Traders,
We had a good follow through after the 3-day holiday weekend. The INDU is back up to the 10,250 level and I would give it some slop up to 10,300 - if we see a stall there today - it means we could be hitting some solid resistance. If a break-out, from 10,250-10,300 means that another quick move to 10,500 is in the cards. Certainly an area to watch for resistance. Interesting to note, Berkshire unloaded a rather large amount of their blue chip shares in the most recent report - let's see if that brings any pressure or uncertainty. |
| Mixed Housing Data
more inventory? |
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Housing starts increase by 2.8% (higher than expected), which sounds great - but do we really want to see an increase in starts? Don't we want to absorb the current inventory? Building permits did fall by 4.8%. (lower than expected). Some analyst said the "cold snap" had created a little more volatility in their forecast. CNBC reports even with a slight edge up, levels remain consistent with poor conditions. I think that it should until we are able to absorb a considerable amount of inventory. In Florida, Nevada, and California - the excess inventory still remains at very high levels. New builds and more foreclosures means more inventory, not less. That means a longer road of recovery in the housing market. Either way you slice it - builders will probably not see a strong rebound in building and housing values will not increase - until those inventories come down. While I am certainly not a real estate expert (and conditions vary in the country) - I think we may be in for a long road on the housing front, prices will continue to be soft and volatile.
http://www.cnbc.com/id/35437232
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| Deere's profit explosion
proper execution and management |
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The company expected to earn 19 cents a share, but they "ripped the cover off the ball" with a 57 cent per share earnings. How did they do it? It was a multi-prong attack, they heavily cut costs (lay-offs), focused on over-seas sales of heavy farm equipment, and also did a bang-up job managing foreign currency risk. That sent margins up 10% (three times more than expected). Their 2010 projections look good and they expect that sales will gain for the year, rather than drop. At the end of the day - they have executed well - in this difficult time. The story remains the same, weak domestic and strong overseas (emerging markets). I haven't looked at the numbers yet, but on Bloomberg they reported that over 12% of their profit was from hedging and managing currency risk, additionally they have managed commodity price volatility well. Also they have made huge moves towards agriculture equipment and possibly looking to expand in South America and Asia. Stock is up $4 in the pre-market. http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=DE%3AUS&sid=ayxfu4QiH_IA |
| Futures Pre-market
Where's the action! |
| The futures got a boost in the pre-market, expect a higher opening. Deere is a lead story that is bringing some optimism to the pre-market. |
| Support / Resistance
Going higher or lower? |
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I said last week that the supports were worth buying, but as we quickly head up to resistance levels - I think we may want to get flat deltas and long gamma. If they start to look weak in the closing session - it might be prudent to take off positions and may open up some shorting opportunities. Right now optimism is carrying this relief rally and as long as Europe remains quite - don't expect too much volatility. VIX could get back to 20 quickly, but that is not a time to forget where we came from.
INDU 10,000 / 10,250 (We had a decent move back-up to this level and could get to 10,300 - but if we look weak in the later session and 10,300 looks more like resistance it would be prudent to flatten out deltas.)
NDX 1750 / 1800 (We might get a push up to 1825 in intra-day trading this week - but if we don't close up there - look at 1800 area as resistance.)
SPX 1050 / 1100 (Closed just shy of 1100 and a visit to 1110 is possible. Watch the close. Anything at or below 1100 means resistance is playing its hand.)
RUT 600 / 630-635 (Looks like a break-out, watch resistance at the 630-635 range for resistance.)
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| Conclusion
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There are certainly some bright spots, like Deere - they managed and executed a strategy through this rough spot, yet the story remains the same in these earnings - Companies focusing on cost cutting and positioning themselves in the international (primarily emerging markets) are doing well. On the other side of the tracks - those companies that rely on domestic consumer growth continue to struggle and the banking/financial sector is still very tight on the credit side. It will certainly remain the tale of two cities. Obama and Democrats will obviously point to any stock market recovery as an economic recovery, to help save seats in the coming election. However, the "real" economic recovery domestically - the one felt by the man on the street - will not mirror any possible stock market recovery.
Housing starts are a mixed blessing, we certainly don't want to see inventory to rise (regardless from building or foreclosures) as it keeps a lid on any price recovery. We also import prices rise this morning by 1.4%, that is showing real signs of inflation hitting our shores and will further put pressure on the domestic consumer.
These are times where building a diverse portfolio that avoids domestic economic pit-falls and political volatility is key. Watch inflation sneak-up when we least expect it.
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| Author |
| Michael Williams has 20 years experience as a institututional floor broker and options market maker. He is a partner in both Silexx Financial Systems (a trading software company) and Kinetic Strategic Group (a private investment firm). He co-authored the book "Fundamentals of the Options Market" a McGraw-Hill text and has lectured throughout the country on Options, Risk Management, and Volatility. | |
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