Nearnings Week

In case you haven’t heard – Yahoo (YHOO) earnings disappointed tonight and just to sweeten the deal they also announced a cut of at least 10% of their workforce. Let’s see what that’ll do to their stock price tomorrow. Texas Instruments (TXN) earnings today outright sucked. The miss was bad enough, but their comments on forward demand were worse, and are probably responsible for the 2%ish sell-off in the Nasdaq futures this morning. Sun Microsystems (JAVA) dropped by 17% after reporting a loss and is hellbent of turning itself into a penny stock. Do they have a business model except for losing money? Sun sure has come a long way since it traded at $25 a year ago – you will not be missed.

The Yen strengthened a bit today and decided to give the bulls are run for their money in late trading. At the same time a large amount of money seemed to be flowing into treasuries, as the $TNX (30 year yield) opened half a percent lower at 3.82% and happily painted a nice long marabuzo, closing at 3.703% – a few ticks above the dreaded 3.7% panic line. Of course none of that kept the mouth breathers from buying, although I’m pretty sure a large part of that was driven by institutional action.

We finished the day pegged at the 9000 mark on very little volume, which I termed the ‘pre-election 9k pin’. I’m confident that level will be breached however, maybe even tomorrow. What spoils the party a little is Apple’s (AAPL) excellent earnings performance, posting an $8 Billion profit for this quarter. However, I can’t really be upset about those news – the last company I want to see disappear is Apple, especially as I’m a stone cold tech nerd and despise Windows. Steve Jobs is a freaking genius and without his creativity and vision this company would have been gobbled up by the collective (i.e. Microsucks (ISUK)) a long time ago.

The Feds seem to be draining the swamp again – I’m seeing reverse TOMOs to the tune of $25 Billion a day, which usually is the maximum – Monday they actually reigned in $50 Billion. In case you wonder what TOMOs or repos are – here’s the blurb from the NY Fed site:

The Fed uses repurchase agreements, also called “RPs” or “repos”, to make collateralized loans to primary dealers. In a reverse repo or “RRP”, the Fed borrows money from primary dealers. The typical term of these operations is overnight, but the Fed can conduct these operations with terms out to 65 business days.

Are they trying to crash the market? Or is this another ploy to squeeze another round of bailouts out of Congress? Better hurry – party time is almost over, only 2 weeks until the election. After that the pressure to act will be greatly minimized. In related news – the effective Fed Funds Rate today was set at 0.7%, less than half the target rate of 1.5%. Yesterday it was 0.6% – boy, you GOT to love free money… wish I could get those bargain basement rates. It might be worthwhile noting that the last time those rates were pegged that low was on October 10th, which coincidentally happens to be the day the market put in a new low. Something’s going on out there – not sure exactly what but my tea leafs are rarely wrong.

For the record, the TED spread continues to narrow, due to the interbank loan guarantees of central banks worldwide. It managed to close at 2.77, which is a far cry from the 4.63% it was pegged at on October 9th. As most of you know, this is good for the credit markets, and hence for the confidence of equity investors. However, at the same time the yield spread between the 30 yr U.S. T-note and Moody’s 3 month BAA bonds keeps widening and is now at a record high of 5.2%. That is extremely supportive of the medium term bearish case, thus there is a bit of contradiction out there in terms of market indicators. Which is why we always go back to what we know best – reading charts – as price is the ultimate indicator.

Looks like a developing triangle to me.

You’ll notice that my wave count differs a little bit from Berk’s but that’s only details as he suggested that we still may be tracing out wave 3 of (3). This is actually a very valid proposition, and the only reason I don’t bother offering a 2nd chart is that the end result would remain the same. The main difference is that the final bottom of his minor wave (3) would be even lower. I dare not to even throw out a number, the profit potential boggles the mind. However, sticking with my wave count above which assumes that we are in minor wave 4 of (3), the drop zone of between 800 and 720 is nothing to sneeze at.

The breadth today on the SPX was 6.1:1 negative – not bad for a day’s work and it also confirms our view that yesterday’s rally was running on fumes (i.e. low volume) and represented nothing but a good opportunity to load up on puts at slightly less IV. Mr. VIX dropped to about 53 today, which is 8 points from where I would want it, but that didn’t keep me from loading up on positions on every rip.

As you can see from the chart above, I see various scenerios going forward. I gave the triangle case about 50% probability at this point, despite the upper resistance line being a bit too steep for my taste. There is a possiblity that we can drop straight down from here, which would change our wave count a bit, and the implication would be that we are in wave 5 of (3) already. I however don’t think the permabulls will give up that easily, dried up swamp or not.

Of course I could be horribly wrong and this triangle could resolve to the upside, pushing the Dow above 10k and then some. As a matter of fact, even many staunch bears do believe that’s exactly what’s going to happen as a number of market indicators point towards a strongly oversold market at this point. One trader I respect very much points out that the Bullish Percent Index ($BPNYA) is in a heavily oversold condition – it closed at 20 today. To put that into context, 30 usually is when traders start to going long in a big way – similarly 60 represents an opportunity to go short. Well, IMHO it’s all relative right now, as the $BPNYA sunk all the way to 2 on the 10th, which I think must be a historic low. I can also counter that the more short term McClellan ($NYMO) is back at 16, which is actually considered slightly overbought. My medium term stochastics also point towards a heavily overbought situation in all cash indexes, I even see strog divergences in the SPX and the DJI. Finally, supporting the continued bearish case is the Baltic Dry Index ($BDI) is all shot to hell and continues to make record lows. Letters of credit between shippers and international banks are not being accepted, plus demand of raw materials, commodities, and manufactured products is subsiding. In a nutshell – we are in a recession, no matter what the headlines out there are trying to tell you.

Gold dropping as expected.

Even Gold is being treated as a commodity and not as an ‘alternate currency’ at this point, which is of course ‘encouraged’ by repeated PPT takedowns. Many have doubted my continued bearish case for the precious metal, stating that investors would surely seek shelter from risk by investing in Gold. Well, as expected that doesn’t seem to be working out so well. The reasons for that are numerous and would exceed the scope of today’s posting but let’s just say that I stick with my target of 600 after which I will start loading up on physical gold. As Trader Dan over at jsmineset.com put it so aptly: “The speculative interest in the paper over the entirety of the last two years has been wiped out.” Anyway, don’t fight me on this, leeches – I have been continuously spot on with Gold for six months now. Why would I stop now? 😉

That concludes tonight freak show – you are free to return to puffing your crack pipes now. Berk and I will continue to post our trades going forward, but I’d like to see a lot more symbols here. Not feeling the love – time to pay your dues, leeches! Of course alternatively we both embrace bribes of the monetary kind (non serial and smaller than 20 Dollar bills please), fruit baskets, nudie bar gift coupons, or passwords to your trading accounts.

Cheers!