Bulls Get in the Boat and Row

The ADP Employment Report came out with a number of -491k vs. -645k expected, which is giving the pre-market futures a very bullish bias. Last week was revised to -708k from -742k. The ADP report has done a better job of predicting the big government Employment Report (due out on Friday) the past several months. This is why the bulls have been hanging around and pushing the past week, they wanted to see a number like this. Yesterday I speculated that the battle was between the Dow at resistance and the SPX, which was 15 points below resistance. Well, the SPX will pick up about 10 of those 15 points just in the gap at the open this morning. The SPY is set to gap up over $1.00 (there's those gaps again). The gap will probably wiggle a bit right out of the gate because it's so huge, but the bulls aren't done being excited, exhuberant, and in love. They will have flashbacks to Monday when they got to be the king of the world. So look for more pushing towards resistance as the market goes parabolic with enthusiasm.

Here is a chart of the SPY just before the open:
(click on image to enlarge)

Here is a chart of the SPY just after the open:
(click on image to enlarge)

The SPY gapped very close to the bottom side of the next resistance level at 92.00, which should facilitate the wiggle I was speculating. If the market wiggles into a Bull Flag on the 5m charts, then the bulls will probably try for another push right into the 92.00 - 92.50 area. The higher end of the resistance zone is a little extreme, but these aren't exactly unemotional fund managers we're talking about. I speculate that there is a reasonable possibility for a test of 92.00 on the SPY this morning, with a lower probability of 92.50. The next resistance zone up is about 93.50 - 94.50, which is other-worldly extreme, but I have it there anyway because.....well.....because these are the same traders that ran the market up to where we are right now.

7:46 am MT: The SPY continues to wiggle back into a Bull Flag on the 5m charts. If the SPY can hold the 91.00 - 91.25 area then it has a decent probability of turning and pushing back towards the 92.00 area. Right in this 91.25 - 91.30 area would be the ideal place for a turn and burn if the bulls are going to actually exceed 92.00 by a little bit.

7:50 am MT: Here is the current 5m chart of the SPY showing the Bull Flag that is sitting near the tipping point of just right and too much profit-taking:
(click on image to enlarge)

A Hammer right in this area would be a nice indication that this is the first dip-buying point for the bulls.

7:53 am MT: There's the hammer.

7:50 am MT: Here is the current 5m chart of the SPY showing the Hammer off the Bull Flag (wiggle):(click on image to enlarge)

We'll see how far this first move reaches.

7:57 am MT: The SPY (market) reached back to the highs of the morning and then peaked a little. It looks like there are some profiteers in the 91.60 - 91.70 area on the SPY, so the market may go into a longer consolidation this morning, which is ok. If the market channels a for a little while then it could build up some strength for another attempt at 92.00 on the SPY. The price action today could end up being somewhat similar to yesterday. Once again, from this point on, it will probably be more productive to play individual stocks rather than the index ETF's, although there might be some nice signals later in the morning or day on the ETF's.

8:08 am MT: There was enough of a downdraft from profit-taking just now that the speculation for price action this morning to be similar to yesterday morning looks to be correct.

Here is the current 5m chart of the SPY showing the similarities between this morning and yesterday morning:
(click on image to enlarge)

I think the profiteers are going to keep locking here and there throughout the day and the dip-buyers will keep trying to prop things here and there. At the end of the day, the battle may tip to the bulls on the hope for better than expected numbers from the Weekly Jobless Claims tomorrow and the Employment Report on Friday. Some fund managers may try to position themselves ahead of those reports.

8:25 am MT: The SPY (market) is right on a key tipping point. The SPY has given up almost the entire move from this morning, so the profiteers are selling sharper than yesterday. This is an initial red flag for the bulls today.

8:30 am MT: The monkey rang the bell.....This day is unlikely to recover back to the highs. It may consolidate a bit from here, but the breaching of the gap on such strong profit-taking indicates that fund managers are transitioning from "buying every tiny bit of good news" to "selling the good news", which means the market is potentially at a tipping point for the overall trend. If the bulls can't sustain an ADP Employment number like this morning it shows that there are enough profiteers that are saying "enough" the trend it far too extreme, we're taking profits and walking."

8:40 am MT: If the SPX drops below 902 - 903 then the market is probably headed for the 898 - 899 area. A drop below 897 and the short term move is probably over and the SPX may go and test the 870 - 880 area. The price action is still somewhat similar to yesterday, but it's weaker - and it's weaker with better news. Those are two key distinctions. So the market may try to push a little here and there, and it may even try to rally back into the 910 area or so, but it looks like the monkey rang the bell and a lot of fund managers are locking and walking today. As always, we shall see.....

9:08 am MT: Traders are consolidating the trend today. If the SPX can hold the 903 - 904 area for most of the day, then perhaps the bulls will try to make a late push to position ahead of the next couple of rounds of jobs data. Just like yesterday, it's not likely that the bulls are able to get back to the highs of the day. A drop through 902 - 903 and the SPX might not be able to stay in the green at the end of the day. It looks like the market is going to roll and grind for awhile now, possibly for several more hours.

12:50 pm MT: The bulls managed to hold the 904 lows on the SPX and rally the market to new highs. The profiteers showed up at resistance in the 914 area again, but there were too many bulls to stop the market from making new highs. The SPY has rallied right into the 92.00 resistance area I was looking for this morning before the sharp intra-day selling. The early selling turned out to be less noisy than the mid-day buying. The SPY and the SPX are now banging into resistance, so this is a place to take at least partial profits on any call trades from earlier today.

1:00 pm MT: The SPX is seeing a little bit of selling right at the 920 target I've had for several days. The index is forming a Tweezer Top on the 15m charts. As I just wrote, this is a time to take any partial profits. However, there have been enough bulls piling in to the boat and rowing since the late morning, and there has been enough jostling and eagerness to get positioned ahead of the next round of jobs data, that it's ok to leave some of the position there just in case the bulls blow off the Tweezer Top just like they blew off the early morning selling. A drop below 914 - 915 and the market may consolidate until just before the close, but the bulls keep making comebacks, so there may be some fundies that decide they have to buy the market in the last 15 minutes.

1:15 pm MT: Here is a commentary about the news bogey (the bank stress test reports that popped the market late morning). The stress test has been reported to death and then beaten some more. It's unfortunate that so many fund managers still fall for this game, but it is what it is and all we can do is keep trading the technicals - especially keeping an eye on the intra-day technicals along with the daily charts. The sum total of how this played out is that the market was seeing some profit-taking after the gap up on the employment data. It was all very normal technical action, especially for how extreme the trend has become. But the stress test "revelation" that the banks might not have to raise as much money as previously thought immediately popped the market out of the consolidation. The main catalyst among the banks appears to be C, which will have to raise "only" $5b. The number was less than feared and C took off like it was shot out of a cannon (i.e. short covering and bottom feeders - although there appear to be a huge amount of bottom feeders on C). The stock rallied about 13% in about 90 minutes, and it rallied on about 225 million shares in that same 90 minutes. As I type, C is now giving back most of the rally intra-day.

Today's market is what it is. There are too many fundies with too much money who are trying too hard to speculate on too much news. So we get wild intra-day spikes and drops. We get 28 gaps of about .50 - 1.00 on the SPY in 32 days. We get the market turning on a dime almost every day. The overall trend is up, which is nice for the market. And the economic data has been improving over the short term, which is nice for the economy. So there have been lots of trading opportunities for options the past 6-7 weeks even if the market is having some volatile times day to day and intra-day.

In the giant, macro picture I still wonder aloud about the real recovery in jobs. There are several key areas of the economy that hire people (and no, sorry to tell our political leader, it's not the government). The small business owner employs about half of all private sector employees. They pay almost 45% of the total U.S. private sector payrolls. They have generated 60% - 80% of net new jobs annually over the last decade. And they hire 40% of high tech workers. Proposed tax increases by the federal government, slated for 2011 (will they come sooner?), are targeting incomes over $250k (although the rumored number has been as low as $120k). In addition, states and municipalities are already raising taxes on that same income level of Americans. That hits squarely right on the small business owner demographic. It is highly likely that taking more money from small business owners means those same people are going to cut back and not hire the same amount of employees.

In addition, the healthcare sector is the largest single employer of people in America - by sector. The entire group of related healthcare industries (hospitals, HMO's, biotechs, drug stores etc.) puts more people in jobs than even the financial sector, tech sector, or retail sector. With the passage of the "spending" bill last fall came the creation of the drug Czar and continuos mandates and regulations on how the healthcare sector has to conduct its business (i.e. socialization). Every time a government tries to take over an industry, it assumes that it has the people in government who can run a business in that industry better than the people in the industry itself. I know it seems strange to even state this, but why would the government think it can run healthcare better than people who spent years in school studying their field of expertese, or decades working in the industry? Think about that logically for a moment. Are you experienced, or well-studied in your field of work? Could the government just take over your job, or your company and make it work better than you? Are they better equipped to do what you do better than you do it? Who exactly is the government? Who in the government is going to do your job better than you?

If the small business owner and the healthcare sector were the only areas being targeted then I would still be concerned. But now the government owns the majority of GM, along with the unions, which is a very large employer of people in the United States. In addition, they own the two largest mortgage lenders (FNM, FRE), the largest insurance company (AIG), and are working on owning the banks (remember that C used to be the largest financial institution in the world). The increased taxes on small business owners, and the socialization of healthcare, automobiles, lenders, banks, and insurance is a huge, huge, huge part of the hiring demographic in this country.

I would stop right there and let you chew on that for awhile if it weren't for another issue that I have hammered on for over a year, and that's energy. If small business and key industries are the hiring engine for the economy, then oil is the energy for that engine. It's impossible (until we create a viable alternative energy) to remove oil from the economic equation. It's also impossible to just "go back to the way things were before China, India, Korea, and South Amerca." We don't get to have a magical time machine. We have a new energy paradigm, and it started about the year 2000. There are too many people with energy needs in our world now, so like I have been saying over and over, whenever the market rallies, oil will go right along with it.

If the government keeps mandating limits on energy creation, then there simply won't be enough supply to stop the price of oil from skyrocketing every time the economy is percieved to be "taking off." The most recent 7 week rally in the market has taken oil (adjusted across multiple futures contracts) from a low of $33 to a high of over $56 today. Now, maybe we're all like the frog in the boiling water, and were so used to $100 per barrel and $150 per barrel that we just shrug off the most recent jump in oil, and the spike in gas as it goes from $1.40 to $2.10 in less than two months. But back in the 1990's this would have been a huge deal. The only reason it wasn't perceived as a huge enough deal during the 2006 - 2007 spike was because everyone thought their house was an ATM machine. Who cared if they were spending $2,000 - $3,000 more on gas a year, or even $10,0000? If your home was appreciating in value by $30,000 - $50,000 a year it was a drop in the bucket, right? So oil just ran up 68% right under our very noses, and most people aren't even batting an eye. Gas prices just ran up 50% right under our noses and many people are just yawning. If the market keeps rallying, how far does oil go? Will the magical energy fairy come down from the sky and wave her sparkly wand and suddenly there will be a disconnect in the new world energy paradigm between oil prices and the stock maket? Or should we send a memo to China and India and ask them to very kindly please stop using energy? What exactly is the goal of our current government when it comes to energy, and how will it affect economic growth for years to come?

The market is excited about the recovery in housing. But how much of a recovery are we talking about. almost half of all homes built from the middle of 2005 - 2006 were spec homes. And in 2007 - 2008 many of the spec homes were not built for the local wage demographic, but rather they were much bigger homes that speculators hoped they would be able to flip in a couple of months for a big profit and then go retire on the beach (such is the nature of some speculators). I don't know about your neighborhoods, but in my area we have a huge oversupply of homes that are three to four times more expensive than the average wage earner in my region can afford. So I applaud the move by the Fed and the Treasury to get interest rates down into the 4 3/4% - 5 1/4% as well as they have. It has stabilized the real estate market somewhat, which is excellent. But fund managers are buying the stock market like the entire housing industry is suddenly headed for the good times and glory days again, and it's not.

Think about this.....A prospective buyer (and remember that we have way more homes than buyers because so many spec homes were built in the real estate bubble) comes to your area looking to buy a home. They look at the neighborhood of multi-million dollar homes and they pass because those no interest no down days are over. They look at the homes that are twice their level of current approval and they pass because those no equity no problem days are over. They look at the homes in their price and loan approval range and they notice a bunch of unkempt homes that the banks own and want to move - but don't want to lose money selling, and they pass because curb appeal is second only to location in the real estate buyers playbook. In addition, discretionary spending is tight because of the jobs market, so people don't want to spend a lot of money to get a fixer-upper into livable conditions. Finally they look at a home that a normal, individual seller who is relocating because of work, family etc. (remember those days?) is selling. This seller has kept up the home because they live in it. The homeowner has added nice design accoutrements and made the home very attractive and livable because.....well.....because they live in it! And the homeowner is very aware of pricing in the neighborhood, including the bank foreclosure homes, and decides to sell at a reasonable price in order to move the house and then move on to their next destination. Now, which homes on the market do you think are selling? Are they the huge supply of overpriced homes. Are they the huge supply of bank foreclosures which will need $10k - $20k minimum to get them up to more attractive conditions? Or are they the normal, family homes that a buyer can walk right in to for close to the same price as a foreclosure? And just how many buyers are there for all the rest of the supply? How much population growth will we need to experience in the United States over the next several years to soak up the supply? And how much of the population will have a job in order to buy the home?

Once again, I'm all for good economic news. Especially when it's real, and it's sustainable. And perhaps this rally is actually the start of a new 27 year bull market. Perhaps I will be wrong for being cautious. And despite my caution, I have been completely in favor of ignoring my own skepticism and playing what the technical charts are telling me, which is that fund managers are buying the market. It may be that the market continues to rally all through the rest of the year. It may rally for three more years beyond that. It may just keep rallying because low interest rates have to mean it's the start of a new macro bull market. It may rally for the rest of my life. And I'll keep buying calls as long as it rallies, and so should you.

I present the charts for trading purposes, and I write about the bigger picture for bigger picture purposes. I don't know the future any more than anyone else, so I just trade what's in front of me. We'll see how this all plays out in the next 3-4 years, which is probably why the fund managers are buying like crazy right now. They figure the future is.....well.....a long way off. So buy now and hope for later. And maybe all their hope is going to pay off, and pay of huge for them. As for the present, we continue to buy calls.....

3:00 pm MT: One final note: The market did rally in the last 30 minutes as the fundies bought right into the close. So despite all the gyrations today, the early-day speculation ended up being the final speculation, which is that the bulls bought into the close in order to position themselves for more "good employment news" the next two days.