Yesterday my levels were 1246 on SP99H and 1935 on NDX we saw both these resistance's taken out, that bodes well for the market. I will reassert a oft repeated point on this employment number, first is that monthly numbers rarely have a long term impact on the market, these numbers only provide volatility, now that traders and pits have nothing else to concentrate on they have brought this dead horse in front again. I will like you to think of these numbers in Dec/Jan rallies, no one really bothered when and how these numbers are coming. Right now to over emphasise this number in my opinion is counter productive one should treat it like any other important economic release.
In my opinion the Purchasing Manager's number in context of profitibility and future growth was far more important, the deliveries and prices paid showed no inflation, manufacturing was low wage pressures in service sectors are possible but manufacturing remaining weak the impact of these wage increases in service sector are quite abated. It was the huge jump in exports which was quite an event to follow considering that just last month we all were worried about this deflationary impact hurting US companies, this increase in export orders would certanly help the US markets, I was noticing that everytime exports have gone up considerably Us corporate profits also expand.
The important issue today is what happens if the number is really strong and we see no inflation, initially even if market test 1235 area we go higher in the afternoon to hit 1255 resistance.
If the number is weak and we see wage pressures that is hourly increases stable we go lower and ht 1228 to retest the support.
If the number is strong and hourly earnings are on the rise the bonds will sell off to yield 5.75% by next Friday, in this case we may see a sell off a rally in later stage but volatility will continue until CPI and PPI resolve the controversy of price pressures.
This market likes to go higher, yesterday pits were concerned about 1250 level we hit that level and rather broke it, they thought we will reverse from their, that did not happen. Right now the trade is to expect a strong number and no wage pressures that would initially lead to bond sell off but bond yielding high takes some over heating out of the system, market money rates on long term bonds is a mechanism that works and will work now too. It takes pressure's off Fed as far as market sees and sniffsome wage or pricing pressures.
This is a very strong market and I know this market is very selective about rewarding companies, you got to be in the league of Nok.a's, Csco's and Msft's or Intc's to make a dent and make your presence feel in this market. At a certain price these winners attract a lot of buyers, imagine CSCO with a target of 135$ is selling at 97 or change.
Why other's are not equally being rewarded? This is a million $ question, within this question lies the answer,t these perpipheral stocks selling at a low multiple on acid test of PEG (price earnings growth) fails the test of market 'wealth creation' in a non-inflationary growth environment. BKX DTX DDX SOX are sectors that have gone thry a significant correction, no one ever claimed that this market should move up in straight line, these test of significant moving averages is life blood of this market, the entire ediffice of the market stands on this unique system of tests of lows and changing of weak hands to stronger hands.
NDX P/E is considered to be very high reaching 35 by some estimates throw in average growth of 20- 30% and you find that 35 starts looking reasonable, the other is the high premium demnaded for owning a piece of world class company like IBM oe MSFT. Globally I recently challenged in seminar that if Europe wants to become US they need to have their MSFT's and IBM's and CSCO's, these prime companies although give a distorted look to valuations but if you take these companies out of the equation and send them to a secluded island, rest of the market is trading well within historical P/E's of 15-18. One way to resolve overvaluations can be taking NDX seperate from the entire market indices, we may have a laggard P/E indices and a growth oriented successful companies index.
The problem arises when we have SOX which contains some lagggards and some NDX kind global presence and hi- growth potential stocks,naturally within a sector/index it looks strange that some trade at a huge premiums to others, now I cannot answer someone if he compares CSCO with RIG, lower multiples neccesarrily does not mean attractive stocks, as stock market has regressive demand curve that more is supplied when prices are lower the market weakeness can be quite understandable.
My target today would be to analyse the number in first few minutes and look at the hourly earnings and than trade on the side which is the side of least resistance, I will be most probably a contrarian. I took advantage of yesterday move in SOX and got out of SOX naked 390 calls for a good profit, I thought if we move higher today like Jerry points out I would be able to sell hard again only to hedge my exposure and recover long call premiums for July from March indexes. It is not shorting the market when I am selling the calls as for me these indexes calls are covered calls which in downturn help me to recover my lost premium on my July long position's.
In case of a break of 1218 I would rather protect myself with SP99H long puts and establish a straddle. |
