December 2nd, 2008

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Bouncing bulls, but bears reign.

Equities traded considerably higher following yesterday's mass carnage, but the market tone remains questionable.  The day-to-day direction of the market is highly uncertain, but I do believe that we are in the process of finding a bottom.  The highly volatile and essentially directionless trade witnessed in the most recent two months of trading supports this premise as markets have a tendency to behave erratically before a large trend change.  However, the process can be long and painful and may even include another new low before all is said and done. 

The early morning technical rally was thwarted by news of weak auto sales.  U.S. sales are on pace for another record low in November.   Do not forget that October's seasonally adjusted sales rate of 10.6 million was the weakest reading in over 25 years.  Analysts were calling  for the November sales to come in slightly better due to aggressive incentive programs.  However, domestic auto sales are on pace to see another record low as Toyota, Honda and Ford all report a decrease in sales of over 30%.  Ironically (or maybe not so ironically), the sales reports were announced on the same day the U.S. automakers were scheduled to testify in front of Congress.  The "big 3" will once again be asking for a $25 billion federal loan in an attempt to avoid filing for bankruptcy. 

Meanwhile, crude oil looks to be comfortably trading below $50 per barrel.  The price of crude oil has been relatively positively correlated to the stock market as energy traders are equating sluggish equity markets with a weak economy and thus weak demand. 

The relationship between equities and interest rates has also been skewed in light of economic struggles.  History suggests that stocks and  bonds are negatively correlated and accordingly should move in the opposite directions.  However, in recent months there has been a disconnect.  We are now finding equities reacting negatively to higher bond prices.  While logic tells us that lower yields should be prosperous for corporate growth, traders are seeing it as a sign of a lack of confidence in the system.  Accordingly, stocks seem to be holding back as yields decline.

In yesterday's newsletter I made the following statement and it still applies:

 At this point, I guess you could say that I am "on the fence" but maintaining a slightly higher bias.  Assuming that the 50% retracement of the move higher holds, we should see another run at intermediate term resistance at 8,590 in the Dow, 880 in the S&P and 1196 in the NASDAQ.  Failure at current levels could translate into another retest of the lows. 

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.

 

S&P 500 Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

November 12 - Our clients were advised to buy the December e- mini S&P 500 1030 calls for $6 in premium or $300. 

Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.

 

Dow Jones Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

 

NASDAQ Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Swing Trade -

Flat

There is substantial risk of loss in trading futures and options.