Market Bounces Off Long Term Support

AIG is down 58% pre-market after having its credit rating donwgraded at Standard and Poor's and Fitch. WM is suffering the same pains. The Financial sector turmoils appear to be reaching a near-term crescendo with all the bad news. The catastrophic, self-inflicted damage may keep the bleeding in Financials going for some time, so I expect more bad news to come flowing into the markets, but the current tidal wave may see its peak with the Fed. Goldman Sachs still has earnings to report this morning, so the news will keep on rolling in today.

In addition, we will get CPI, which I expect to show a one-month deflationary reading after the big drop in oil prices recently. Also, HPQ is cutting 24.6k jobs and DELL is warning of further softening in global end-user demand. I will use the negative tone early in the day to scale out of the last of my puts and then watch for the next signals. It may be that we go quiet ahead of the Fed, but I expect a bounce back on speculation of a rate cut, especially if we drop a bit more right out of the gate. The Dow could jump 100 - 200 point mid-day and still not be able to undue half the damage done by yesterday and this morning.

7:31 am MT: I sold the last of the DIA puts right into the big gap at the open for the max gain of 2.20 on my calls just before the bounce I was warning of. The total trade was a 1.45 profit or 34.5% gain.

8:00 am MT: GS beat earnings by 10% but the stock got caught up in the early morning carnage and gapped down before bouncing back. BBY missed earnings and gapped down sharply. CPI met expectations, which was a drop of -0.1%. That met my expectation of a deflationary reading. AIG is now a penny stock, last week it was a $25.00 stock.....

The Fed Funds Futures are now pricing in a 100% chance of a 25bp rate cut today. In addition, they are pricing in a 28% chance of a 50bp cut. I speculated that the risk of a rate cut today will cause the shorts to cover a bit this morning, which has already happened to an extent with the gap and bounce.

8:30 am MT: Oil has had a big gap down along with the market. If the market comes back, it will probably be aided, in part, if Oil stays down in the low $90’s. Oil may be oversold short term, and it may bounce, but if it stays in between $90 - $100 for awhile, it will really help the economy.

12:15 pm MT: I’ve never been prouder of Benny and the Feds than I am right now. GOOD FOR THEM!!! They stared the market right in the eye and said “you (meaning speculators on all levels all the way up to the biggest Financial Institutions) got yourselves into this mess, and if you want to keep enjoying speculating in the Financial markets for the rest of your lives, then you can darn well get yourselves BACK OUT OF THIS MESS!” Think about it for a moment…..There are millions of people in the Financial markets that make a living (and for many a spectacular living) speculating every day in the major markets. Do you think they just want to give it up and go dig ditches for the rest of their lives? Absolutely not!!! This is exactly what the Fed (and the government) needed to do. They needed to stare down the market and say “look folks, we’ve already done a lot for you, in fact, we’ve done an awful lot for you, and we’ve hit the limit, you need to get off your rosy red cheeks and start doing something for yourself, because we’re done bailing you out.” “Start figuring it out, start fixing your own problems, we’ve done all that we can, and all that we should, now use all your ingenuity, savvy, guts, and determination and get the rest of it done yourselves."

See, the principle here is that sometimes you reach out a hand to lift someone up when they need it (even when they caused the problems themselves). But you can’t do it every time or they become dependent on you, and you take on the role of enabler or crutch. The best way to help someone help themselves, is to lift them up from time to time, empower them, but then let them have an opportunity to take care of themselves as well. Urge them to action, encourage them, and above all, tell them that they can do it – that they can succeed on their own. I like to say that you teach someone the tools, give them the support and example from time to time, and then give them something to live up to, motivate them to action. Then it’s up to them to live up to their potential.

You will see some yapping heads and elevator analysts claim that the reason for the bounce (after the big initial drop on the “no rate cut” news) was either the news that the Fed is reconsidering its stance on helping AIG or that Barclays is indeed going to buy LEH. I don’t believe it for a moment. There just isn’t enough fundamental strength in Financials or the market to make a huge bounce back on huge volume based solely on speculation of AIG or LEH. That’s just bad trading, in fact it’s idiotic trading. Smart Money doesn’t make big moves in the market based on two stocks that are still hanging in the balance. This was Big Money saying, “look, it’s up to us now, we either support this market or we all go home, dig a hole in the ground and live in a cave for the rest of our lives.”

I also speculate that Smart Money knows that the Fed refused to put an artificial bid under Oil. Now that’s a HUGE positive. If the Fed had artificially stimulated short term inflation by lowering rates today by 25 or 50 points, then Oil would eventually catch a bid and.....back up we go to $4.25 a gallon. As it is, it looks like the average American is saving about .50 cents a gallon, and the recent drop in oil from the $115 area to the low $90’s could drop gas another .50 cents a gallon. That means the average American is probably saving at least $50 a month right now, and it could be well over $100 a month if the price of gas drops another .50 cents. That’s a huge amount of extra discretionary spending that could prop up the economy and at least keep us fundamentally sound.

1:30 pm MT: I nibbled on STI and COF calls. I wanted to do a little more, but I’m going to see what happens the next several days before I get too overboard with calls. But I think that Big Money may be stepping up and rising a little to the Fed’s challenge (I know the Fed never said anything out loud to the market, but actions speak louder than words).

2:00 pm MT: Market Wrap: The Dow rallied 351 points off the low this morning and eventually finished up 141 points on the day. Right after the Fed announcement of no rate cut the Dow (and the market) took a big dump. The Dow dropped 158 points within 7 minutes after the Fed. But somewhere in there the backbone of the market finally kicked in as professional traders around the United States realized that if it the market was going to show some toughness, then it was up to the guy or gal staring at them in the mirror. From there, the Dow rallied 311 points in the next 60 minutes. We may not be out of the woods, and it sure would help to have a change in the supply equation of Oil, but this was a very resilient day with HUGE volume.

I like the guts that Big Money is showing right now, we’ll see if it holds up. We may not make much headway in the next several weeks, but the floor for the market was established right here right now, today. It will be important for the market to build a strong base off the move today.

By the way, guess where the market drew the line in the sand today? Hmmmm? Any guesses? Who has been following the trend channel I have posted over and over again on the Dow and the SPX? I’ve posted the channel lines numerous times this year if you look at past entries, like on the July 26th post. I’ve had the same channel lines for months, and as you can see, I didn’t have to move one tiny inch to get the support point on the SPX. And the Dow was just about as close to dead-on as the SPX. In addition, the Naz did a nice job of holding a horizontal support in the 2,150 area that it has tested twice previously this year, and that I posted also on July 26th.

Here is the long term chart of the SPX showing the channel I first drew months ago. The SPX pinged off the support line almost to the penny:
(click on image to enlarge)


Here is the long term chart of the Dow showing the channel I first drew months ago. The Dow bounced very close to the support line of the channel:
(click on image to enlarge)


Here is the long term chart of the Naz showing the horizontal support I first drew months ago. The Naz bounced right where it was supposed to hold. This is a critical support zone for the Naz, a break below the zone and it's probably headed for 2,000:
(click on image to enlarge)

Now, as I said above, I think today is a nice start, and I think Big Money/Big Institutions showed the guts they needed to today instead of always looking to the Fed or the government to bail them out. But, the huge X-factor in all of this is the price of Oil. This whole year has been about two things: Real-Estate and Oil.

Real Estate and all the attendant problems that big institutions and individuals caused themselves will only be cured by time and low interest rates on the LONG end of the Yield Curve (not the short end that the Fed refused to manipulate today - good for them! Have I said that already a few times!).

Oil can be cured immediately. And here is the solution - drill for more. Now, I'm not trying to make a political point, I'm simply describing the immediate solution to the price crisis. We all want alternative energy to be viable, but until it is, the only way to keep prices down is to increase supply. Another point, many people will say that drilling for more oil will not change supply for 3-5 years - and here's my answer: they don't know the first thing about speculating and I do. In fact, I would like to think my track record, live, right in front of everyone this year has proven that I know a whole lot about speculating. And the simple fact of the matter is this, we can keep bullish speculation OUT OF OIL if we even demonstrate that we are beginning to start the process of drilling for more oil. That alone will keep the price of oil under $100 per barrel. In fact, speculators will eventually SHORT OIL and push the price even further down (much to the chagrin of OPEC, Russia, and Venezuala). The key negative to drilling for more oil right away will be that research for alternative energy might slow down. However, savvy corportions and intelligent scientist will realize, especially with the huge issues from the current price crisis, that even in the future we are just one supply shock away from another mega price spike. I would speculate that that issue alone would keep many people researching alternative energy for as long as it takes.