Friday was another day of flirting around the top of the resistance levels again ramping more hidden volatility in the market. The VIX is also below 20 for the first time this year. Fear has generally left the market, even with no changes to the economic conditions. Investors are needing to find a bottom to the bad news – and have pushed aside the systemic problems of the economy – looking for greener pastures. Never forget the market moves on perception, initially, that is until the fundamentals come back to solve for price, when perception wanes.
___________________________________________________
Buffet blowing bubbles?
Wrigley rallies in the premarket as Mars in conjunction with Berkshire make a move for a $22 billion bid for the gum maker, significantly above the current market cap. It’s no doubt that Wrigley is a staple in America’s past-time gum chewing and the Wrigley family is part of the old school that has also been a hallmark in everything Americana. They have a corner on the Gum market and with the added name of Wrigley – well it just might be what Mars is looking for. Buffet is a keen investor and knows synergy. Look for some action in this sector – hey what is the symbol for the candy bar index?___________________________________________________
High Noon has past – so what is Ballmer’s move
I was expecting for him to draw his 6-shooter and start blazing – but I am not sure that even Ballmer knows what he is doing. Is it friendly, is it hostile, is it just walking away? Does Microsoft just want the website and brand – or are they looking to the staff as well for a full merger? Do they want to integrate it into MSN? What is the plan?
It seems that the threat of Google has got them in a panic and reaching for Yahoo “SEEMS” like the thing to do…but is this starting to look like another AOL / Time Warner deal? Does it REALLY make sense for Microsoft to buy Yahoo? What about Google and AOL and Murdock?
Maybe this is like the Democrat primaries and Google wants Microsoft and Yahoo to play cat-and-mouse for as long as they can – while Google focuses on bigger fish!
___________________________________________________
Bernanke’s Week
All eyes will be on Bernanke this week. Does he cut 25 bps? What is his wording going forward? Is inflation a concern? Are there more Discount Window deals?
Probably more so than at any time during his tenure his wording will be scrutinized. He has cut rates first slow and then dramatically to stop the bleeding at the banks and to shore up the credit unwind in this country. However, by doing so he has unleashed a massive wave of inflation –that is “helping” send oil to new highs and food prices are rocketing like never before. While this is not solely Bernanke’s blame – the cut in rates did help send the dollar lower pretty fast at the same time that does have a rather large affect on prices.
Bernanke is caught between a rock and a hard place. Many economist equate the current situation back to Volcker’s time – when oil prices were rocketing, recession was on the horizon, a weak dollar, and inflation was becoming very hot. Volker of course was not facing a massive collapse of the banking system and massive leverage from homes to hedge fund positions that were going bust. Volcker’s fear was massive inflation – and he took interest rates to 20% to stop the bleeding of inflation. Bernanke does NOT have that option –because it could trigger MORE pressure on the banks – which on the surface seem to have put the worst behind them.
The “Core” is reporting moderate inflation, but with all the changes to methodology in the last couple of decades – we are really measuring the Cost of Living and not inflation (because of Hedonics and Substitution). Based on original method of CPI calculations (before all the changes pre 1990) inflation is running at 7.5%, not 4%. I think the people on main street would agree – after seeing the food prices ramp and filling up their gas tank. You can’t double the price of gas and food without seeing inflation go up – but the “Core” would have us believe otherwise.
We will just have to wait and see what he does. A 25 bps cut is in the cards, with better than 50% that it will happen. He will certainly talk about inflation, but I am sure he will try to smooth it over. It most certainly WILL inject volatility in the market.
This market wants to rally – if he says 25 bps cut and they are done – well we could break through those resistance points. For how long? I don’t know – but we could get a sharp pop.
______________________________________________________
Future Pre-Market
The ES and NQ futures are looking fairly flat and the DJ futures are front running the cash by a 8 point (20 above fair value). This is a week of volatility as Bernanke speaks and rate cuts are on everyone’s mind. The Arb traders seem to be taking the sideline – and I don’t expect the cash basket to push too hard one way or another.
______________________________________________________
Support / Resistance
We are still just below those breakout points – and have been flirting with a rally. We could yet do it – but we keep retreating back at the close. We may NOT break through them until after Bernanke talks mid-week.
INDU 12500 / 13000 (we continue to move up and down less than 1% as we flirt with touching the 13000 level. The economy is not fundamentally ready for a big rally – but investors need something positive to get them out of this funk. A breakout of the Dow Jones would certainly bring optimism back to the market as a whole – abed temporarily. Bernanke could also be the catalyst to send us higher – if he plays his cards right.)
NDX 1900 (We gapped up here last week and have been above and below the strike. It is a magnet strike for now – as the economy and earnings story unfold. Google, Apple, and a couple of others heavy weights drove this market up, but Microsoft reeled it back in. It’s a mix bag with volatility. The longer we stay at 1900 the bigger the move up or down as hidden volatility loads into this index.)
SPX 1350 / 1400 (The cheerleading to 1400 is helping us get there, so far we have not closed above it. We could see 1400 today – and that could signal a new (short-term) rally or a place to short this market. It’s 50/50 if we close there until Bernanke speaks. Even then any move up or down is still in the cards.)
RUT 680 / 720 (We are right AT resistance for the broader market to head higher. Watch the close on this – as it could be a sign of money flushing into the broader market.)
______________________________________________________
Conclusion
We have had a good rally off the lows in this market, in the face of the continual housing problem, oil reaching new highs, food prices rocketing, and the dollar dropping. Fundamentally, as pointed out by Rogers, Ross, Pickens, and others it may be just a calm in the storm – because on the ground the fighting is still fierce and the economy has not made any gains. The big stocks that have moved away from US shores to greener pastures are seeing boosts in profits – however as pointed out by some a boost in profits predicated on a weaker dollar is nothing to cheer about – it just means they have met the burden of inflation and are keeping a neck-n-neck race with it. Yeah, that is good news for those companies - but they need to continue that pace to beat the ailing dollar.
The dollar may have hit a low for now and we ARE seeing some strength return and Gold has fallen off from its previous highs. All good news – but it will be perception and how investors READ into Bernanke’s wording that will boost confidence in this market.
BREAK OUT?
It’s perception and confidence vs. fundamentals, so far optimism perception is winning and we are at the snapping point before round 2. Do we break the resistance levels and go higher. I have to side with optimism perception for now and I think Bernanke will play his “Good Karma”, “Worst is behind us” cards to help with that boost. However, I think Fundamentals will revisit and smack down optimism in the future – unless the economy changes SOON!This is a pivot point – get ready for anything!
NOTE: As it was pointed out to me last week about the VIX. The new formula does include OTM options, which does take the skew into consideration – but only so far as to boosting the ATM options slightly by the OTM weighting. This goes a long way to get a better reading on Volatility as per the VIX, however it still does not reflect the steepness of the skew or kurtosis. I am going to work on a formula for this – to track hidden volatility.
Thanks to Dan and Brains for correcting me. For more information about VIX visit http://www.cboe.com/micro/vix/vixwhite.pdf
No comments:
Post a Comment