Are Tuesdays Good for Reversals?

What is it about Tuesday’s that makes them such good days for reversals? We expected a technical bounce yesterday and I discussed it last night how we had decided the drop was a bit overdone but, if you go by the pre-market action, it seems the whole day was overdone as the Dow is up over 100-points at 8 am.

We hate to stand here and say it’s all some vast conspiracy but when you watch it happen, and predict the next steps and then see them happen and then predict the next steps and see them unfold all according to the premise that the markets are manipulated, it’s hard to keep pretending they aren’t!

Not much is happening in Asia other than Apple launching the iPhone in Japan, which kind of makes Apple’s (AAPL) frantic sell-off yesterday seem just a bit suspicious as well. We discussed the mechanisms of market flushes over the weekend and the short story is that when funds need to accumulate large amounts of shares, the first thing they do is force the stock lower to "shake out" the retail shareholders or "weak hands" as Cramer lovingly calls them. By sowing doubt among the proletariat, fund managers are able to swoop in and buy shares on the cheap and this kind of activity really heats up at the end of the year, when fund managers are more prone to cheat in order to make their numbers.

Speaking of fund managers making their numbers, Goldman Sachs had great earnings - as expected. We played (GS) to be flat as great earnings were expected and I had no reason to feel they’d disappoint so we went with spreads on the Jan $220/Dec $210 calls ($1.85) and Jan $200 puts/Dec $210 puts ($1.75) yesterday afternoon so a flat-line around $210 will make us very very happy this morning.

Europe is providing the real fuel for the markets this morning as the ECB moved to allow members to tap UNLIMITED funds for 2 weeks at 4.21% and the Bank of England (who likes to pretend to be independent of the EU) is auctioning off another $20Bn worth of funds. Of course infinity plus $20B is still infinity, but it’s the thought that counts!

The UK treasury, to be fair, was busy bailing out Northern Rock and has extended the government’s guarantees to include all uncollateralized and unsubordinated wholesale deposits and other borrowing. Bank of England governor Mervyn King, testifying before the House of Commons Treasury Select Committee on the Northern Rock crisis, said that the global banking sector faces a "painful adjustment" in the coming months and the strains in financial markets are still evident. "The problems in the financial sector remain with us," he said. "A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repaid bank balance sheets." Let’s keep that in mind while the market bounces back to the top of my trading range - there’s plenty of bad news to come and we already knew GS was doing well, unless we break well over 13,300, we stick to our plan and re-cover around that level.

Let’s be very real about this people, the European Central Bank finds it necessary to push about $500Bn into the banking system, the M3 Euro Money supply is up 11.3% as of October - that’s an 11% increase in the amount of Euros in the World! I would say they are emulating "Helicopter Ben’s" money dump but you couldn't possibly get a helicopter airborne with the amount of Euros they are throwing into circulation so, while this may goose the World’s financial markets into the holidays - we are heading for on mother of a hangover in 2008!

Nonetheless, we said Monday we needed to keep an eye on DAX at 7,900 in order to get the global markets back in recovery mode and they sit at 7,919 as of 9 am, retracing almost all of yesterday’s loss. Our bounce line for that index is 7,897 and we expect a test of 7,950 so we’ll use that to see if our own rally is likely to have legs today.

We’ll also be watching the XLF closely to see if they are happy that the rest of the World is as screwed up as we are or if it occurs to US investors that, if the EU feels the need to push close to $1T into their banking system in Q4, then what our own government has done to date is probably woefully inadequate to stave off a crisis and the cold, hard fact is we just don’t have that kind of money - so we are pretty much screwed if we need that kind of bailout in the states.

Of course this will be great for commodities and especially good for gold, which we rolled and uncovered yesterday, as these moves put us well on the way to rendering paper money all but meaningless. Inflation in Europe is running at 3%, 50% over their target limits as the ECB has been holding off rate increases as a favor to the US but oil is flying up in pre-markets and they include energy in their CPI so —- something’s gotta give!

It’s going to be another interesting day with Cramer going out of his way to push FSLR so his buddies can get out before the stock goes back to $200 as that drop scared them enough to merit a Mad Money segment last night. There was so much wrong (polite word for misleading) about Cramer’s take on this company that I simply don’t have time but please don’t fall for this nonsense as Cramer has the timing of a Nigerian rebel when one of the great momo stocks start collapsing. By the way, I’m not a bitter short, we’ve been long on (FSLR) for ages - that’s why we know it’s a top and that’s why we know this man is a sham and is leading his followers into a slaughter, right at the beginning of a pullback cycle in this stock, which is already up 1,000% for the year.

On the brighter side of the market, our long-suffering (IRBT) finally got their contract to build $286M worth of killer robots for the army! 3,000 armed Roombas will be joining our troops in action over the next 5 years. Unlike Jimbo, I will not be putting you into this play at the top - we made our money and we’re cashing out, this is a nice boost for the company but we’re going to hit my $20 target on this news so we’ll be selling into the initial excitement and possibly picking up a cheap roll but, on the whole, we’ll wait for a pullback to buy some more.

Speaking of pullbacks, (TASR) is cheap(ish) again at $14 and they will be getting more military contracts down the road as well. June $15s are kind of expensive at $2.28 but we will sell Jans against them on a good run.

Comments

[Jax3:]

I have been taken down by so called market flushes (manipulations) on AAPL three times now and not without some surprise- and damage- each time. This one really hurt coming after yesterday. Isn't this illegal? Deceptive and unethical for sure. Ouch! Who can blow the whistle on it? Tom

2007 Dec 18 10:54 PM

[setting the...:]

Thank you for the comments on the hypocrisy that was Cramer last night regarding FSLR. I've always enjoyed Cramer and his schtick, but his comments last night on the supposed certainties of FSLR's earnings five years out (!) were reckless and irresponsible. Anybody who really does the homework he advocates quickly realized that his comments last night about FSLR were half-truths at best and mostly pure hype. You rarely get the flip side of the momo plays from Cramer until post-slaughter. Then he'll come out after the fall and say "I told you so". Cramer lost my respect last night.

2007 Dec 19 12:20 AM

[beandog:]

I thought Cramer had great timing, by jamming the shorts a good one.
beanieville.blogspot.c...

go cramer go!

2007 Dec 19 05:45 AM

[Michael Davey:]

Cramer is a hamhead for sure and his buddies thank him nightly I'm sure, but FSLR doesn't yet look toppy to me. Forget 5 years!, but hell, I don't see how the hottest group is going to crush lower at yr end , now that the Russell just kicked-in, etc. Good trading!

2007 Dec 19 03:44 PM

[Philip Davis:]

Deceptive, unethical and only illegal if you get caught which is impossible to prove and why very rich people belong to very exclusive clubs where they can talk. While it may be a problem if you were to dump Google and suddenly buy it back as it would leave a trail, if I happen to mention to you in the clubhouse that this week that I'm going to be dumping my Googles by lunch on Friday if they don't cure cancer by then and you just happen to be looking to execute a block purchase of Google this week (which you may have mentioned to me over cocktails) then it is sheer coincidence when I dump my shares and cause a panic and you happen to decide that's a good time to buy. Next week, you happen to hear me mention a desire to get into RIMM and you happen to mention to me that you are sick of yours and giving them until Thurday's close to come out with a phone that drives your car or you're getting out. And round and round it goes...

Cramer - hypocrisy or not the guy is good. He gets that hype machine cranking and drops a few street.com articles around that he then uses to back up what he's saying and it's amazing what he gets done but we make a fortune shorting his crap once they run it up.

Michael - that's a great call you made and I like your work on the blog! Very good stuff.

2007 Dec 21 06:36 PM