That will teach us to be bullish!
I’ve been trying really hard not to be a curmudgeon during this very silly rally, but I should have paid more attention to my inner bear yesterday when I noted first thing in the morning: "Home Depot (NYSE:HD) / Sears Holdings (NASDAQ:SHLD) not doing so good - is there more bad home news?"
We noted some poor action in the housing and mortgage market along with a study that showed homes are still way overpriced, but it really hit the fan this morning as both companies issued severe warnings and D.R. Horton, Inc. (NYSE:DHI) reports a 40% drop in sales leading to a loss.
Fortunately we tightened up on our Diamonds Trust, Series 1 (NYSEARCA:DIA) puts so we’ll just get to sit back and see how bad this is. It’s up to Uncle Ben, though, who is speaking later today (1 pm), to calm the markets (i.e. lie to us some more) and tell us inflation is under control and subprime isn’t spilling over into other parts of the market (like the earnings of Dow components).
Sears is actually in much better shape than HD. Uncle Eddie is still putting his money where his mouth is and buying back another $1B worth of stock (5%) while you’re selling. As SHLD is a long-term play for us, I’m inclined to ride this one out (selling calls of course) and seeing where we bottom. The big question is where will the Dow bottom on our first day of really bad news in weeks. Will other earnings help us pull the fat out of the fire or is this the shape of things to come?
Asian trading was mixed today with Hong Kong essentially going up all alone against mild pullbacks from the other markets. Hong Kong’s gain of 68 points was actually very unimpressive as the banking sector made huge gains on earnings expectations. China’s trade surplus (I know, what’s a trade surplus?) accelerated to $26.9B, bringing the first half total to $112.5B, which will put upward pressure on the Yuan and downward pressure on the dollar. "This level of trade surplus is unprecedented for China or any other major economy in the world," said Goldman Sachs in a research note Tuesday. "This again highlights the ineffectiveness of the policy tinkerings that have so far failed to tackle the root cause of China’s bloating trade surplus: the significantly undervalued currency."
Europe is also heading sharply down ahead of the US, but those markets were already weighing heavy as $75 oil has begun to exert a drag on those otherwise strong markets. I warned yesterday that they were having a commodity-based rally, not what we want to see at this stage of the game.
Our markets, and everyone else’s, are well above the danger zone so even a 100-point correction will have little effect on the big picture today. So we’re just watching to see if we blow critical supports like Dow 13,500, S&P 1,515, NYSE 10,000 or Nasdaq 2,600:
Zman and I will be keeping a sharp eye on our remaining energy puts as that market is due for a hell of a correction, but if they hold up strong here, we may have to make some more permanent bullish adjustments. So far, covering yesterday and keeping the puts looks like it may have been the right move and I couldn’t be happier about taking that money (oil profits) and running yesterday as I had no long-term faith in that sector. It’s all about $72 and whether it holds today, a great effort was made on the NYMEX to make sure it did yesterday. As I mentioned in the wrap-up, though, it’s getting a a little expensive to maintain this charade:
With Bernanke speaking on inflation, we need to watch gold very closely - the last thing we want is for gold to take off while the markets go down, as that will indicate a rapid loss of faith in our Goldilocks economy.
Remember: We have covers, so we DON’T have to panic and sell on a dip. If this is a real rally, we will shake this off and get back on our feet, but if there is underlying weakness, we will see a lot of profit taking from our recent high-flyers so let’s be very careful out there today!