Market Gaps Down and Fades Away

Morgan Stanley played the earnings game just like you'd expect from a Broker, but FDX didn't get the memo.....

MS came in with less than catastrophically bad numbers (at least they beat the dramatically lowered estimates). FDX was a different story, they missed the numbers and they guided down, which is the double whammy. The big story here is that FDX is a barometer for business activity in the economy. So the knee-jerk, market-wide reaction is bearish. A closer inspection however, will show that a lot of the problem was rising fuel costs. Overall I think that the news we had yesterday, and the earnings reports from this morning will keep the pressure on the market, or at the very least keep the bulls corralled. That should be enough to continue the downswing for another day or two.

I will probably sell the rest of the SPY puts right into the open, but keep the rest of the put trades. Here is the explanation: I noticed how reluctant the Bulls were yesterday, and how jumpy the shorts were as well. I am guessing that the shorts will come in and cover right on the Gap just like the Bulls sold right on the Gap yesterday. However, I still think the swing is down, so I will get back in to partial positions on puts while also riding a lot of the puts I keep.

7:35 am MT: I sold the rest of the SPY puts, half the DIA puts, half the QQQQ puts, and all of the OMC puts (I don't like OMC for now).

7:55 am MT: I sold a little more of the JPM puts, and I sold a little of the KLAC puts. Here are the numbers: The SPY trade (completed) was an .88 cent profit, or 22% gain. OMC (completed) was a small .05 cent gain. DIA is a .98 cent profit, or 30% gain so far. QQQQ is a .26 cent profit, or 13% gain so far. JPM is a .94 cent profit, or 24% gain so far. And KLAC is a 1.13 profit, or 32% gain so far.

I was correct about the shorts covering right out of the gate, so I hit these outs really well. I expect some more fussing around, which will give me a chance to jump back in to SPY, and add back positions on the other puts.

8:50 am MT: If the SPX is going to bounce intra-day, it will probably be right here at 1,335. Therefore, I sold a little more of the DIA and QQQQ puts. If we get a bounce, then I will come in and enter another big put position on DIA, SPY, QQQQ, and possible some individual stocks.

The DIA is a 1.13 profit, or 34.5% gain so far, and the QQQQ is a .34 cent profit, or 17% gain so far.

11:10 am MT: The market did bounce right off SPX 1,335 earlier, just as I warned. It was a good, hefty short-covering rally, which I used as an opportunity to get back in to puts on DIA, SPY, QQQQ, and OMC. I also took a tiny call position on BTU just because I would like a little coal. On the drop back down to the intra-day supports, I sold a small amount of the DIA and SPY puts.

I also sold the rest of the JPM puts, the final trade was a .75 cent profit, or 19% gain. I don't like how twitchy the shorts are being about the Financials right now, but I understand why they are, so I'm done with that sector for now.

11:15 am MT: Alert: the market broke to new lows intra-day. This was a key tipping point for the shorts. They will probably lay off the covering now and the market is unlikely to finish the day in the green.

12:30 pm MT: There's not much to do right now but ride the puts. If the Dow dumps in to the 11,950 area before the end of the day, then I will scale out of some more of them, so far so good.

1:40 pm MT: We had another round of short-covering off the 12,000 lows on the Dow intra-day, but I'm not concerned yet, I think it will fade into the close.

3:30 pm MT: Market Wrap: The Dow followed through nicely on the downswing today and dropped to new short-term lows. The SPX is hanging on to the previous low, and the Naz is still above the previous low. We may get another drop tomorrow, but the SPX will have to break below 1,331. If that happens then the SPX may drop to 1,324 pretty quickly, the Dow would probably drop to 11,950, and the Naz would probably drop to 2,390 - 2,400. If we do get the breakdown and drop I will look to exit all my put positions as we approach those levels. Financials are getting too much short-covering and are being very reluctant to the downside. They may even be getting some bargain buying. Either way, I don't want anything to do with the sector right now, puts or calls. There aren't any really significant catalysts before the open tomorrow, although the Leading Indicators and Philly Fed reports 30m after the open will probably move the market a little. If the Philly Fed is poor enough, it could cause the SPX to break down through 1,331. If oil prices jump up, then that will add more pressure to the downside.

Speaking of oil (and coal), here are some interesting bullish movers in Energy and Coal stocks:

Coal: ACI, BTU, CNX

Energy: XTO, DVN, CNQ, ECA, MRO, PXP, UPL