We saw some huge selling pressure in the morning through afternoon, only to see some short covering going into the close. The tech sector saw the sellers step aside and a rocket move in the NDX index back to positive territory. While the VIX was down on the day, there was no doubt it was a volatile day. Also it looks like Hillary revived her bid for the Democrats. However, it maybe that she wins the popular vote in Texas, but loses the caucuses vote to Obama. The bad news for the Democrats is that they have no clear leader and the longer this plays out the worse it is for them. I saw a very interesting poll – which should if Obama won then the Dems that supported Hillary would vote for McCain. What made it even more interesting is that if Hillary won the Dems that supported Obama would vote for McCain. Regardless of accuracy of the poll – it clearly shows dissension in the Democrat ranks, which is rather shocking. On the other hand, most far-right Republicans HATE McCain. So there you have it, a Republican Candidate that the Republicans Hate (for the most part) and two Democrats that have split their party down the middle to an extent that some of the Democrats will vote Republican if their candidate doesn’t win. Talk about a volatile election cycle – I don’t think it could be any crazier. Which leads me to believe we are going to have lots more volatile in the market and economy going forward.
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ADP (leading the Employment numbers) – shows DECLINE!
Prior to the official government job numbers the ADP “unexpectedly” showed the first decline in jobs in 5 years (based on payroll numbers). A decrease of 23,000 jobs vs. the gain of 119,000 the prior month (which was also less than previously estimated) – is clearing showing the pressure on the economy. Analyst this morning indicated this was a clear sign of a “deepening” recession (which he believes we are already in). With the tighter credit markets, housing recession, inflation, and now job LOSSES – the future will be bumpy.
ADP forecast was for an 18,000 increase (according to the mean estimate), being off by over 40,000 and slipping into the negative has put some pressure on the futures in the premarket, which were significantly higher going into the opening.
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US Productivity Rose 1.9%
In stressful economic times Companies batten down the hatches, lay-off people (expecting the other employees to carry a bigger load), and look to cut cost at every corner. While some “talking heads” are trying to turn an increase in productivity into some positive economic spin, the reality is that companies NEED to increase productivity and cut the fat – in lean times.
Of course economist will argue over the correlation of productivity to the economy until the end of time, but in my book it clearly shows that companies are trimming the fat. Cause in the good times – they all get FAT.
Don’t read too much into the Productivity numbers – stay more focused on the Job numbers and inflation – since they have a bigger impact on Fed decisions. Let the economist argue this one over – but always try to take the “1,000 foot view” as to WHY? – sometimes it makes things MORE CLEAR!
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Costco Profit Rises
You would think you would see a pop in the premarket when Costco reported increase in profits, clearly showing people looking for bulk cheap food – but it’s hovering slightly lower. Costco just might be one of those recession stock plays – where cheap food in bulk can clearly go a long way – we have to eat, don’t we?
The stock has pulled off significantly from the 70 level. It looks like $58 would be a support area over the near future. The question is can this stock rally from here, even with great profits?
The problem in these times is that when you need to get liquid – even good stocks get sold. I think we may see some continued slippage in here – coming more from economic data and the company’s fundamentals may not be able to keep it from going down. Regardless - $58 is a fairly good support area. Also any longs should continue to hedge.
Look for other CHEAP/BULK food companies as a recession play – but remember they all have room to slip more. So use spreads rather than getting naked long.
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Oil slipped below $100 yesterday – but is rallying back!
OPEC decided NOT to cut production, but maintain current levels at their meeting in Vienna. While US may see reduced gasoline consumption at these levels, well we are not the only people in the world to use oil, other countries are seeing massive increase in oil product utilization. OPEC can’t afford to cut production – since they are facing increasing demands. Of course they will SPIN it that maintaining current levels will allow them to cut in the future – if US consumption rate drops.
Remember – OPEC plays to the US (or you could say SPIN) – since oil is priced in dollars and is the world’s leading economy. But the reality – that aim is very self-centered (as if the US is all that matters). OPEC knows the game and knows it well – keep US happy – maintain max extraction – sell to all countries = $$$. They have acted like they wanted to cut (even hinted at it) – but the reality is that they can’t afford to do so – since supply vs. demand is a very tight spread.
The US will report its weekly inventories at 10:30 am ET today – so expect to see some more volatility in OIL today – which could have a whip-lash affect in the market place.
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Futures Preopen
Futures were up in the pre-market and then got a little pull back after the ADP reported their “unexpected” job loss numbers. However they remain in positive area. The futures are front running the cash – but only by a narrow margin. Expect the futures to pull back a little going into the opening and the cash basket to rise and the ARB traders close the spread at the opening. However, after the opening it’s anyone’s game.
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Support / Resistance
The market was fairly weak all day and started really getting a serious pounding by mid-day, however a strong close (abet most of it short-covering) saw most indices gain back most of their losses, the NDX even moved into positive territory. As I continue to point out – expect large short-covering rallies at any moment. There is a ton of short interest in this market – which could send upside spikes into the market. Believe me the rally isn’t because the economic problems ended at 2pm yesterday!
INDU 12250 (It continues to be the pivotal support area, a place that we would normally want to get very long – technically speaking. But the economy continues to loom overhead. We almost touch 12k yesterday before bouncing off it going into the close. We could see some follow through today and even rocket back to 12500 if the sellers step aside. This market wants to rally – but there may not be enough buyers to get it to. Remember – any rally is optimism at this point. 12500/12750 areas are resistance and 12000 is support. Don’t expect to stay at the 12250 area for long. As long as we sit between 12250 and 12500 the more volatility will load into the market)
NDX 1750 (we are in a BIG support area and this is a place to get long – 1800 will be resistance. If we can’t hold around the 1750 area, 1700 will be the next stop – which is very scary – because 1700 is not really a support area. This index wants to rally out of here or Hopes too!)
SPX 1325 (another BIG support area and we need to rally back through 1350 and to the 1375 level. Resistance band is 1374-1400. This is a critical area – retesting Jan’s lows is in the cards)
RUT 650 / 700 (If we are to gauge the broad market – we have already broken support. The RUT has broken below 700 and is on its way to 650. If this cannot get back to 700 and continues to slip do NOT expect the narrow based indices to hold their big support areas and will most likely get pulled down with the broader market. The KEY is to get the RUT back to 700 to strengthen the narrower based indices.)
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Conclusion
This is traditionally a great area to start loading up on long deltas (getting long) – however the economy keeps punching at this market and knocking it down. We saw some strong rallying into the close, but most of it was a combination of short-covering and sellers stepping off the accelerator – it wasn’t as if the economy had made a turn for the better at 2pm on Tuesday afternoon. This market will continue to be very knee jerky so expect volatility. Do NOT use the VIX as a gauge to measure volatility of the market – other than ATM premiums. The skews are very steep on many products so the ATM vols are not even close to being realistic. Today could be critical – if we can NOT hold those big supports and RUT falls further (or does not gain to 700) we could revisit yesterdays lows again and NOT bounce. Make sure to use soft deltas to take positions – all hard deltas (long and short) should be hedged.
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