Options Trader: Tuesday Outlook

 |  Includes: DIA, QQQ, SPY
by: Philip Davis

Ho-hum, another day another 250-point move in the Dow…

Wouldn’t it be nice to string two of these together without the seemingly obligatory 250-point dip in between? We sort of had two consecutive up days now as we came off the floor at 12,100 on Friday and finished almost 500 points higher yesterday but I don’t like anything that comes in 250-point chunks at this point as it seems to be the new UNIT of movement, as easily reversed as it is gained.

Stock and Options Trades points out that we have critical tests on the Dow at 12,600 and the S&P at 1,380 but I’ve already moved on to 12,750 or bust as my outlook for the week and I want to see us finish ABOVE 1,400 on the S&P this Friday or we’ll be shorting into the weekend. We have to get past today’s PPI report, but we also have Consumer Confidence at 10 with Durable Goods acting as tomorrow’s wild card. Wednesday we also get oil inventories as well as Ben’s first day of testimony to Congress so don’t expect too much today with all that up in the air for later in the week.

Wednesday we also get the Preliminary GDP report for Q4 but expectations are so low (0.6%) that is would be shocking if we disappoint there. Friday is the PCE Inflation and Chicago PMI and, again, there is so much doom and gloom anticipated that I see most of these numbers as a reason to rally. Bernanke is the wild card this week, along with random statements we can expect from other Fed Governors.

8:30: Holy Cow! PPI up 1%, "core" PPI up 0.4% - that is HUGE! That is the biggest one-month gain in 26 years! Inflation, inflation, inflation, inflation… how will the market react to this? Answer: Probably not well. This is, in part, a snap-back from the 0.3% DROP in PPI in December, which we thought was nonsense at the time. Analysts missed this one by a mile generally looking for 0.4% and I didn’t expect a number this big but with energy up 5% for the month, it was hard to avoid some undeniable inflation.

On top of that, the Case-Shiller Home Price Index shows that housing prices fell 9.1% in December from the prior year, this is being spun as a huge negative but it is just about what we expected and nowhere near low enough as we have at least another 10% to go before home prices begin to get attractive again. “Home prices are headed lower,” Michael Moran, chief economist at Daiwa Securities America Inc. in New York, said before the report. “With demand soft and inventories still high, there will be pressure on prices to keep declining.”

This should be good for our XLE puts but not much else this morning but it is going to be a great test of market resolve to see if we can hold our levels, generally the same ones we were at last Tuesday morning like Dow 12,400, Nasdaq 2,350 (we’re still below that!) and S&P 1,360. Google is down $14 pre-market so that’s going to be ugly but it will give us a cheap roll if you can still stand the pain (and, with a month to go, I can). If the market can recover from this, it may truly be over for our bear phase but I’m not going to count on it. We went into the close 1/2 covered and I’m going to be keeping tight stops on those covers this morning.

Hong Kong was up 445 this morning and the Nikkei was off 89 but it’s a new ballgame after the PPI report so, if anything, I’d be shorting the (NYSEARCA:FXI) if we drop more than half a point today. Europe turned down sharply on news of our PPI although Trichet called it correctly over a month ago. We’d like to see the FTSE and the CAC hold that 2% line and the DAX took a normal rejection off of the 7,000 mark but we don’t want them falling below the zero line today.

This is a perfect set-up for a Fed statement that would rally the dollar but they’ve squandered every other opportunity to strengthen our currency since pretty much Jan 2001 and we are sitting at a very embarrassing $1.49 to the Euro this morning - THE WORST LEVEL EVER!

Oil is priced in dollars, not Euros so the 77% INCREASE in the value of the Euro against the George Bush Dollar means that Europeans are paying the Clinton Dollar $57 per Bush Dollar $100 of oil. Don’t let the talking heads tell you this is a global crisis, this is very much a US crisis as 43% of our dollar buying power has been taken away from us over the past 7 years in one of the worst managed economies in the history of our planet.

So how can I remain generally bullish at a time like this? I’m bullish BECAUSE it’s an international economy and BECAUSE America has never mattered less in the World and BECAUSE we still have many fine globalized corporations who may call America their home but operate around the World where things are pretty good in general. The President can send $2Tn Petrodollars a year out of America and into he hands of our enemies but that doesn’t stop The Gap from putting Levis on the well-dressed insurgent and it certainly doesn’t stop BA (who just scored a $77M missile contract) and other parts of the US war machine from making Billions of dollars selling the most expensive disposable items ever created as we spend Trillions of tax dollars to fight for whatever it is we’re fighting for this week.

As screwed up as this economy is, we are still not in a recession and a recession is already priced into the mix. While it is not our job to save the markets, there are certainly A LOT of very attractive deals out there and today will be a great day to take note of who’s hot and who’s not (regrettably, Google (NASDAQ:GOOG) is decidedly NOT in pre-market).

It’s going to be one of those mornings where we Stop (out our callers), Drop (our positions to lower strikes) and Roll (to longer positions where we can sell covers) if we get a big drop as there is nothing today that changes our longer-range outlook but it’s going to be another painful day and possibly week until we get past Bernanke’s testimony.