Courtesy of Phil’s Stock World

TGIF for sure, it seems like ending the week is the only way to stop the markets from dropping!

We failed to take back our weak bounce levels I laid out in yesterday’s morning post as the Dow failed to hold 8,250 on a very brief spike past it, the S&P failed right at 888 in the morning and again in the afternoon (where we were able to use it as a “go short” indicator), the Nasdaq flirted with 1,750 all day and barely held it, the NYSE also failed 5,700 in the afternoon and gave us a good, bearish indicator while the Russell never came close to 488 and failed our critical 480 mark at the close.  As I’ve been saying all week, we really don’t have to watch anything but the NYSE, which will test the critical 5,600 mark this morning and failing that level would be, in technical terms: BAD!

Oil ($62) and gold ($920) also failed our levels so there was nothing to be bullish about in yesterday’s action.  We were in and out of DIA puts and calls, using S&P 880 as our inflection point and we took the money and ran on our AA calls (up $330, 78%) and DIA calls (up $45, 20%) as our first two completed plays in our $5,000 Portfolio, which will now be tracked under Seeking Alpha’s “Stock Talk” feature as an experiment for non-members.  We did a day-trade as well in the $5KP on MCD, picking up the $55 calls at $1.65 for a quick ride to $2, adding another $175 (21%) to the kitty for the week.  Our only open trade in this hit and run portfolio is SGR, where we are in the $22.50 calls for $3.30, selling the $25 calls for $1.45 for a net $1.85 entry on this bullish $2.50 vertical spread (4 contracts).  Earnings were a slight miss but we’re not worried as the order backlog is fantastic and we’ll be buying more if the after-hours sell-off holds into the morning. If this play comes through for us we’ll be up about $800 in our first week and well on-track of our goal to double up over earnings season.

It will be a shame to have to play the dark side but we’re back to neutral now after covering our bullish plays with DIA puts as the upside just seemed way too risky heading into the weekend.  It looks like the puts will be doing well this morning as the futures look dreadful (7am), pushed down by a 2% move up in the dollar that has oil back below $60 and gold under $910.  CVX gave disappointing guidance last night and if XOM follows them down 2%, just those two will cost the Dow 25 points.  We have trade data at 8:30 but I don’t see that as a rally point and at 9:55 we get to see how confident (or not) our consumers are.

As you can see from David Fry’s SPY charts, we have now clearly formed the dreaded “head and shoulders” pattern and only a very rapidly declining 200 dma stands between us and technical Hell.  We are going to test that line today (87.69 on SPY) and possibly run into the 89 dma at 86.48, which is almost exactly a 10% drop off the June 11th top of $96.11 so we are loving that spot for a 20% (of the drop) bounce back to 88.40 so that will be our significant upside line today.  Sadly, that is just 2 S&P points over yesterday’s close and 888 resistance is above that so the chance of slogging through that mass of resistance to have a good day is not very high this morning.

Only the low volume caveat is giving us hope as perhaps Mr. Stick is saving up his firepower for a big finish on Friday.  It will indeed take a Deus Ex Machina to save the markets this week as we’re not expecting any data or announcements to move the markets this morning.  Next week is a data fiesta with PPI, Retail Sales, CPI, Industrial Production, Fed Minutes, Housing Starts and the NY and Philly Fed Reports plus tons of earnings so it’s good to be in cash or neutral into the weekend as we’ll have plenty of fun things to play off next week, especially with options expiration day looming on Friday!

Asia closed out their week fairly flat and back around the May averages.  The Nikkei finished at 9,287, 500 points off Friday’s open and the Hang Seng gave up early gains to finish down 82 at 17,708, also down about 500 points for the week.  Japanese shipping stocks fell after a report in the Nikkei that rates on container ships from Asia to North America had been dropped for the first time in three years, reaching six-year lows. The paper said in just-ended negotiations with businesses, shippers had agreed to reduce rates by 20% to 40% for the fiscal year ending May 2010.  The dollar was propped up to 93 Yen in overnight trading but wasn’t fooling anyone and is back to 92 Yen ahead of the US open yet the dollar remains strong against the Euro ($1.39) and Pound ($1.62), which means those currencies are exceptionally weak against the Yen which is, as we’ve been saying, TERRIBLE for Asian exporters.

Chinese exports did, in fact, fall 21.4% in June but that was a little better than May’s 26.4% decline.  Imports were down 13.2% in June, despite China’s massive commodity stockpiling during that month and it was, of course, much better than May’s 25.2% decline. You can see on the chart of the Baltic Dry Index how China’s commodity binge pretty much commandeered the fleet for June, pumping up rates and then dropping them as the program wound down.  That being the case, it’s no surprise that the BDI chart looks very similar to the oil chart or the CRB chart for that matter.  China’s stimulus program is having some effect as June property prices rose 0.2%, the first increase in six months,  fueled by low interest rates and government measures to support the sector including tax breaks on transactions and lower downpayment requirements – things our government needs to do if they want to get serious about building a recovery.

Europe is down about half a point (8 am) ahead of the US open with the FTSE testing the 4,100 line, the DAX bumping along 4,580 and the CAC barely holding 3,140, all right about the 10% lines off the June highs.  Overall, the global markets have gone from being down about 20% for the year in March back to up about 5% at the end of May and are now (other than the Hang Seng, which is outperforming) down about 5% for 2009.  Of course our starting point for the year already sucked and we’re all (other than the mighty Hang Seng) still down around 40% off our highs.  The question that will be answered next week is: “Do earnings justify that 40% drop in valuation?“  Perhaps they do but I don’t think they justify a 50% drop in valuation and the Nikkei is already there so we’ll see if they can hold the 9,800 line.

If not, it’s the Hang Seng that has the farthest to fall and FXP (ultra-short China) is a good way to cover the potential drop.  July $12 calls are $1.07 while the July $13 calls are .57 with FXP at $12.83.  Taking this $1 vertical spread for net .50 gives you a break-even at $12.50 and makes excellent weekend disaster protection as it won’t take much of a dip in China to double you up by taking the FXP over $13.  On a longer-term basis, the Jan $15 calls at $2.62 make excellent downside protection as naked longs (FXP was over $100 last Fall) or you can sell the Jan $20s for $1.62 against them and put yourself in a $5 spread for $1 net.  These are nice protective plays as you can take $5,000 out of a $100,000 portflio and have $20,000 worth of downside protection against a collapse in Asia.  5% of your portfolio giving you a 20% hedge is a good risk/reward strategy.

Another fun way to play FXP is a FREE play you can create by buying the ETF at $12.83, selling the 2011 $40 calls for $1.75 and buying the Jan $20 puts for $8.80.  This puts you in for net $19.88 and you have the right to sell your stock for $20 through January 15th (by exercising your put) so you have no downside.  Should the FXP fly up, you will, of course make all of the upside gains and you will be capped out at $40 by the calls you sold.  Should FXP head down and force your exercise, the 2011 caller will retain some value and that would be your loss (risk) against the potential $20 upside.  Those are a few of the creative ways you can hedge against disaster as the Hang Seng is outperforming other global indexes by 20% or more and if we go down, you can be pretty sure they will go down too!

We don’t want to hedge the US markets lower, we think they are low enough and hopefully today we’ll get the bottoming action this market needs to break higher but Mr. Stick has his work cut out for him this afternoon as we need a move up over 8,300 to avoid printing a very ugly weekly chart.  As I said to members yesterday into the close:

I just don’t get this half-assed defense of MINIMAL support levels.  Right at 480 on RUT and 880 on S&P and 1,750 on Nas.  Arguable the Dow and NYSE have made progress but if this is all they can do then this is very scary.  Maybe they are saving up for a ridiculous rally tomorrow or maybe they simply can’t do it, even on this pathetic low volume and that means we are one snippet of bad news away from a black Friday-type event.

My logic is that clearly the markets are being supported but then I have to say, to what end?  Why support them at all if you can’t close the deal?  I expect better out of my evil market manipulators, that’s all….

So it’s all up to Mr. Stick to save the markets today but in cash we trust is our motto as we don’t like to place our faith in the invisible man pulling the strings (but we sure have learned not to bet against him!).  Our trade deficit numbers were actually great, the lowest number since 1999 in May, despite a 20% rise in oil prices that month.  Import PRICES, on the other hand, were up 3.2%, the biggest monthly increase in 20 years thanks to Goldman’s commodity manipulation (oops, allegedly!).  Excluding petroleum, import prices were up just 0.2%.

Lines we don’t want to fail today are:  Dow 8,100, S&P 880, Nasdaq 1,750, NYSE 5,600, Russell 470.  Most likely, we will open below all of those lines so the trick will be taking them back but even that is just going to be pathetic and will give us a bad pattern into the weekend.  The only thing that is going to turn us bullish is a return to Wednesday’s opens and that would be Dow 8,300, S&P 895, Nasdaq 1,775, NYSE 5,750 and Russell 495.  Our shining ray of hope is the SOX, which close to recovering at 262 so we’ll be watching them very closely but these are the slimmest of hopes and the dark side is still the quick and easy path for most of our trading.

On the whole, we should be thrilled though.  We finally got the down week we expected (and held out for) all last month but, as the old saying goes:  Be careful what you wish for because you might actually get it!

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