MP 5/23/08

Traders,

I got a lot of feedback about the oil preview yesterday – mostly having a political slant. I appreciate that gas prices are high and it is easy to blame one group of people. Finger pointing from responses came from every direction, OPEC, the oil companies, speculative traders, the Fed and the weak dollar. Sure – they all have something to do with it, but let’s for one second strip away all the blame and look at what oil is. It is a finite commodity, in which consumption is accelerating at an exponential pace and the extraction rate has flattened.

Granted there is premiums in oil from speculation, weak dollar, and political risk – but at the end of the day the intrinsic value because of the nature of oil is only going to rise. What IS debatable is how MUCH of the premium is attributed to speculation, weak dollar, or the plethora of other factors. Depending on how much value you place in those premiums – the range intrinsic value can be anywhere from $60 - $90. I doubt that we will ever see oil drop below $50 again in the foreseeable future. So at the end of the day we must understand that we are getting very close (if we have not already gotten there) to the inversion of consumption vs. extraction. And if you accept that as being true – oil is only going one way for now and that is up.

Sure we will see a volatility band and on any given day – oil will no doubt pull back and then pop again. So do not get caught up in the daily volatility, the “knee jerk” news stories, or what the talking heads are saying any given day.

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Job-growth forecast

One of the leading indicators of the strength of the economy is job growth – which no doubt everyone agrees with. While the government methods have no doubt changed over the last several decades (including part-time, temps, excluding discourage workers, etc) – and while the measurement is hard to track on a year-over-year basis if those methods continue to change – we are still able to extract some indication of the real job growth picture.

The problem with Job growth measurements is looking at short-term trends vs. long-term. Sure the holiday season rolls around and part-time and new full-time jobs are created – so getting a better year-over-year measurement gives a better overall resolutions. However, that being said we will still hear the latest “short-term” trends which can send “knee jerk” reactions into the market.

The latest of these is coming from Treasury Sec. Henry Paulson – who is predicting that the tax rebates will create 500,000 new jobs this year. How he came to that conclusion, well I am not sure. The economist on the other-side are looking at the tax-rebate check as a one-trick pony that may artificially create a boost to government data for one quarter. While there may be SOME job creation, coupled with a pickup in retail sales it should be rather insignificant and those jobs (which could be part-time) made fade back out of the system. The median estimate by Bloomberg survey was for an increase of 158,500 jobs (resulting from the stimulus package).

``It is a one-time shot, a drug addict getting a hit,'' said William Dunkelberg, the National Federation of Independent Business chief economist in Washington. ``It will feel good for a quarter, but then the stimulus is gone and it's not clear what would fill that void.''

The reason to keep track of this information is that we MAY see some boost to some numbers – the trick is to filter out the impact of the stimulus and not get lulled in and start basing longer-term trading decisions on the numbers. It’s forecast not earnings that detail the future.

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NYSE trading volume falls significantly – but U.S. volume rises

There has been many reports of lighter volume – being reported by the NYSE which is down over 26% this quarter. New routes have been picking up a tremendous amount of volume – over a spider web of networks. This has made it harder to track technical signals for many traders out there that rely on accurate data from the NASDAQ and NYSE.

``Technicians should be losing sleep over this,'' said Ralph Acampora, the 40-year Wall Street veteran who helped pioneer technical analysis. ``I can't be as trusting of my indicator, because I don't have all the data. More volume means there's more money and support, more demand and momentum. You need money to push stocks up.''

Bats and Direct Edge have been taking volume from the big players – and unless technicians are able to get accurate readings from ALL exchanges – technical assumptions could falter. Several new data firms have developed complied indicators from multiple exchanges – however for those relying directly on the primary exchanges may not get a clear signal. It is definitely time to analyze your data and making sure that you include third-party exchanges.

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Futures Pre-Open

The futures are getting hit in the pre-market as Oil moves back-up after yesterday’s retracement. The commodity market on the whole is pushing higher and the dollar (while yesterday seeing some strength and helping oil pull back) is still on average moved lower. Going into a holiday weekend and possible light volume (note: on ALL exchanges) could create some additional volatility going into the opening. The futures are front-running the cash for now – so we may see some Arb trader pressure on the cash basket going into the opening.

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Support /Resistance

The market held those areas yesterday and saw a very slight rebound, which was not good news for the bulls (expecting a larger pop off the short-term support). Today will be key on how firms want to go home over the extended holiday weekend – many probably do NOT want to be holding long equity with any commodity risk exposure. Look at the short-term supports - closing above the supports is key for the bulls.

INDU 12600 / 12800 (Wednesday took us to 12600 and yesterday we treaded water above it. However it is NOT a place to get long – but for those bulls to flatten out there positions. If 12600 does NOT hold then 12400 will probably be the next short-term support.)

NDX 1950 / 2000 (We are still 14 points above the short-term support and could possibly stay above it going into the weekend. Unlike the broader indices this is driven by some over-weight stocks so keep an eye on AAPL, MSFT, INTC, and the other over-weights to get an indication where the big caps in the NASDAQ are going. A big slip in AAPL could drive this down through 1950 and AAPL has already made it’s big move into the summer. 1950 is tricky ground and a risk to get long – if you want to play it long at 1950, I would only do it with a Gamma position that is at the very least .25 : 1 to hard deltas. So on a four point slide down to 1946 area you should be flat and start to get short. That’s if you can take 4 points of pain – tighten up the Gamma to Hard Delta ratio if 4 points is too much to swallow.)

SPX 1390 / 1400 (Do NOT I repeat DO NOT get long at 1390 – yeah it is short-term support and yeah we COULD rally – but any long hard deltas at that line going into a 3 day week-end is NOT what you need – cause you will be going crazy on Monday when you can NOT trade. If you want to take shots on the long side at the 1390 level do it with a spread or soft deltas so any break-down will NOT be painful.)

RUT 720 / 740 (720 is a good short-term support – the key is that it HOLDS that to show good flow into the broader market. If that doesn’t hold expect the narrower based indices to follow. However if it holds and you see more volatility in the narrower based indices – it could just be noise.)

Sure we could rally out of here – off these short-term supports. But do you think anybody (other than some retail shot-takers) want to be holding naked long positions into a holiday weekend after the oil rally, Fed notes, and Moody’s news? Hey – I could be wrong and intraday the Fed could come out with some new stimulus or something could change – but if there is NO good news to get this to rally today – it will be about ONE thing – holding short-term supports over the weekend. Today is not a day to play the long side. It IS a day to play the short side if we break-down!

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Conclusion

Don’t be stubborn, the market going up or down is not good or bad – just position yourself for the direction. We had a very surprising run for the last 2 months, be thankful and take you profits off the table. There are still some good sectors to get into out there – but no matter how much you see a sector get beat-up (like Financials or Airlines) that doesn’t mean you should be bottom picking. They are down for good reason and remember one important fact Fundamentals ALWAYS trump Techinicals in the end. Techinicals only work if the fundamentals of the company are none volatile. But no matter how low a company gets because there is some fundamental problems it can ALWAYS go lower – regardless of technicals. So avoid the financials and airlines for now.

For bulls look for sectors in the energy area and also benefit from a combination of weak dollar and strong commodities. For Bears get ready for broader downward pressure across the bigger indices as the few good sectors will NOT be able to keep the broader market from sliding. Commodities is the strong play – so are the foreign currencies to the upside. It is a mixed game and the U.S. economy is in the dog house – do NOT bet on the U.S. economy – bet on the Global economy and commodities.

As my friend Amy always says – “The trend is your friend, and don’t sell your friends short!”