Last week was pretty weak and not reflecting that things are getting better. I had a couple of emails (as well as a conversation with my father) who said – the Market Preview has been pretty depressing to read. I do not deny that is the case, I wish I could say we should just ignore and “HOPE” that things get better. I have spoken to both some retail investors, brokers, and financial advisors (one even said – I don’t want to talk to you because I while I KNOW you are right – this is just too depressing to talk about!). WHAT? I ask – get off your lazy butts, get focused, and get a hold of yourselves. There is NO TIME for the PITTY PARTY. Get solid and start hedging those positions. If you feel you don’t know what to do, then ASK your financial advisor or broker – if you are not happy with them – find one that CAN help.
There are traders and investors that are NOT losing money. There are traders and investors that are actually making money. 99% of all investors trader with one strategy – pick a stock and get long! They don’t hedge, they don’t trade other products, they are pigeon holed into one strategy and one product. As Jimmy Rogers said – this is the greatest bull market in decades (in commodities).
So if you think the Market Preview is depressing and don’t want to read it – it’s no skin off my back. I start writing this (not for the public) but for my partners and some traders on the floor that wants a “one pager” on news, futures, and indices – I am NOT a talking head that is going to blow smoke up their butts to make them feel good. This is not the Bull Preview or the Bear Preview – it’s just what it is – if you can’t figure out how to make money or hedge your positions – then go get some education or a good financial advisor.
Sorry – I just hate getting the pity party emails or people that are “hoping” – hunker down – get real – and be ready to fight!
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Oil, ECB, Holiday week, and Quarter End = Volatility
Oil is heading higher, hit 143.50+ in the early trading session. The dollar got hit pretty good after Bernanke’s bluff was called. The ECB MAY raise rates if they are concerned about inflation. It’s a holiday week – short week – light volume ! AND – it’s Quarter End, which usually means marking UP positions! All this spells more volatility this week. While the VIX index didn’t get up to the 30 level, which I would of thought would have been the case with the market selling off – we nevertheless did see some huge volatility.
The skews on some of these indices are pretty steep. The problem with the VIX is that while it DOES use the OTM options – the weighting is significantly less than the ATM – thus the skew IS considered – but it is still hard to determine if the VIX is reflecting a higher at the money or higher skew.
Example of what I mean. Since we are only look at a single number when we review the VIX and not looking at the skew it is possible for the following to happen. The VIX is at 25, the ATM is actually at 22 but the skew is VERY steep which pushes up the VIX to 25. OR the VIX is at 25, the ATM is actually 24.5 and the skew is not steep. The above is to simply illustrate that without doing further investigation the VIX number is just scratching the surface of what is actually going on with the premiums and market expectations.
I think we may see some pressure to try to get the market up today – to mark these quarter end positions after a very bad week. I don’t know how well they will be able to do that or how much they can commit to such an endeavor. They DO have a light volume trading week working for them. However, the higher oil prices and the possibility of the ECB raising rates could put enough negative pressure to keep the quarter end mark up for happening.
One thing for sure – expect some volatility.
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ECB and rates
President Trichet is seeing a huge split and now has to choose sides. The oil and food prices are putting serious pressure across the globe, but a strong EURO to fight off inflation will probably hurt exports. I personally think that Trichet is not caught between whether he SHOULD raise rates or not, I think he knows he will be doing so and not just one. I think his problem is if he should do it NOW. The U.S. Fed had their tough talk about strenghten the dollar and hinting they would raise – a bluff – it was called (Bernanke can NOT raise rates without hurting the financial sector). I am sure that President Trichet, like many here in the US, expected Bernanke to actually raise rates, even a paltry 25 bps to show they are serious about fighting inflation.
Now, the burden falls squarely on the ECB shoulders. The ECB is now having to be the global leader in fighting inflation, the US currently cannot carry the burden. However, he has to get his own members in line. The division is clear, almost as if some of them would rather let Bernanke take the lead and do nothing and “wait”. Others want to charge in and fight inflation now. Thus taking the lead and let US play catch up.
Many analyst at financial firms are surprised as well. There was a belief (or perception) that Trichet and his group had some level of cohesion and that decisions (based on the mutually agreed observation of higher inflation) was unanimous. The problem with the ECB is that inflation is NOT affecting all countries the same. Germany the largest producer and exporter in the ECB is seeing signs of slowdown in the export market and also seeing inflation pressure.
The split and pressure has made what seemed like a sure thing – now not so certain. I think Trichet’s press conference will be observed and analyzed – to see if it is a one and done rate hike (if there is to be one) or if he indicates that a rate hike cycle has started. If the later be the case – expect more pressure on the dollar – until Bernanke is able to play catch up.
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Commodities going higher – a bubble ? or just the new reality?
When the NASDAQ mark rallied in the 90s and then the Dot.com bubble gave it an additional boost – many had called it a bubble. Eventually it was, but only in the Dot.com sector for the most party. Once the Dot.com bubble popped – the market had made another rally – this time no one called it a bubble. Why not?
No doubt the commodities have moved parabolic to the up side. Not just oil, but many hard and soft commodities. The talk of speculation in oil prices is starting to wane, as more are beginning to see (or realize) the massive increase in demand in the China, India, and other emerging markets is GROWING and not a little trickle rate – but compounding. Until demand eases – oil prices will remain high – but THIS HIGH?
I am not sure – I think we will see a significant pull back in commodities – but not a crash like in the Dot.Com market. I consistently get asked why I don’t think commodities (and oil) will come crashing down. To me the answer is obvious – we ALL use OIL, we ALL need to EAT, we ALL need commodities. You didn’t need Pets.Com, Webvan, or many of the other internet companies. Try living without food, oil, and other commodities for a month! You can easily live without Dot.com stocks for the rest of your life.
I think Jimmy Rogers is right. The world has and always will live on commodities. We don’t take notice and have become not only dependant, but just expected it to be there. The world’s foundation is built on commodities. Now in the last decade India and China (and others) are growing – faster. People are building cities (not one but many). These are big cities. Companies are opening up in these countries daily. Billions of people are moving from a 3rd world life style to a 1st world life style. They want cell phones, TVs, cars, etc.
So here is what I see…..(IMHO)…..we are going through serious growing pains – Commodities (including OIL) will be high for some time. Sure OIL may hit $200 and/or pull back to $100 - but it is NOT going to $20 or $30 any time soon. The same for other commodities. Eventually – things will begin to settle – people will stop panicking and realize the world is not coming to an end – but is just changing. We will see global contraction. When the dust settles China, India, and others will be the world’s largest consumers. The AAPL, DELLS, NIKE, etc. will figure out how to sell and market to these growing populations. Those companies that move into a global roll and embrace globalization will do well and prosper. Those that fight it will suffer. This global growing spurt is not going to be easy and will hurt – don’t fight it – just accept it. It is happening with or without us.
Expect OIL and commodities to come off – but don’t expect a crash. It is possible when they come off it just creates another buying opportunity. This is nothing like the Dot.com bubble.
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Futures Pre-market
The futures have been down for the most part, but is seeing some volatility this morning. The spread is pretty narrow. Don’t expect the ARB traders to drive the opening this morning. This is a short and light volume week. Additionally the ECB, commodity prices, and Quarter End marking could inject more volatility, thus leaving the ARB traders side lined.
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Support / Resistance
We may find support today for no other reason that if there was ever a time for quarter end marking, today is it. Firms need to show something for the quarter and anything to help reduce those nasty hits last week will help.
INDU ????? / 11500 (we really haven’t created a support – since we broke. We are in what is known as “free fall” there are no supports until the market can consolidate somewhere. We may get a pop today – with some marking – but don’t bet the farm that if that does happen it was the bottom.)
NDX 1850 / 1900 (We are still a ways up from the March lows (unlike the other indices) and we may be able to get a short pop today if the marks come in. However, this index is still very high (VXN at 28) – but I don’t want to call this a bottom.)
SPX 1275 / 1300 (We are AT support (March lows) we need to hold here. The INDU could not and the NDX is still way up from their lows. However – this is a broader index (500 stocks) and we are at a key area. Watch 1275!)
RUT 700 (We a just below 700 – we need to close above it to bring any “Hope” back. We may get a strong Qtr. End close today – but don’t buy that as a support. However, 700 is a key area).
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Conclusion
I am sorry that I am not able to bring good news every day for those equity investors (or long and wrong crowd). Most of the readers of the email are traders and make money regardless of direction – however some financial advisors, brokers, and retail investors read this as well. They want some bit of “hope” or good news. For investors out there – these are the times about protecting PRINICPLE first – and be happy with not losing any. It is a tough time and retail brokers and financial advisors are now earning their keep to the down side. When the market goes up – you are looking for a good financial that can beat the S&P – those that do earn their fee. Now those same financial advisors earn their fee when they can principal protect those positions from losses. If you end there year flat (with no losses) I would be very happy to pay the financial advisor his fee. Good brokers and financial advisors should be also measured by how much they can save you in difficult markets (I think even more so than winning in a bull market).
I wish I could point to good news and be a cheer leader for the economy, like many talking heads on TV. However, what good would the Market Preview be – if it just blew smoke. I don’t believe ignorance is bliss. It is time for us to toughen up and take a proactive roll. Toss “hope” into the trash can and get in front of this. If you are a broker or financial advisor – pick up the phone and call your investors (don’t wait till they call you). Get some non dollar ETFs on those sheets. Get some commodities on those sheets. Get some different bond holdings on those sheets. Get a annuity on those sheets. Don’t try to pick the bottom in the financials or housing – that is a crap shoot. I know Citi is trading $17, but who knows – it could go to $10. Why not? Remember – it is NOT about price it is about VALUE! Don’t be fooled by low price stocks as being good values. Low Prices does NOT always mean good value. Avoid dollar cost averaging – unless you understand value!
Good news – 4th of July is coming up – enjoy the BBQ, Friends, Family, and Fireworks! At the end of the day it’s family, friends, and your health that is all that matters!
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