The Sword Goes Back in the Stone.....

Pre-market futures are down sharply as traders run away from the Financial sector this morning. The combination of BAC, government interference (oops, I meant "intervention"), and C are keeping pressure on banks and the financial sector. In addition, traders are taking profits in the Energy sector after HAL and WFT announced earnings this morning. That's two of the key sectors that drove the one-month rally in the stock market.

Use the numbers from the 8:35 am MT posting on Friday for the SPY (market). I will update those in a few minutes.

There's so much I can say about all the news and some of the fund managers this morning, but I'm going to bite my tongue a bit and just glide through this.

Here's the recap: BAC announced in their earnings that they made a bunch of hay on refinancing and trading. The mini refi boom should not be a surprise to you, I've been hammering on the development on and off for the past six months and what the real impact on the economy is, both the good and the bad. The trading profits are also not surprising because financial companies (specifically brokers, and BAC owns MER now) make money trading or from trading during bull rallies. In this case it's a bit of a chicken and egg scenario where you could ask if the money made trading was feeding itself and helping the rally when the fundamentals really weren't there. It also shows a pattern, because GS also announced recently that they made money "trading", which means that other banks and financial companies made money trading, which again begs the chicken and egg question about the true health of the financial sector and the real economic fundamentals of the banks. Speaking of which.....the reason the market is down so much this morning is that BAC increased its first quarter credit loss provisions to $13.4b from $8.5b in the fourth quarter.....so they're still writing down losses, and the losses don't look like they are shrinking dramatically.....

Speaking of losses part deux.....GS stated that C's losses are growing at a rapid rate.....so GS decided to throw their own update on the C earnings from last Friday. "The bank, once the world’s largest financial-services company by market value, now ranks as No. 70, Bloomberg data shows."

"Citigroup had $4.69 billion of bond trading revenue in the quarter, as it benefited along with Goldman Sachs and JPMorgan Chase & Co. from the failure of Wall Street competitors and the government-led rescue of the financial system. Sales of U.S. corporate bonds surged to $438 billion this year, up more than 50 percent from a year earlier, according to Bloomberg data."

"The fixed-income bonanza, along with wider net interest margins and gains from accounting changes, masked declines in credit-card and consumer banking revenue, and soaring costs to cover bad loans at its credit card unit."

So C made a bunch of money on the flight to bonds, wider net interest margins (as the Fed and the Treasury played games to lower both the short end and the long end of the yield curve), refis, and accounting rule changes (I wrote about the rule change applications on Friday). But the gains couldn't overcome declines in credit card and banking revenue and ongoing bad loans at the credit card unit (which are all very good clues for current consumer buying habits.....and remember, consumer spending is 2/3 of GDP). So the biggest deal of all, consumer spending, which should be the key driver of any assumption by fund managers in a stock market rally, really isn't on the mend, and doesn't look like it will be on the mend for a long time - especially with the jobless rate continuing to climb, not "stabilize." I might add another tidbit to the pile. I went driving around yesterday to see how the home sales were going in my region, and I still saw the same amount of for sale signs and foreclosures as I have the past six months. I continue to believe the banks are in the business of bad real estate whether they like it or not.

The final bit of "big news" in the financial sector this morning is that government "leaders" want to focus on "fixing" credit card abuses. Translated what this really means is that politicians want to score votes from people who use credit cards and then don't like it when the credit card companies raise the rates "at any time for any reason." I could go on all day about this one but I'm going to do a quick recap instead......I like the concept of regulating against fraud as much as anyone, but this isn't fraud. Think about this for a moment. First of all, people don't have to use credit cards (I know that will come as a shock to some Americans). No one is breaking peoples arms to force them to use credit cards.....Second of all, credit card companies know that people don't have to use their credit cards, or if they don't like a credit card company they can simply pay off the debt, close the card, and never do business with that company again.....Third of all, the only reason a person couldn't simply pay off a card, close it out, and tell all their friends to never do business with that credit card company again would be because they made purchases that were so huge that their income won't allow them to pay off the debt for a long time.....and I'm going to just take a deep breath and not say anything else about that one.....

So credit card companies know how competitive they must be, they know that they must keep a good reputation or lose business. They know they must stay competitive with rates to keep long-term, loyal customers. I understand fraud as well as the next person, but this whole Chris Dodd bill smacks of cheap vote harvesting and not actual consumer protection. And the vote harvesting is aimed at people who were irresponsible with their money for reasons.....well.....I'm sure you can figure out why some people are irresponsible with their money.....

Anyhow, the net net is that credit card companies like COF are getting hammered this morning. I find the irony and incompetence of certain government "leaders" who started the stock market rally with "news" and now are potentially ending the rally with "news" to be amazing, even if it is predictable. That's the problem with pandering to special interest, victim groups, and the media for votes.....they can't have it all ways no matter how hard they try.....eventually they end up contradicting themselves.....

I know that I've spent a lot of time dissecting the news, once again, but the news the past 15 months has been intense, and sometimes very, very messy. The market has been roiled and boiled by the news to the point of burnout. And many fund managers, especially the Googly-Eyes, are in a news cycle (and economic cycle) the likes of which they have never seen or experienced before. Remember, many news organizations are going under right now. The mainstream media has never seen such bad times. So the urgency to market news while pushing their own playbook for the "reshaping" of America has put the media in a frenzy that is unprecedented in our lifetimes, and I include the early to mid 1970's when I make that bold statement. I can easily make a case for the manipulation of the news being worse than it has ever been by a wide margin, and the amount of news being vended is, by far, much much larger than it has ever been. And if that wasn't intense enough, the methods of communicating the news have expanded in size and increased in speed far, far, far beyond any other time in history. And it's critically important to know, for your own trading, that Big Money is not always going to see through the barrage of news and news manipulation, which will continue to create volatility in the market as the country works through this economic recession.

8:35 am MT: The SPY opened just below 85.75, which was my first short term support level from Friday and blasted straight down through 85.00. As a result, the SPY (market) is headed towards my next level in the 83.75 - 84.00 area. I speculate that right in this 84.50 area will be an intra-day bouncing point and that the market will wiggle a bit before attempting the next leg down into the 83.75 - 84.00 area either later today or tomorrow.

Here is a 30m chart of the SPY showing the current price action:
(click on image to enlarge)

It's possible that the market just sells straight down from here, but if you are playing puts this morning, you will want to take 1/3 to 1/2 your profits right in this area because you will probably be able to add back any positions in a little while at a cheaper price. Keep at least half the position just in case we get the statistical frenzy and the market just drops like a flaming meteor.

8:47 pm MT: It looks like Fast Money is taking the flaming meteor approach. The closer the SPY gets to 83.75 - 84.00, the more likely you will want to lock and walk on the first stage of puts in this trend rollover - if you decided to play a short swing this morning.

If the SPY stops short of 84.00 or so on this intra-day downswing, then any intra-day bounce back to test the 85.00 - 85.25 area (old support from Friday becomes new resistance today) is a possible opportunity for another put short-swing into the end of the day.

This is the sharpest selling since March 20, and unlike that day, this bear gap and selling is already approaching the previous low in less than 90 minutes. Like I said on Friday, a significant drop below 83.50 and the trend is technically over and Excalibur's sword goes back in the stone.....

11:55 am MT: If you still have some puts from this morning, you will probably want to lock down the last of them right now.

The SPY made it all the way to 83.75, pretty much on the nose. It was a flaming meteor, which is why I said to keep half or two-thirds of your position back in the 84.25 - 84.50 area. At this point, price action is starting to slow down and round around. There may be one more good put opportunity before the close, but the market needs to rally back into the 84.50 area before that happens.

Here is a 10m chart of the SPY showing the huge sell-off intra-day, but the slowing price action:
(click on image to enlarge)

The SPY (market) may make new intra-day lows right now, but I speculate that the 83.75 zone will be the rounding around area as the selling slows and the market has a little counter-move off the huge drop.

The flaming meteor is another way of saying momentum day, and today has seen plenty of selling momentum. These fundies are nothing if not frenetic. So fast to pile in, and so fast to pile out. Nothing like the speed of modern communications to dramatically magnify the emotional reactions of human beings.

Normally I don't carry a position overnight during the heart of earnings season, so if you do hold some puts overnight, keep the position fairly small. Today after the close, IBM and TXN report earnings, so the Naz and tech will get a workout tomorrow morning, whatever direction the volatility takes the markets.

12:15 pm MT: The 83.50 area on the SPY becomes the next critical tipping point today and tomorrow. A drop down to the low 83.00 area signals a lower low on the charts and the technical end of the frenetic uptrend.

I speculated last week (to myself) that the Dow overshot its fundamentals by about 1,000 points in this frenetic "once in a lifetime" uptrend that I nicknamed Excalibur's sword (which may still become Scooby-Doo's sword as I pointed out last Tuesday). The Dow is right at it's previous low and still selling (7,870 area). In my experience, this kind of Rounding Tops usually end with a sharp selling day that starts the market down the right side of the slowing price action (as I stated in the comments on Friday). It is also fairly normal in a rounding roll-over that starts this way for the sharp selling to take it through the previous 1-2 lows, which means the Dow will probably pop down through 7,750 in the near term, especially if earnings are not so good today and tomorrow. My speculation for the consolidation of Excalibur's sword (soon to be Scooby-Doo's sword) is down to the 7,250 - 7,300 area over the next several weeks if earnings put more fear into traders like they did today. There are still a huge quantity of earnings to be reported in the next two weeks, so we'll see what happens, but so far, the trend is just on the verge of breaking.

Here is a daily chart of the Dow showing the rounding over price action of the uptrend. The Dow is exactly at the previous low, and is at risk for dropping to the next low in the 7,750 area:
(click on image to enlarge)

The next set of key earnings comes after the bell today, this time in tech. We shall see.....

1:25 pm MT: The SPY made it to 83.50. Price action is getting a little sloppy on the SPY so I switched over to the 5m charts of the DIA to get a feel for when the intra-day selling may be over. Like I stated a few hours ago, this is a momentum day, so even if we get a wiggle back there will probably be more selling. If the DIA pops above 78.80 then it will be warning that late-day short-covering by Fast Money is probably hitting. If it breaks above 79.20 then the DIA (market) might push all the way to 79.50 - 79.70. If the shorts do cover to those areas, and there weren't a couple of big tech earnings today after the bell, I would be picking up more puts in a heartbeat. As it is, you should tread lightly if you keep or add more put positions into the close.

Here is a 5m chart of the DIA showing the price points I mentioned above:
(click on image to enlarge)

1:32 pm MT: And just like that we get the strongest short-covering (and bargain buying by the Googly-Eyes) of the day.

I don't know how far this will go because any wiggles are probably going to be met with more selling, but a move to 79.10 - 79.20 would be pretty easy.

2:00 pm MT: Market Wrap: The market finished at the lows of the day, completing a momentum day in true fashion - with momentum right into the close. The SPY is sitting precariously right in the 83.50 key support area and barely clinging to the previous low in the uptrend. If traders get a plethora of bad news from the major earnings today after the close (IBM and TXN), or tomorrow before the open (AKS, CAT, COH, KO, DAL, DD, LMT, MRK, NTRS, SGP, UAUA, UTX, USB, and UNH), then expect the trend to be officially broken. If the selling gets fierce, then expect the Googly-Eyes to stare like deer in the headlights and wonder just how they got Scooby-Dood on so badly.....

If the market does sell, I don't think we will see a news bogey from political "leaders" for a few more days. I think their "handlers" are telling them that a little "profit-taking" is normal and that all their "good news" announcements and "market bailout" actions will keep traders happy from now on. I don't think the "leaders" or the "handlers" will panic and knee-jerk into "secret emergency lock-up brainstorming meetings" until the Dow reaches the 7,250 - 7,300 area. At that point, I will be keeping a sharp eye out for news bogeys.

There will be a bucket-load and a half of earnings between now and tomorrow morning, so don't even bother trying to pick a direction until about 20m - 30m before the open tomorrow. Rest your brain, rest your eyes, and enjoy the profits from some nice puts today.