Ah, I love Fed days!
Hope springs eternal and the pre-markets are already up half a point (7:30), which suits us just fine because the level I set to flip bullish in Monday’s first Alert to Members (and mentioned again in yesterday’s morning post for those of you who don’t need to know these things on time), 9,775, was perfectly tracked by the Dow yesterday and we even adjusted for the extra 5 points at 10:04, after we tested 9,980 at 9:57. The 9,780 line was tested 5 times in yesterday’s trading but, rather than stay more bearish, as we did on Monday’s failure, we took the DDM $39 calls (which I also mentioned in yesterday’s post) for $1.15 in anticipation of a nice pre-Fed move up.
Our play for today is to ride out this move up, cash out 1/2 the DDM and use the profits to buy some DXDs (ultra-short Dow) ahead of the Fed as we play for a big move in the opposite direction. We love to strangle the Dow on Fed days, especially when it’s so early in the options period and our losing side has plenty of time to recover. Overall, yesterday’s action was weak and we are still generally bearish so we are mainly guarding against a sudden burst of additional stimulus and waiting out (as seen on Trader Mike’s Nasdaq chart) the oversold conditions to work themselves out.
We are watching that 2,025 line on the Nasdaq, which is exactly 7.5% off the spike top at 2,190 on 10/21 and 2,060, which is 5% off the firmer top at 2,170, is the line we need to see crossed to the upside to get excited about tech betting again. We were already very excited to see our Research in Motion (RIMM) recover as they were our first big bottom-fishing expedition on the Nasdaq and they did us proud with a nice, 10% gain off Thursday’s bottom. As I said to Members on Monday, we want to keep our cash ready to take advantage of meltdowns "like the one RIMM is having right now."
So we are not perma-bears! I discussed Valero (VLO) and Lloyds (LYG) in yesterday’s post and those were our first two buys of the day yesterday. People seem to forget that the stock market is essentially an auction and you don’t do well at auctions by simply jumping on the bandwagon and bidding up whatever everyone else is interested in. The real bargains are found in the hidden gems, the treasures that others are discarding because they are momentarily out of favor or slightly tarnished.
Gold wasn’t tarnished at all in yesterday’s trading and we took a spread on UGL and GLL to play the volatility but I couldn’t help grabbing some GLL $11s for .40, just in case gold gets real over the next week. Oil also got too expensive again at $80 and we opted there to sell the ERY $13 puts for $1.50, which gives us a net $11.50 entry so the bet is, essentially, that oil closes lower than $82 by November expiration. Both oil and gold are expecting the Fed to remain loosey goosey with the monetary policy today or there will be some serious panic in the commodity pits if the free money spigots get cut off.
We got a (surprise!) 1.8% move up in the Hang Seng this morning, neatly erasing yesterday’s 1.8% drop and that index finished at 21,614, which is 4.4% off the top at 22,600. That is significant to our 5% rule, as a bounce back to less than 4% is still a sign of weakness and the Hang Seng chart looks very much like the Nasdaq chart as it bounces against key support at 21,450 (5% off the top) and 21,375 (5% off consolidation), both of which were (not coincidentally) the lunchtime levels on Monday and Tuesday. When numbers you calculate seven sessions earlier are hit almost to the penny two weeks later - you have to consider them to be significant!
The NIkkei, on the other hand, is looking downright ugly at 9,844, up 0.42% for the day but 7.5% off the top and their 50 dma is dropping down to cross the 10,200 line we had been watching as a breakdown point for the Nikkei last month. The 200 dma looms large another 5% below us at 9,300 and keep in mind that the falling dollar is BAD for Japan so the Nikkei acts as a global market balance to the Chinese and American markets, who celebrate dollar weakness (which is, due to the peg, also Yuan weakness). 9,630 is 10% off the top for the Nikkei and that line held up in early October, so the break on the International front will be either that or 10,200 being crossed, which will most likely signal which way we head for the remainder of the year.
The FTSE is skating off the 5% line at 5,035 but the DAX is testing 10% off the top already at 5,300 and the CAC needs to retake 3,700 to get back over their own 5% line so that will be our key European level to watch today. But they are already up 2% this morning at 3,653 so it’s not likely to happen today. France and Italy are enjoying a boost this morning from a surprisingly strong PMI report. We are having a massive commodity rally this week, which is playing well in Europe as miners are leading the indexes higher despite the continued drag of the financial sector. Trading is very light today ahead of the Fed so a lot hangs on what is usually a three-paragraph statement at 2pm.
The dollar was soundly rejected from its own 50 dma on Tuesday and that has emboldened commodity traders to push oil and gold to new highs for the year, but the dollar is just 5% over its 5-year lows and 15% below our consolidation level at 88. All it will take is a word from the Fed to break the dollar over the 50 dma at 76 and send it up to test 80 and that would be devastating for the markets. The Fed knows this, so it’s a fine line they will have to walk today if they want to keep this "recovery" on track.
Speaking of being on track - I mentioned yesterday that we were bottom fishing VLO, AIB, ARNA and YRCW and, so far, it’s 3 for 4 on those plays with big moves on Allied Irish Banks (AIB) and Arena Pharma (ARNA). Of course we have to wonder how much of this is a real move and how much of it is simply due to the fact that I mentioned them, as the more thinly traded AIB and ARNA are moving the most, so do be careful and don’t be greedy - I certainly don’t want to end up having "the Cramer effect" on these small stocks, which is exactly why the vast majority of our picks are "Members Only."
The Treasury is on track to auction a record $81Bn next week, topping August’s quarterly record by $6Bn. We’ll see $40B in 3-year notes (vs. $37B last quarter), $25B in 10-year notes (vs. $23B) and $16B in 30-year bonds (vs. $15B) so we’ll see how weak or strong the dollar looks then but the Fed needs to say something supportive as these offerings will refund $38.5B in maturing debt and raise approximately $42.5B and, with this additional capital, the Treasury says it could hit its debt ceiling as early as mid-December. Maybe we’ll get a government shut-down for Christmas!
Speaking of shut-downs - According to the October Challenger Job-Cut Report, "only" 55,679 additional layoffs are planned by big corporations, and that is the lowest level since March of 2008. The job-cut report must be analyzed with caution. It doesn’t distinguish between layoffs scheduled for the short-term or the long term, or whether job cuts are handled through attrition or actual layoffs. Also, the job-cut report does not include jobs eliminated in small batches over a longer time period. Unlike most economic data, this series is not adjusted for seasonal variation.
ADP, on the other hand, shows 203,000 jobs lost in October, which is in-line with expectations and down from 227,000 losses in September. According to ADP, 7.2M private-sector jobs have been lost since the recession began. We get the usual 500,000 weekly pink slips tomorrow morning but the Big Kahuna, the Non-Farm Payroll Report, hits us Friday morning and if that number is as low as the ADP number, the markets may have reason to rally.
We’ll be watching the Transports to see if they can crack that 1,800 level (4,000 on the Dow Transports), otherwise, all Buffett’s efforts will only amount to a weak bounce off the 10% drop from the double top at 2,000. I mentioned the Nasdaq and our upside watch levels will be: Dow 9,962, S&P 1,066, Nas 2,097, NYSE 6,955 and Russell 580. Low bar levels to watch are last Wednesday's lows at: Dow 9,800, S&P 1,045, Nas 2,060, NYSE 6,800 and Russell 570 so let’s say failure to hold 3 of those levels will flip us back to bearish and, either way, we’ll be covering with those DXDs ahead of the Fed.
It’s likely to be another wild one today. We’ll see if the 10:30 inventory report can support oil at $80, but it’s really all about the dollar as actual demand for oil is in the toilet.