WHICH WAY THIS MARKET IS HEADED
This past
week was super volatile--four out of the past three trading days were up
but the week STILL ended down 16 points on the Nasdaq and 39 points on
the SP-500. This market is confirmed bearish with every ‘buy the bounce’
entry being crushed after every weak rally attempt. At this point
margins are being called and forced selling is taking over—we could see
a capitulation spike lower soon.
Two big reports Thursday knocked the stuffing out
of any rally hopes. The first was the Employment Report showing 62,000
jobs lost in June with the unemployment rate remaining at a four-year
high of 5.5%. Payrolls have now declined all six months this year for a
total job loss of 438,000, the strongest evidence yet that the economy
is in a recession and will likely keep weakening as consumers limit
spending on all but necessities. Scared employees don’t make for big
spenders.
After the Employment Report the ISM was released
showing the U.S. service sector contracted unexpectedly in June, falling
to its lowest level since the beginning of the year, the private
Institute for Supply Management reported Thursday. The ISM's
non-manufacturing sentiment index fell sharply to 48.2% in June from
51.7% in May, making for the lowest level all year.
Neither of these two reports did the markets any
good with an initial spike lower after the ISM was released. The SPX
recovered somewhat before the end of the day but the bottom line is the
economy is still deteriorating.
Of course the big market influence is still oil and
it’s what everyone is naturally focusing on because of its impact on
everything from the price of steak to the price of steel. Crude surged
more than 3% this past week to a new high above $145 a barrel--the price
of oil has now doubled in less than a year and is considered the major
driving force behind inflation—that and a runaway printing press in
Washington and continuing low interest rates versus every other major
global currency.
Retail gasoline prices also reached another
all-time high Thursday, and natural-gas prices gathered steam as the
second named storm of the hurricane season formed in the Atlantic. This
hurricane season is just beginning and any real threat will drive oil
through the roof as the Gulf disaster of ’06 is still fresh in
investor’s minds.
Another influence driving oil futures to new highs
is a U.S. government report showing declining supplies of crude. Plus
concerns over a potential conflict between Israel and Iran have been
supporting prices as the market continues to worry about global
production.
On Thursday, Saudi Arabia's Oil Minister Ali Naimi
implied that his country had no immediate plans to boost crude
production in spite of recent reports to the contrary—apparently the
Saudis are enjoying the current price trend and will continue to support
it until some substantial demand destruction dictates otherwise.
Oil has been an ongoing focus point—but the new
market focus this week is earnings. Investors are bracing for a fresh
spectacle of slowing economic growth and high energy costs taking a bite
out of corporate profits. Aluminum producer Alcoa kicks off the season
this Tuesday after the close---the company is expected to report a 17%
drop in operating profits—not a great starting note.
Analysts anticipate earnings of the S&P 500
dropping nearly 10% in the three months ended June 30, according to
estimates compiled by FactSet Research. Brokerages polled by FactSet
rival Thomson Financial anticipate an even worse performance with
earnings declining 11.5%.
The financial sector, historically one of the
biggest contributors to profits in the index, is likely to be the driver
behind much of the S&P 500's decline. In fact S&P earnings were actually
expected to climb close to 10% for the quarter if it weren’t for the
withering influence of the financial sector. Earnings for bank,
brokerage and insurance companies are anticipated to drop a
mind-boggling 58% this quarter. With the financials making up such a
big chunk of the S&P it’s not hard to see how earnings are on tap for
another down quarter.
It’s no wonder the markets have been falling with
all these negative influences. Most indicators show stocks have become
oversold and we could see a short-covering bounce at any time. However
the VIX tells us fear levels can rise substantially higher before an
inevitable bounce—the question is…
HOW DO WE
MAKE MONEY ON IT?
We’ve got two high odds plays lined up this
week—the first can make us money no matter which direction the markets
run—and the second is straight-out bearish.
Our first play is on an index poised to explode—and
we’re going to take maximum advantage of that explosion with positions
in BOTH directions! This play is known as a ‘strangle’ and the great
thing about it is we don’t have to be right on direction—no matter which
direction this index runs we’ll have a position in place to profit—and
if the volatility really gets wild we’ll make a DOUBLE profit!
Our next play is on an American icon of industry
that up until May was doing pretty well—but when the company’s
international prospects started to falter so did the stock. Then on
Thursday the stock broke below a critical support level that indicates
this one has MUCH further to fall—a fall we’ll be taking full advantage
of with the right puts first thing Monday morning.
We’ve got two great plays lined up on a market
ready to explode—so let’s get to it…
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