Revised Bailout or Rearranging the Deck Chairs?

Market futures are down a little after yesterday's big jump after the day be fore's big dump.....Traders are supposedly focusing on the probability of an economic recession, but I don't think a full blown recession is out there yet, at least not based on the data. However, traders are speculating that the ISM Index due 30m after the open today, and the Employment Report due on Friday, will show numbers that cause the market to sell down a bit. These are the two biggest economic reports of the month, so the market will actually take a brief break from the political gyrations in Washington and focus on the current economy.

The market will probably push back and forth a bit this morning on the ISM, depending on the number. But traders will eventually look towards the ramifications of a bailout for more clues on where the economy may be headed in the next few months. If the ISM is a decent number in the 49-50 area then traders will probably have a somewhat muted reaction, which means that jobs and the Employment Report will take center stage along with the bailout. We will probably still see some newsy conditions the rest of the week, so keep taking this day to day.

7:40 am MT: I nibbled on some SPY and DIA puts on the gap down and break of the Bear Flag on the 120m charts.

7:55 am MT: I added to the puts on the gap test just ahead of the ISM.

8:15 am MT: I sold both puts for a 7% gain in about 30m. I’m just diddling around right now, but it was a quick $332 gain in a few minutes. The ISM number was a fairly nasty 43.5, which is well below the 49.5 estimate. Traders will have to wring through all the data with a protractor and some surgical gloves, so I’ll sit back and let them gyrate the market for a little while before the next trade.

8:25 am MT: I nibbled back in on the SPY puts on the next Bear Flag on the 5m charts.

8:40 am MT: Price action started slowing down, so I sold the puts for a small .15 cent gain, which is basically breakeven on normal spreads. I really am just diddling around and keeping myself sharp. I think the market is conflicted over bad economic numbers and a potential recession on the one hand and a huge government bailout on the other hand.

WFC is really hanging tough right now, so I may nibble on some calls over there.

9:00 am MT: I just can’t get the pricing on the spread I want for WFC, so it’s a no go. The market is probably going to go a little tighter today. It had every chance to sell off after the poor ISM, but traders blew it off and are holding the line for now.

3:30 pm MT: Market Wrap: We did indeed finish with a tighter day as I suspected. The market was a little nervous over GE’s financial services division, but GE is raising capital through offerings and through Warren Buffet, so GE is of the torture rack for now. Traders are watching to see how the Senate’s revised bailout vote goes tonight. Personally I’m wondering how much of the socialist language was stripped out of the bailout bill.

The market pretty much ignored the terrible ISM number today. The yapping heads made a HUGE deal out of the bad ISM number because it meets their agenda of fear and insecurity. By contrast, it looks like professional traders are treating the ISM as near-term slowdown in manufacturing but not necessarily a recession of the broader economy. So Big Money didn’t sell the ISM even though Big Media made it all the rage today.

Oil sold off a bit today after the Weekly Inventory Report showed a bigger than expected build in inventory levels. As usual, a drop in the price of oil is a positive for discretionary spending and the economy (as long as we don’t get huge inventory builds because of an imploding economy). Traders will be focused on the Employment numbers tomorrow and especially Friday. They will also be very focused on the bailout gyrations. In addition, we are in Earnings Warning Season, then we get Earnings Season, then we get Political Season, so there’s plenty of potential volatility in the works for the next several months. I'm not expecting a strong trend to develop in the next few months (but as always, I'm open-minded). Rather, I speculate that will we see more quick, sharp short term moves followed by some choppiness until the next move (similar to much of the price action from the Summer). I expect the VIX will probably have a 3-4 month peaking out period in the 4th Quarter, similar to 1998 and 2002. That means I will probably be playing short swings (1-3 day swings) and intra-day swings for much of the rest of 2008. Hey, why would we want 2008 to change now?.....We’ve only got one quarter left, we might as well finish it out the way we started.....