8/10/08 (Deere Hunter, Retail Falls, Get your HEDGE ON!)

Traders,

We began to slide back down and both the INDU and SPX slide over 1% after the big run up. The NDX had AAPL (after a buy recommendation) holding solid ground to leave that index flat. The RUT also gave up some ground, just shy of 1%. The slide in equities could not be blamed on the dollar or oil, as oil also slid and the dollar didn’t give up any ground. Interesting was the massive reduction in short-interest in many issues after this massive rally, clearly indicating that short covering DID play a big part in the rally. The question now, do they re-enter the market up here?
Remember – volatility doesn’t mean direction – it just means big moves. The VIX has made a good move down (as premiums fall off in rallying markets) – however statistical volatility has gone up – since we are still seeing big moves. This clearly means we should expect some MORE big moves – not less. The hyper rally means more big move in the cards, especially on the rebalance of the short-interest. I am sure that will increase again.

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The Deere Hunter

Deere’s earnings fell short of expectations – and shares are sliding in the pre-market. Which is putting pressure on the futures in the early session. The big bite out of profits has come from higher commodity prices as they have to buy raw materials to build those monster farming beasts. Additionally, the company is also forecasting a fall in construction sales as much as 5%. While the company is getting hit in the pre-market, they still have solid revenues – they really need to take a bigger step into the multi-national scene, like CAT. Which could off-set domestic slow-downs. Expect pressure in the market based on this American Icon Company getting hit in the pre-market.

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Retail Sales fall!

The Commerce Department reported a .1% decline, the first decline in 5 months as credit lines and any rebate checks have be cashed. We had kept up those retail sales even after the economy had been slipping. Even the government gave out billions in the stimulus checks – to keep the spending going. Many forget that 2/3rds of the GDP comes from consumer spending and we are the world’s leading consuming nation. If there is one thing the people of this nation knows how to do – it’s spend money.

Many economist have been pointing to the retail sales number (being positive the last 5 months) as to an indicator that we will not have a recession or that we are not IN a recession. However, the house ATM has been tapped, the rebate checks spent, the credit cards tapped, and inflation up – unless we can get the government to give out some more free money, well retail sales have been expected to fall and continue to remain low until the credit (deleveraging) can fully unwind.

The problem? Where are people going to get more money? The credit lines at banks have tightened, Morgan Stanley closed their client’s ability to tap equity lines – and that will probably be the norm across the board as banks need capital to carry these leveraged positions that continue to see write downs. Unemployment is up and combine that with higher inflation, gas, food, and energy prices – which is sucking out MORE money than normal. The AUTO sector is really taking a beating, especially the GM’s of the world who usually move those large SUVs and Trucks – now collecting rush on the lots.

Economist are predicting that the 3rd and 4th quarter are NOT going to be looking any better. There is still too much uncertainty. Until we find a bottom in the housing market, foreclosures reduce, employment increases, and we see inflation curtail – well things are just going to get tough for at least a couple of quarters.

However – the Wal-marts might be the recession shopping place as things get tight – hope they keep rolling back the prices!

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Futures Pre-Market

Between the Deere and Retail Sales news – the futures are getting hit in the pre-market. The spread is there – so expect some Arb traders to buy the futures and short the cash basket going into the opening. If the spread remains at the opening, expect a drop down at the opening.

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Support / Resistance

The short-interest dropping off across the board is a big way over the last couple of days clearly indicates that part of this hyper rally was fueled by some big short covering. Again, not a good sign that the rally had fundamental solid legs – expect a pull back – part of that we saw yesterday. The bandwidth from the move in a short period of time also means MORE volatility and hyper moves – before stability is found. The VIX is NOT indicative of the actual intra-day volatility that we are seeing – so do NOT use it for forecasting standard deviation, use statistical.

INDU 11500 – 11600 / 11800 (Was 11800 the blow-off top? Well it seems like it and we may revisit the 11600 area today – but I would not get long, but rather flat at the 11,600 line. The recent hyper moves mean more volatility and less stability at the narrower support/resistance points.)

NDX 1900 / 1950 (We didn’t come off, but that was because of a couple of overweights that kept the index from falling. The hyper volatility in this index is being driven by the top 10 overweights. The futures are down, 1925 is in the cards – but we could also easily rally back to 1950. The short-interest did wind down a lot in this sector, so we may see that re-enter. If it does with any force we push lower.)

SPX 1275 / 1300 (The head pop above the 1300 line was nothing more than that. However both 1275 and 1300 are both in the cards. Expect volatility.)

RUT 720 / 760 (The two-day hyper rally in the RUT was a shocker, yesterday saw a gap down and it pull back more. We could visit 740 the middle zone and previous resistance point. However, don’t get long there!)

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Conclusion

While the VIX may say there is little volatility – the market is moving as if the VIX is in the high 20s. The skew has also fallen off, meaning – get your puts on! When they are giving you hedges against long hard deltas on the CHEAP – BUY THEM. Remember – this golden rule, “Buy when you CAN! Not when you HAVE to!” - that means on a hyper rally in the market and you are now able to roll up and lock in gains with CHEAP puts – don’t hope for a bigger run up the next day – buy in some hedges NOW. It’s like they are offering you cheap hurricane insurance during hurricane season because we haven’t had one it in a few years. That means get it on! Buying when other don’t want to because they are “hoping” for the rally to continue, means you are getting it CHEAP. Ok – I will stop beating the dead horse – but you get my meaning. If this market falls back down and you give up a crap load of unrealized P&L – don’t cry about it!

Now go get your hedge on!