Merry Monday - Will Santa Deliver Dow 11,500?

Includes: DIA, QQQ, SPY
by: Philip Davis

Click to enlargeI’m still worried about Europe.

Everyone else seems to have forgotten, including the Europeans. The Stoxx EU 600 Index hit its highest point since September 2008 this morning as commodities continued to climb (another chance to short oil futures below the $89 line). The Stoxx 600 are up 6.5% for the month and up 9.9% for the year. We had talked about gold, oil and the S&P in my Weekend Post, which are all up about 10% in the second half of the year as the dollar fell 3.5%. This morning, the dollar is hugging that 80.75 line, still 10% off its June high. If Europe really is "fixed" then the dollar is free to drop back to its lows, which could provide tremendous rally fuel for stocks and commodities.

Moody’s warned it may lower Spain’s rating, citing "substantial funding requirements," and France is on Credit Watch and Belgium faces a rate cut at Moody’s as well, while Standard and Poor’s is reviewing its assessments of Ireland, Portugal and Greece. The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s but, if it doesn’t bother the Europeans – why should it bother us?

There is no -- ZERO -- logic to global markets racing back to all-time highs with the VIX running back to its lows as if there is not a care in the world, and I don’t say that because I’m a bitter short – we had 16 bullish trade ideas last week and just 8 bearish ones as we simply threw up our hands and played the technicals in Member Chat as the Dow tested that magical 11,500 line. Europe reads the same news we do and markets over there are up 1% this morning despite a pretty poor performance turned in by China, where the Shanghai fell 1.4% (and that was AFTER a 50% recovery into the close) and the Hang Seng fell 0.3% (also big recovery into the close) and the Nikkei fell 0.85% (small afternoon recovery) and the BSE, who were our global leader into November, weakly flat-lined 5% off their highs.

We’re watching 11,500 on the Dow as well as the 1,225 line on the S&P, which is their "must hold" line that we’ve been tracking on the breakout. Will the Dow break higher or the S&P break lower? That’s our directional question for this thinly-traded week. The easier path is for the Dow to move higher – as you can see from the chart, the markets generally rise on lower volume weeks and we’re pretty much guaranteed two in a row to close out the year with Christmas Eve this Friday and New Year’s Eve next Friday:

Click to enlarge

This is the same channel we’ve been tracking all year with our most recent chart update on May 5th (you don’t have to update very often when you get the channel right!) so none of this is any surprise EXCEPT the breakout, which we did not expect to happen without a proper pullback. You can blame inflation or POMO or tax cuts or commodity speculation for throwing off our forecast but that doesn’t matter – we have to be ready to go with the flow, even if we don’t agree with the direction of the flow at the moment. That’s why we began last week with "5 Trades to Make 5,000% on a Breakout" last weekend, and those were April plays that are still available as all we’ve done is flat-line since then.

5,000% may seem like a lot to stock traders but that’s exactly why those of us in the top 2%, who trade derivatives and not stocks, LOVE inflation. As I was saying to Members this morning in Chat, you can, for example, put $7,500 into 10 Suncor (NYSE:SU) 2013 $35 calls and if SU heads back to their 2008 highs of $60, you get back $25,000, a profit of 233% while the poor sucker who bought the stock doesn’t even get a double. Do a little hedging with those and it’s fairly easy to goose the gains well over 1,000%, keeping the wealthy WAY ahead of inflation while middle class stock investors tread water and non-investors – well, tough bread for them…

The Fed is doing its best to stoke those inflationary fires this week with 2 rounds of POMO this morning totaling $17Bn – a new one-day record! Tomorrow is a mere $11Bn in two rounds and I don’t even know why they bother opening the window on Thursday with just $2.5Bn but still, it’s a nice $30.5Bn week at the Fed’s printing press and THAT is how we can ignore Europe, Asia and anything else that smacks of reality in this world.

The scary chart above is from a good article last year that explains how the Fed, levering up $2.2Tn it effectively steals from the taxpayers (by debasing the currency), then funnels it up to those of us who trade derivatives and turn it into real money. Well, real in that as long as we cash it out before the whole thing collapses we’re in good (relatively) shape. Already this year, the Fed has added enough to get that balance close to $3Tn and they plan to push $3.7Tn (another 20%) which should run the OTC Derivatives on top of the pyramid (that’s us) up over one Quadrillion Dollars!

Muhahaha! We’re getting ours and we hope you get yours too…

This is what happened in America and other parts of the world in the 1920s as inflation, brought on by WWI and market speculation which crashed the markets (like 2008), followed by a depression (like the last two years) which was followed by World Governments using currency devaluations to increase the competitiveness of a country’s export products to reduce balance of payments deficits (like now). This worsened other nations’ deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and an overall decline in world trade (see the Baltic Dry Index). Although this strategy tended to increase government revenues in the short run, it dramatically worsened the situation in the medium and longer run.

Don’t worry though, we were saved by a massive World War in which about 60M people died, which was like 150M people being killed today as the population was only 2.5Bn at the time – my how we’ve grown! Would killing off 150M people reduce our global unemployment picture – you bet it would! More or less, that’s the plan The Bernank has in store for us as it’s going to take either war or starvation to cull the herd as we sure aren’t doing anything to create actual jobs, are we?

Click to enlargeWhat’s our solution? I already told you – we trade our derivatives and make lots of money because the vast majority of the top 1% came out of the Great Depression and WWII in excellent shape and they would have been in much better shape if Roosevelt hadn’t taxed their income and given it away to the poor. That’s why, this time, we’re going to do it right – without all the liberal bellyaching along the way. I tried to care – really I did – but it just seems so overwhelmingly out of fashion these days…

So we will embrace the rally if it comes and we shall welcome it with open arms. We are still short-term bearish as our short plays have higher deltas than our hedged longs but that will change once we top 11,500 and hold it for a day or two. We had hoped for a nice market correction to do some bargain hunting but, then again, they are ALL bargains if oil is going to $100 and gold is going to 2,000 and copper to $5 and none of that will bother the consumers (according to analysts who must be much smarter than me because I don’t get it) and that will rocket retail and consumer stocks as the unemployed masses run out and buy iPads and electric cars and rent movies on NetFlix (NASDAQ:NFLX) and, of course, get take-out from Chipotle (NYSE:CMG)!

The German Ifo index fell in December, the seventh consecutive month that index has fallen and Europe being buried in snow can’t be helping either. Another thing the markets don’t seem worried about is the debt spreads between EU high-grade corporate bonds and US bonds are narrowing (US was lower) as investors are downgrading the outlook for European companies dependent on government spending as budget cuts and job losses. Well, thank goodness none of that stuff is happening here! Sorry for the sarcasm but this is just ridiculous, isn’t it:?

Oh well, we’ll just sit back and see how this all plays out. In addition to record amounts of money coming in from the Fed, Goldman Sachs (who have already told us to buy on POMO days and EVERY day is a POMO day now) has upgraded their outlook on Japan (up 20% in just 6 months!) and they are joined by Morgan Stanley and Credit Suisse, who also predict the best year for Japan since 2005. Not wanting to be outdone by their fellow Gang of 12 Members in making ridiculous statements to goose the markets on a Monday (since there is no M&A), Deutsche Bank drove their 2011 S&P prediction all the way to 1,550 – the very top of our chart! That’s up 25% for the year and that means we can buy the SPY 2012 $145 calls for $2 and sell the 2012 $85 puts for $1.95 and that’s net 0.05 for a contract that pays $10 if we hit DB’s S&P 1,550 target. That’s a nice 20,000% gain for the year – who says it’s hard to make money in this market?