Ike's away for four days on a skiing holiday to Chamoneaux (may not have spelled this right) and will be unable to post everyday. I spoke to him and mentioned Steve's question, and he dictated the following over long distance. Should there be an error in the text or numbers, please accept my apologies in advance:
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I think Friday's unemployment report can cause some ripples in the market. Nearly two weeks ago, I had posted that the inflation price would be brought out and that is exactly what has happened. Bonds have been selling because NAPM numbers were stronger than expected. If they were weaker, market would have taken that as a sign of weakening demand and would have punished Dow Industrials heavily. As far as I know, industrial growth, capacity utilization and employment cost index are representative of the most important and critical element - the wage inflation. As long as these are under control, this is what is required by major corporations. The only way to have above 8% growth in profit is at the back of a strong economy. Recently, I've been watching numbers in Europe and find that this is the first time analysts are being cautious of future numbers; what has been discounted as expected fallout from Asia is still not fully priced.
At the moment, nothing is suggestive of the fact that we're going to go down. I think yesterday's SOX action was quite indicative of the strength of the market. It went to 293 but closed up at 301. Even Composite from lows of 1042 closed up quite a bit. Only one scenario can be deducted. It is not possible that S&P can stay shy of 1056, an all-time high, still SOX and Composite go through this kind of selling so the natural outcome should be that SOX and Composite go back and probe earlier heights and break them, like Banking has been doing and BKX is an advance indicator (Bart, this is where the smart money goes).
Basically, I don't think we're in a setting where we may have a big fall right now. Of course 2-3% movement within this global setting is not too much. So April 1040 puts can always be a good insurance. You don't have to worry about the downside all the time when you have protection of $250K on the downside, but there's a price you pay; there are no free lunches in this market. You want to have the upside, you've got to pay for it.
Movements of SOX and S&P, pre-1000 movements, are very much similar. It did test 330, failed to go any further, also had two closes above 320, stopped us out at 326, broke 310 (a very important support), went and tested nearly 292 breaking the critical 302 level. For me, all this action is a repeat of the 11th November S&P action where it broke through that critical 910 support and closed below it. I strongly believe that nothing has changed. Pre-announcements create a kind of negative environment and this is exactly the kind of pressure required for Tech to flourish.
For today, a close below 300 and support withheld would not be good at all, but a close above will show that it is a single day anomaly. Let's keep the strategy based on 300 support. I've been stopped out for TXN at 57 level, I'd be looking into re-entry in TXN to leaps if TXN is not broken today.
On S&P, in the face of unemployment numbers, there can be a lot of turmoil, but if the numbers are bond-friendly and S&P is sitting at all time highs, S&P may not rally this time, as weak numbers will not be construed as good for corporate numbers. Its a double-whammy kind of situation we're facing here. If numbers are too strong, markets will be hit because they'll say inflation's coming back, and if numbers are too weak, bonds will rally and they'll say that future corporate earnings visibility is being compromised.
I think 1040 puts for April is not a bad idea to purchase - more for insurance and peace of mind than anything else. For the art of good trading, one should be more worried about 10% downside than 5% upside.
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Samira |
