Traders,The bottom fell out of the market yesterday and busted through any supports down below – panic started setting in all the way into the close. Was it reality that we are still in a credit crisis, job market getting worse, and the possibility of recession becoming a reality? It’s not like we didn’t KNOW this could or would happen. However, euphoric optimism continued to keep the market from falling – now panic has set in. As I said hidden volatility was ramping into the market – take heed and HEDGE those long hard deltas.
Now what, now where? We are trying so hard to find a light at the end of this tunnel – but there is none. We are continuing to extend credit lines to banks and financial firms – doing everything we can FROM trying to find a real bottom. This is NOT the end, nor is it definable near. That is the problem – we can just as easily have a massive short covering rally as easily as a big sell off.
This market will survive – but first we must find a FUNDAMENTAL bottom to the market and leave optimistic hope at home. If and when we see the following happen, only then will we be able to POINT to a bottom.
1. The Discount MUST be closed to NON-MEMBERS, it also needs to see the borrowing from the FED decline
2. We must see the bottom of the housing market (foreclosures subside and decline) (sales to become flat, instead of fall)
3. Banks and investment firms STOP writing down mark-to-market losses (when will they just write it down to ZERO?)
4. Jobless claims decline (and not just for one month)
5. A GDP based on domestic strength (not foreign trade and stimulus checks)
6. Oil prices to drop below $100 and remain there
7. The dollar strengthen (seriously – not just jolts up or down).
Once we see these changes begin to take place – then and only then are we able to point and say THERE, things are getting better and FINANLY the worst is behind us. However, it doesn’t look like that will be happening until at the earliest the 1st quarter of 2009. It is very possible that when we DO find that bottom we could remain in a stagflation environment for some time – expect that and plan for that.
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Unemployment rate up to 6.1%
If you asked Labor Sec. Chao, she would read from her que card, everything is fine. I don't think she has ever lost the smile or said the employment market is having problems.
However, back in the real world, companies are battening down the hatches and reducing their overhead, that includes jobs. Why? Because consumer spending is down, inflation is up, and margins are getting squeezed. Companies do NOT like to lay people off, because it means one thing – there profits are shrinking (margins are shrinking). Companies just like the citizens of this nation are being squeezed by higher fuel prices, higher commodity prices, and inflation. If it is affecting YOU, the consumer – you can bet that it is also affecting Companies. They need capital to ride out this tough times and companies are quickly moving from reorganizing their business model and shoring up losses in margins – to the next step – that dreaded strep – and that is cutting staff.
This is also a clear sign that a recession is on the horizon – you can’t have increased inflation, decreased consumer spending, and now increase in unemployment and expect to dodge a recession. We could HOPE – but that is just not reality.
The unemployment rate head highest level since to 2003. Payrolls shrank more than 1%, by 84,000 jobs in August, more than expected.
The futures got a serious smack down in the pre-market when the news came out.
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AIG and others need more money – go figure
As more and more firms (insurance, banks, mortgage lenders) continue to get in line for more money to shore up balance sheets. AIG is the next in line and may need to raise over $15 billion according to Morgan. Morgan went on to say their short-term future looks cloudy as there are serious questions about its balance sheets. AIG has posted losses in 3 straight quarters and are expected to post more.Merrill Lynch is also on the chopping block – as Goldman downgrades them to a “SELL” – concerned that MORE write-downs are to come. Merrill has already fired their CEO and have written down more $40 billion – where is the bottom? Merrill is also taking that trip to Korea to find a buyer of their mortgage related businesses, Lehman got there first – but they too have not been able to strike a deal. Since Lehman and now Merrill have failed (so far) to strike any deal – it is only a matter of time before they need to take some more write-downs on these positions if they are not able to sell them off.
Don’t expect the financial sector to look rosy any time soon.
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Futures Pre-market
The unemployment news (which was kind of expected from the ADP numbers yesterday) gave the futures a good smack down in the pre-market. The spread is very wide at this point over $5 in the SPX and $9 in the NDX. The ARB traders would traditionally start buying futures into the opening to sell the cash at the opening – but they may be a little nervous to do so after yesterday’s market fallout. The spreads are wide – so we could see some volatility in pre-market future action until the opening when the fair value spread will narrow.
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Support / Resistance
You might say, WHAT Support? You are right – we blew through those yesterday. Panic set in yesterday and we may see some more at the opening. But this market is a YO-YO and we could just as easily see a euphoric rally set in and send this market back up – or we could see more panic that sends this market down. The hidden volatility I eluded to has now reared its ugly head – but we can continue to see big moves.
INDU 11,000 (11,275) 11,500 (We stalled at 11,275 area yesterday before that too gave up and headed lower. 11,000 is in the cards - so don’t be surprised if we do touch that level. However, we could see a euphoric rally as investors may look at this as a buying opportunity. 11,275 is still a strong gravity point that we could get pulled back to for a breather. However, it’s really going to be about one thing – how investors want to hold positions going into the weekend. – watch the close).
NDX 1750 (1800) 1850 (This is a volatile uncertain range for sure – not only did we not hold the previous upper band of the 1850 level but we cut through the 1800 big support area like butter. Like the INDU 1800 still has a pull and we could revisit that level and hold. However, the futures are looking like a suck out this morning and 1750 is in the cards. Expect more volatility – up and down.)
SPX 1200 (1250) 1300 (Again we blew through the 1250 support, but we could revisit it by the close. 1200 was only an intra-day visit back in July – however we could revisit that level. It’s going to be after the opening panic that will set the stage going into the weekend.)
RUT 700 (720) 740 (This was the one index that look better than the rest. The 720 level was pretty strong and we really didn’t break down from there – until the late session and we still are not seriously below that. This morning looks like a 3-4 point drop – but we could rally back off – if panic does not ensue. If we close above 720 strongly – that could be a supporting single for the narrower based indices.)
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Conclusion
Well I watched CNBC this morning and it was all FOOTBALL this and that. It was like nothing happened yesterday – come on guys – get back on the ball, and not the football - leave that to ESPN. The Football story would have been nice if the market just didn’t take a dump on Thursday. Hey I am a Football fan – but I don’t watch CNBC for Football news – it seems like CNBC is more about having fun some of the times than seriously reporting the market news.
McCain got to make his speech yesterday – a little flat and not too exciting. The good news is that all the DNC and RNC smoke is over and we can get on to the debates and policies – I was never a fan of self congratulatory DNC and RNC (even though I watch them both) – they never really tell us anything except how great they are and blow their own horns. I want DEBATES – that’s just me. I missed Obama being on O’Reilly last night – not that we would of learned anything – but at least there wasn’t going to be any softball questions (not that I am an O’Reilly fan). Maybe they should hold a debate on the Daily Show and the Colbert Report – that would be fun.
This market is about one thing Volatility – we could continue to drop or also see another big rally – don’t think you know what is going to happen (other than volatility) – we DON’T. And because we don’t know, it is about one thing = HEDGING and GAMMA. If you don’t hedge and don’t have gamma – whose fault is that?
Expect some hyper moves today – either way. Market looking lower going into the opening.
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