $52.77 on this ho-hum earnings report, then there may be hope for the broader markets as they will be breaking out of a very similar weekly pattern.

It’s 8:25 now and the pre-markets are at the morning’s highs, up about half a point from yesterday’s close. Grainger (GWW) came in with a beat - off 15% from last year but better than the off 35% that was expected so… Yay! Fastenal (FAST) missed by a penny but no one seems to mind, and we’re still waiting for CBSH but I’m getting the feeling we are back into a "Meatballs Rally" like we had back in the fall of ‘07 where, no matter what the fundamentals - "IT JUST DOESN’T MATTER."

The March PPI fell a deflationary 1.2% but, the hell with that, Retail Sales were down 1.1% and down 0.9% ex-autos. That is truly terrible and it mattered enough to give us a 100-point dip in futures within 15 minutes of the announcement. So we have deflationary indications and declining sales - not a good combination. This is what we were worried about yestereday when I sent out a Member Alert at 12:51, in which I warned: "So far today does not look very different than last Monday, where we gapped lower and then drifted into a stick save (would be about 8,050 today) before falling off a cliff on Tuesday morning with a 200-point drop so I’m less than enthusiastic about today’s action." I was off my mark by 7 points on yesterday’s close - let’s hope I’m less accurate on today’s drop…

Yes, there is nothing more annoying in a fake, pumped up rally than real, actual facts - especially big ones like this that are hard to ignore. There was a 1.6% decline in gasoline sales and a surprising 5.9% drop in sales at electronic stores. Even Internet Retailers were off 1.7% and that should hit AMZN pretty hard as they’ve had a great run recently. The PPI decline was 1,100% more than anticipated by "experts" and the last time we had a PPI decrease of 1% or more was December, the report we got about this time in January, right about when things fell off a cliff.

We’ll see what levels hold up today. We’re likely to hold the levels I listed in yesterday’s morning post: Dow 7,900, S&P 833, Nasdaq 1,580, NYSE 5,225 and Russell 444 - at least at the open. Failing those we’ll be looking for a floor at our old support at Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420. In addition to hearing from our President, our Fed Chairman will be speaking in Atlanta this afternoon where his prepared remarks are: "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing... A leveling out of economic activity is the first step toward recovery." He cites recent figures on housing, consumer spending and new vehicle sales as some of those signs that the recession is slowing.

As I quoted Barry Ritholtz saying yesterday: "Understand the difference between an economy that is improving versus one that ‘getting worse more slowly." Apparently our Fed chair doesn’t quite see the distinction…

Let’s be careful out there today and watch those levels. Congrats to all the Dendreon (DNDN) players this morning, the study was good, as we expected, and they are popping over 200% pre-markets! Don’t forget - we ALWAYS sell into the initial excitement (unless you are in the buy/write, in which case we just wait to get callled away with a mere 342% gain) - and all DNDN needs to do is hold $5!