So I did receive lots of email and a couple of calls…. “What happened yesterday?” - I always get that if the market moves up or down 300 points. Silly, I know – but those people that usually ASK me that question did NOT read (or only skimmed) the Market Preview. Obviously they didn’t hedge or missed out. PLEASE READ – before asking questions.
From yesterday Support / Resistance Section:
Getting short at the resistance area may be in the cards today. What you have to WATCH OUT for is the sellers stepping away and SHORT COVERING kicking in. A full hedge of SHORT positions is a must at these resistance areas is a must – because IF we break through we could move up FAST and HARD. You may OVER hedge to profit to the upside – using ratio spreads to give yourself extra bullets and gamma.
I had said two days ago we are coming into Qtr End – and therefore we should see some MARKING – which always pushes the market up. Additionally (yesterday) I mentioned in the end of the Support / Resistance section IF we break resistances – watch out for a short-covering rally FAST and HARD! Which is exactly what happened – the sellers stepped away and BANG this market ripped to the upside.
However, as I keep saying we WILL continue to see volatility – remember 300 point rally on March 11th and 18th or for that matter the 200+ point sell off on March 19th and Feb 29th. We are going to continue to see this kind of jerky up and down market. Hedge those positions at supports and resistances – cause when the buyers OR sellers step away the market WILL move – fast and HARD!
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ADP reports INCREASE in payrolls by 8,000
The big number that will sustain the rally or see it turn back to the downside is the Friday job
numbers by the Government. It has been a key indicator as to the health of the economy. Some analyst go as far as to use it to help forecast consumer spending. It is also closely watched by the Fed – as a indicator as to inflation and interest rate adjustments. ADP reports their payroll numbers BEFORE the Government data – which HAS been (until recently) pretty good at forecasting the Government data.The ADP reports shows an UNEXPECTED increase of jobs by companies of 8,000. The forecast was estimated to show a decrease of 45,000 jobs (based on estimates of 24 economist) – this is a HUGE swing to the upside. The economist are now scrambling to adjust their forecasts for the Government Figures due out this Friday (most assuredly to the upside). However – their previous month was revised LOWER by 18,000 jobs. It is ALSO important to note that ADP ONLY counts private sector employment, while the Government Numbers include all work forces.
Quick Break down:
"Today's report showed a decrease of 77,000 jobs in goods- producing industries. Service providers added 85,000 workers. Construction employment dropped by 22,000, bringing the decline since August 2006 to 259,000 jobs. Employment in financial institutions was little changed.
Companies employing more than 499 workers reduced their workforces by 52,000 jobs. Medium-sized businesses, with 50 to 499 employees, added 5,000 jobs and small companies increased payrolls by 55,000.
The ADP report is based on data from 392,000 businesses with about 24 million workers on payrolls. "
Note: The futures spiked initially to the upside when the news was released – but is starting to fall off again. Friday job numbers will sure push this market higher or lower quickly if those numbers are come in different than what’s expected. With the surprising ADP report – expect more volatility.
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UBS, Lehman, and others raising capital
The recent rounds of fund raising by the financial institutions coupled with the latest rounds of write-downs has been touted that the end is near (or has past). While this is certainly good news and we could see the financials continue to the upside – there is still serious credit issues (specially from housing and now credit cards) that the consumer is being pinched. I think until we see strength in the dollar, commodity prices SERIOUSLY come down (oil, gas, etc.), and the bottom of the housing market – in big rally in the financials MAYBE short-lived. For now ride the wave – and roll up
hedges.The Fed has proved that while they may not support bailing out the banks- they may HAVE too because the positions are MONSTERS – specially in the OTC market. When firms hold trillions in counter party trades – you can NOT let them fail – because the dominos will fall. I don’t think it’s over yet – but it maybe that we are through the worst of it. I still have a bad feeling about it – since nothing has changed for the consumers and they make up the majority of the GDP. Without consumers – nothing thrives.
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Futures Pre-Open
The futures are up pre-open, but are slightly down from FV because of the big run up after the close before the Globex sessions started. Futures are only front running the cash by a couple of points so don’t expect the ARB traders take too big of a position at the opening. Buy programs may kick in giving a boost to the market at the opening – but after that it is anyone’s game.
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Support / Resistance
We ripped though the resistance levels yesterday – and the hyper move to the upside follow. I am still getting word of some additional short-covering going into the opening (depending on where we open) – so we could continue to see some follow through.
INDU 12250 / 12750 (We almost made it to 12750 – which is a KEY resistance area – since that is where we pulled off in Jan, Feb, and almost in mid-Mar. So we will probably be testing that area again for the 3 time. If we can’t bust through and if the shorts HAVE covered (mostly yesterday) this is a place to get FLAT deltas and start getting short. However – like yesterday HEDGE short positions.)
NDX 1800 / (1850) 1900 (We ripped through the 1800 level like butter and are now testing Feb 1st resistance (1850) which is light on volume – so we could continue to rip up to 1900. Which is probably a good place to start getting short. I would (in the morning) flatten out all long delta and probably look for some soft delta shorts at this point – depending on how we open.)
SPX 1350 / (1375) 1400 (The SPX hit resistance areas in the 1375 range a couple of times earlier this year and we could visit that this morning. 1375 is a place to flatten out long deltas and look for soft delta shorts. At 1400 hard delta shorts – fully hedged is a good place.)
RUT 680 / 720 (We ripped through the 700 level showing a general bullish move for the broader market. 720 is a flat and start to short area that we hit several times in Feb without getting through.)
We could get a follow through today – which the opening show probably indicate. However if the shorts are done and the sellers step back end – we could just be seeing the same action that we have seen 3 times before after a 300+ move in the INDU. Make sure to hedge both long and short hard deltas.
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Conclusion
It looks like Paulson and Bernanke are starting to take flack from the Bear Stearns issue and now the Senate and Congress are looking into what had transpired. While I am a staunch free market guy and would traditionally say let Bear Stearns fail – after seeing the MASSIVE positions and the US dollar start sliding like a hot knife through butter when the rumor hit the streets. I think (without bailing out Bear Stearns) the brokering of JPM purchase of Bear with the $30 billion of coverage against debit was needed – unless we wanted to see the Euro trading over 2:1 against the dollar, a run at a bank (like Northern Rock in the UK), and $10 trillion of counter party paper’s solvency an issue. I am NOT one for bailouts at tax payer’s expense or special deals at the discount window – but I don’t think we really had an option. These leverage positions at the firms are MASSIVE and I still think we have a long way to go before we KNOW the real risk and losses.
A friend told me last night that yesterday’s move was April’s Fools! Indicating that it was more sentiment of putting the horrible first qtr behind them and starting fresh. Additionally – the short covering sure did help. I am not sure how much follow through we can get – but we may retest some of the Feb highs. However, we still have a long way to go. I think analyst are so caught up in stock price that they fail to remember the most important component of the puzzle – the consumer! And unless the consumer has money (or Credit) to drive the economy it will be slow. We already saw manufacture purchases drop sharply – meaning that companies are NOT expanding – knowing the consumer slowdown. So was the rally April Fools? Only time will tell – maybe it can continue to rally long enough so the consumers have enough time to sort out there issues with debt and cash flow – but that is wishful thinking. Expect more volatility – we still don’t even know the Democrat Candidate yet – so there is so much uncertainty still out there.
Did we forget that oil is still above $100 and the dollar still very low? You would think so by yesterday’s action. Don’t get sucked into the Hype from a 300 point rally in the day as if everything is now fine because it’s a new quarter!
Hedge those positions!
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