Wall Of Worries Wednesday: Will The Fed And ECB Push Us Over?

by: Philip Davis

.SPX WEEKLYAs foretold, we flatlined into the end of the month - now what?

Today is May Day, where we celebrate the Workers of the World (as long as they don't unite, of course) and that means most global markets are closed or slow but the bad economic data keeps pouring in.

Slovena's credit was lowered to junk by Moody's, China's PMI came in at 50.6, which is expanding slightly (50 neutral) but lower than 50.7 forecast and lower and 50.9 in March and, if you were paying attention to my chart lesson on Monday, you are thinking of how these readings affect the curve of the 50 dma that WILL be drawn in the future and how this WILL make the chart look - that's how you use TA to predict, rather than just react.

More importantly on China, new orders fell from 52.3 in March to 51.7 in April and, even worse, new export orders fell to 48.6 (CONTRACTION) from 50.9. The Shanghai Composite is already down 11% for the year and we are ignoring this the same way we ignored it in 2008 - as our markets flew and China declined. Our situation is a little healthier this time as we're not being led higher by energy, commodity and builder stocks - all things that ultimately suck money out of the pockets of consumers - so not the same situation for a total collapse but - correction? - maybe.

As noted by Bloomberg re. China: "Growth risks include weakness in export demand, property-market overheating, a surge in so-called shadow banking and the damping of consumption by President Xi Jinping's campaign to rein in official spending."

Don't forget, China is doing this on purpose to curb their out-of-control 8.5% growth/inflation and, as is very normal in government tinkering, they are overshooting the mark ahead of making corrections (we assume they will). By the way, China now surveys 3,000 manufacturers in their survey vs. 820 previously, so the data is now more accurate as well and, of course, I think it's bullish just to know they care enough to try!

Back to the bad news though (oops, this is getting to be the morning post), Australia's Manufacturing DIED, dropping 7.7 points to 36.7 from an already crap 44.4. This is their worst reading since 2004:

"The sharp drop in manufacturing production, employment and new orders in April, along with the continued erosion of exports, is deeply concerning," Innes Willox, AIG's chief executive officer, said in a statement. "The strength of the Australian dollar is a major burden on domestic producers." A gauge of employment plunged 9.4 points to 39.3 in April, while new orders dropped 7 points to 32.4, the report showed. The production measure slumped 8.6 points to 33.1. The manufacturing index's reading on wages edged down 0.7 point to 57 last month, while inventories fell 4.8 points to 46.4, today's report showed. Supplier deliveries slumped 7.3 points to 41.1, and selling prices dropped 2.7 points to 40.3, it showed.

Or to summarize - ABANDON SHIP!!!

Australia, as noted, is suffering from having a strong currency and, of course, a commodity based economy with commodities falling about that 10% they are missing.

May Day is a good day for riots to break out - especially with 50% youth unemployment, so good day to short the still-excited Futures with the S&P (/ES) testing 1,595 earlier this morning - it was a very easy line to short off in our pre-market Member Chat.

Oil is down to $91.94 and we've been waiting for it to turn up but we want to go long now over the $92 line ($92.25 never came back, of course) into today's 10:30 for a great pair trade vs. the S&P. Already (8:42) the S&P is down to 1,591 and the Egg McMuffins are paid for and we can keep a 1/2-point trailing stop on the S&P although, of course, the 1,590 line is almost certain to get a bounce.

Gasoline (/RB) was another Futures long we picked in Member Chat at the $2.76 line and we're already at $2.7624, which doesn't sound very exciting but it's $4.20 for each of those 0.0001s so up $100.80 per contract is more than enough to get yourself a nice breakfast while you wait for the markets to open. With Gasoline Futures, of course we're going to get rejected at each .0025 line but, in general, we're bullish into inventories (10:30) but not after so the goal would be to get maybe a full penny move and then very tight stops.

The dollar is super low at 81.50 and that can be played for a currency bounce (/DX) but I hate playing currencies so shorting the S&P in anticipation is the better move. Long on oil is into inventories only (10:30) and I'd be thrilled with a small gain as you can see from Australia and China that, fundamentally, it would be total BS.

Gold is $1,465, silver $23.83 copper way down at $3.12 tells you how ill the economy really is, natural gas is flying back to $4.40 (and /NG is a short off that line) on all the happy, happy talk about LNG sucking up a 2-year supply of the stuff as we begin shipping it around the world.

9 am update: Well we hit a home run on shorting the S&P but oil and gasoline failed to hold their lines so out of those and our pair trade works like a charm. As I was saying at our AC Conference - if you have a discipline that limits your losses but doesn't limit your gains, you don't have to be right very often to make money. In this case, even if we had been careless and taken $100 losses on oil or gasoline, the pair of the S&P shorts has already paid over $750 per contract in less than two hours. FUTURES = FUN!

Check out this cool GIF I found, it analyzes 5 balls thrown at bat. 3 times, he doesn't like the pitch and lets it go by. One time, he swings and misses and one time he swings and gets a hit. THAT'S HOW YOU TRADE!!! We don't "swing" at every opportunity, we wait for a "pitch" we think we can hit and then we take our swing.

If we get to know our own swing (trading style) and we get to know what kind of pitches (trading opportunities) fit them, then we can learn how to be as successful as a great baseball hitter is at hitting the ball (about 1/3 of the time). That sounds terrible but it beats the hell out of a poor player that swings at every pitch and gets on base less than 20% of the time (and that happens to be the performance of all but the 1,000 people in the world who are good enough to be pro ball players). The key is to develop a trading style, a risk/reward entry system that allows for the fact that you are often going to be wrong. If you limit your losses (one strike per swing) but are able to get a single, double, triple or home run off that one swing - then any time you hit that one out of 3, you will be a success.

We get the Fed announcement at 2 pm today but what are they going to say? "More free money forever"? They already said that, didn't they? So it's the ECB that matters tomorrow morning and the expectations are they will be lowering their rates by AT LEAST 0.25% so that won't boost the markets. Only a full reversal of policy and an announcement of QE from the ECB is likely to lift the markets. Otherwise, those "M" patterns are still waiting to be made.

Oh, and it's May by the way - as in "Sell in May and go away" for investors.

Why should this May be different?

Disclosure: I am long TZA, ABX, AAPL, HMY, NAK, DBC, GLW, FCX, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly neutral mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at philstockworld.com - a paid membership site that teaches stock, options and futures trading, portfolio management skills and advanced income-producing strategies for investors.