Traders,
We got up a little, but the SPX didn't get its head above that 1100 area. The action of the day looked like it was testing resistance and it will need something extra to push through that resistance area. There is a pause on how the EU will deal with Greece and the bailout, that continues to inject some volatility into the dollar/euro trade and could ultimately bring either confidence or more fear as to how that plays out. The data today will give us a better gauge on how inflation maybe impacting the economy. |
| Inflation & No Job Creation!
PPI coming in hot. |
|
The PPI (Producer Price Index) reported hotter than expected, with an increase of 1.4% - certainly inflation is ramping. The weekly jobless claims increased by 31,000 to 473,000. In a traditional market when inflation begins to show itself, the Fed usually starts talking about raising rates with action soon to follow. However, part of the Fed's mandate (which in my humble opinion - should not be part of their mandate) is job creation. Now I think you begin to see the Fed's problem, inflation is starting to increase, but there is no job creation. Tightening rates is like putting the brakes on and will no doubt put pressure any economic growth and in an already fragile recovery and jobs continue to be lost (abet more slowly) - any rate hikes could send us into a stall or worse.
The PPI came in highest amount since October 2008 and it will be very interesting to see how this trickles over to the CPI, the consumer price increases. If the CPI comes in hot it will really put the Fed in a corner. The dollar is also the cheap "Carry Trade", any indication of a rate hike will put serious pressure into the market.
The futures are not initially taking well to the news and are under pressure in the pre-market. The treasuries didn't see as much volatility, but I think they are waiting to see how the CPI might be affected. If see a push up to 3.85 on the 10 year - it will be a test, a break there could send yields higher. That has a double impact - not only to the economy and consumer, but also with the government looking to issue more stimulus and going back to the well "treasury market" to finance the deficit. The government certainly doesn't want to pay higher rates and I have the feeling the Fed will again have to play back stop to make sure any low interest funding is filled as foreign interest declines in that scenario.
http://www.cnbc.com/id/35457298
.
|
| Wal-mart's short fall
Sales looking flat. |
|
As I have been reporting the earning season is the "tale of two cities" - those like Deere, Coke, and other that have made big end-roads into international sales have done well and the domestic reliant companies continue to suffer. Wal-mart is no different, while I believe Wal-mart is a recession survivor company and has done a great job on capturing business from competitors, they still face a weak consumer as credit continues to decline and consumers spend only what they earn. Wal-mart reports that sales FELL during the holiday quarter and the forecast the current quarter could also miss estimates. This news is certainly creating pressure in the stock in the pre-market and with sales flat to only up 1%, domestic growth doesn't look good. We certainly are not able to measure a domestic recovery if we use any of the Wal-mart data as any gauge. This is rather disconcerting for economist and analyst - who use Wal-mart (the world's largest retailer) as a bell-weather indicator. Early indications seemed as if they had captured sales from higher-end competitors, this morning on Bloomberg a analyst reported that WAS the case, the problem is that domestic sales have declined with such a large breath (of products) that even with capturing competitive sales, they still face a wider decline in consumer sales. Certainly, as he points out, this is not just sector driven but shows a wider issue on domestic sales growth. If the PPI (followed by the CPI) shows inflation kicking in - this could have further impact to Wal-marts margins and that is not good. One analyst believes that Wal-mart is offering the most conservative estimates and will surprise investors. I guess he believes they are playing that "set the bar very low, to beat estimates" game - (something we became accustom to last year). He may be right, but Wal-mart has no control over that jobs and inflation report - which could bring more pressure to domestic sales. Stock is down $1 in the pre-market http://www.cnbc.com/id/35442486 |
| Futures Pre-market
Where's the action! |
The futures are under a pressure in the pre-market as inflation and no job creation creates more uncertainty as to the Fed monetary policy.
|
| Support / Resistance
Going higher or lower? |
|
Flatten positions and Pin Risk.
INDU 10,000 / 10,250 (We are up in the 10,250-300 band and it is certainly a place to flatten deltas. Sure we could push higher, but I think pressure is do the downside a snap through 10,250 can quickly bring us back to support areas.)
NDX 1750 / 1800 (As with the INDU, the NDX is a little stretched and this is an area of resistance. We may pin at 1800 this week for expiration, but come later - we could be revisiting support.)
SPX 1050 / 1100 (Closed right below it and now under pressure in the pre-market. I think resistance seems stronger than a possible breakout. Flatten deltas and those with gamma - if you leaned short yesterday it might pay off a little. However - look for pinnage on Friday at 1100 for expiration.)
RUT 600 / 625-630 (Up in the resistance band - looks a little tough for now. Flatten or hedge out positions.)
|
| Conclusion
|
We have had a quick and solid run up to resistance, a good time to flatten out deltas. It is also expiration week so we do have a chance of seeing some pinnage up at the resistance area - I briefly looked at Open Interest and while it is not as thick to declare a pinnage - there is enough to make it likely. However, if CPI gives us an inflation blow as much as the PPI - we could be in for some market pressure going into Friday's close.
Euro/Dollar continues to see volatility and it looks like the dollar is the winner during the uncertainty phase, but once we get better insight as to the EU/Greece headache - we could easily snap back. It's a combination of chasing safe haven and forcing a cover of the "carry trade". The game is certainly bringing volatility to the currency market - which is spilling over into the equity and treasury market. | |
|
|
|
 |
| Obsidian |
| Professional trading platform!
FREE DEMO |
|
| 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. | |
|
