More intra-day volatility yesterday, pressure during the day with some strength going into the close. In my gut I would love to get long at these levels, traditionally and technically it’s the place to do so. However, the economic landscape – specially the dollar, inflation, oil, have caused SERIOUS trepidation. I expect to see SHARP pops in the market, but the economic situation is putting a lid on any fundamental strength that we would see enter this market. So what WOULD get this market to rally? In my book it would be hope, optimism, speculation, and where else would I put my money attitude. In traditional markets we would see a move from one sector to another, as some area becomes more favorable than another. However, in the current market the collapse of the sub-prime, bonds, insurance, and weak dollar is affecting EVERY sector and is SUCKING out the fundamental strength of the market. While true, some sectors do well with a weak dollar because they are large exporters, the fact is this country has become a consumer nation. The majority of products PURCHASED in this country are manufactured overseas, including food and energy. While some of these companies in the sector that benefit from the weak dollar do well, it’s the consumer that suffers from the loss of buying power. At the end of the day – being a consumer nation – it is that simple fact the keeps the cogs of business going. So while technically (and traditionally) I would say this is a area to get long (and could very well be) – fundamentally and economically I couldn’t out of good conscious recommend that anyone do so with OUT fully hedging those positions. In a traditional Bull market we move up methodically, with HUGE spikes down. In a traditional Bear market we move down methodically, with HUGE spikes up. The last couple of months seem to react to a traditional Bear market, with huge spikes to the upside when there is a injection of HOPE. The economic landscape has not changed overnight and there is more that needs to be resolved – so rallies MAY BE short lived. For traders this is great – but for investors take heed and hedge those positions, even at these levels.
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CPI Shocker!!!
CPI (Consumer Price Index) remained unchanged in February – showing that we have NOT seen inflation going up in February – yeah RIGHT? Of course Bernanke LOVES this news, because he can use it by saying that rate cuts have NOT affected inflation. Again – please feel free to read my essay on the CPI and government numbers http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html . What this CPI number means as correctly stated by Mark Zandi, chief economist of Moody’s is “It allows the Fed to continue easing rates aggressively with a clear conscience.” Of course you and I are not seeing ANY inflation pressure are you. Gas prices have not gone up, the dollar has not gone down, and food prices have not increased. Oh wait they have, but I forget Bernanke just looks at the CORE – and doesn’t include energy or food prices – so even if Gas prices and Food prices go up, he doesn’t count that! What about the dollar sliding HARD?
Of course the futures that were down significantly rebounded with an aggressive rally, maybe overly so. The futures knee jerk pre-open reaction is taking the CPI leader as there is NO INFLATION and Bernanke is going to continue to cut rates (aggressively) expect a 75bps cut – and flood the system with MORE money. Thanks!
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Futures Pre-open
The futures are front running the cash by 7 points in the NQ against the cash after the CPI report. The knee jerk from being underwater by as much as 10 points to +20 points is a huge swing an clearly shows the volatility in this market. Expect Arb traders to start shorting futures into the opening and buying the basket – which will put some upside pressure on the stocks. However, after the opening it is anyone’s guess. No doubt the rate cut is coming and the Fed Fund Futures are increasing the probability of the 75 bps cut coming.
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Support / Resistance
We are back at previous support levels of a week earlier and we could get some follow through from the CPI numbers. Look for possible short covering – which could catch on if the market hits those thresholds. However, expect to see more heavy intra-day volatility.
INDU 12000 / 12250 (12500) (While 12250 is some short-term resistance area and not an area to get short – I would seriously think about taking off long hard deltas at that level. The shorts should kick in about 12500. If we get another short-covering rally we could have a violent knee jerk up like the other day. However, yesterday saw intra-day weakness. We are range bound and 12000 – 12500 is the play – for now)
NDX 1700 / 1800 (1750 is serious pivot – or straddle area – we will NOT sit here and will move towards 1800 or 1700. I think we could see some strong volatility in this area if the futures are any indication.)
SPX 1300 / 1325 (1350) (1325 like the INDU is a short-term resistance to flatten long hard deltas – but don’t load up with the short deltas until 1350. Again in the range and today is getting some upside juice.)
RUT 650 / 700 (We saw a HUGE percentage move to the upside yesterday and moved off the support. We could get back to 700 and even see it intra-day. It’s an area to take off those long hard deltas – flatten your position – and start leaning short (hedged of coursed).
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Conclusion
I mentioned to a friend yesterday to expect the CPI to be flat as a joke saying that Bernanke needs that to continue to cut rates and convince us that there is NO inflation, of course he laughed at the notion. I NEVER thought they would be flat, I was ONLY joking. The market is just rallying hard on that news – but I wonder how short lived that would be.
I had a nice lunch with some “young professionals” in the community and we had a pretty good open discussion and debate about the economy. No denying, whether we agree or disagree about the Fed’s method, we all agreed that the economy is going to get worse before it gets better. So far – there is no blood in the streets. A banker at the lunch believes that the cuts are helping the trade balance, while I DO agree with that and it DOES help some sectors – the man in the street is NOT getting any benefit from the affects of the weakening dollar and higher food and energy prices. I had responded to one of his comments that it sounded like a “Hillary sound bite!” – the table glared at me as if I called him some horrid name. I quickly apologized – and we all had a good chuckle – It takes a village! Yeah – right a village of greedy ignorant home buyers that want their mommy (the government) to bail them out. One thing is for sure the Womb-to-Tomb politics were not a part of the lunch conversation. I was very pleased to have open discussions with other intelligent people and I can only hope that the YPG (Young Professional Group) becomes more open to political and economic topics of the time.
Take heed to these rallies and the CPI – expect the rate cut – would could also fuel the rally MORE. However, how long the rally last and how much fundamental strength to back any rally beyond hope and optimism should be questioned.
Investors – Hedge those positions.
Traders – have serious fun!
NOTES:
I have (after requests) posted an archive of the Market Previews – http://marketpreview.blogspot.com/
Also – I will be giving a lecture (locally – Sarasota) on Managing Your Portfolio in Volatile Times on the evening of March 26th. If you are interested in attending the IBD meeting – please contact Sonny sonny1926@aol.com about attending.
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