The FED told us they were concerned with both the economy and inflation. Well guess what? So is everyone else. The reaction to these comments was subdued at the start. Option bid/ask spreads did not widen even close to the extent that they usually do after Uncle Ben speaks.

Eventually as the day finished out volatility increased in the stock market. The DJIA shot up over 100 points, but eventually settled in just about unchanged. The Nasdaq continued to distance itself from the rest of the pack by posting a gain of almost 1.5%. The problem from a contrarian point of view is that the volume was lower than the previous day.

There certainly has not been any news that would indicate that the economy is has started heading in the right direction. The Nasdaq is holding up better than the DJIA and the SP500 because it includes a lot of technology stocks, and no financial stocks. Besides that, money managers have to put their money somewhere and they, like me, want no part of the financials.

For those of you who like to hedge your bets, It turns out that one of the best plays for 2008 would have been to be long the QQQQ and short the DIA. Even better would have been to be long the XLE and short the XLF, but we’re not looking for perfection here. Option players could have put on a funky straddle with Calls on the QQQQ and Puts on the DIA. Of course this is easy to see in hindsight, so I for one would not take this approach. I preferred bearish spreads on the DJX. That proved to be worth the effort. The question now is will they continue to work?

So how would you play it if you agreed with me that there may not be a lot of downside left, yet you do not think this market is ready for a turn around. As we have said a few times already this year, the Bear Call Spread is your safest bet. An example of this would be to Sell the July DJX 123 call and buy the July DJX 125 to cover yourself. With resistance on the DJIA at 12,250 the probability of success is pretty good…and the DJIA does not have to drop another point for you to keep your credit.

JD

The DJIA is only a day away from testing its March lows. The SP 500 is two or three days away. The NASDAQ, on the other hand, has held up well since March as the bulls think that Technology stocks are going to lead the way to the promised land. If the NASDAQ tests its lows in less than a week, we would have a sure sign of market capitulation. That could also be a good time to buy in anticipation of a bounce.

More likely though, it could take weeks for the NASDAQ to get that far, if it gets there at all. Its strong relative strength is a good indicator that Technology stocks will lead the way to recovery, but there is no need to hurry to get on that bandwagon. It appears that the financial stocks are not finished trying to drag the rest of the economy down with them.

As Bob has said many times stay defensive. Maybe it would be a good time to move to cash and take your kids on a summer vacation. That could be a lot less expensive that staying fully invested. If you want to be active, more bear call spreads may prove worthwhile for July, just as they did for the June expiration.

JD

The market continues to get pounded. There seems to be a new bomb everyday. A few days ago it was LEH. Today, MF and FITB dropped bombs. The CFC combo that was recommended last month should be bought in for a nice profit. The bond market is completely confused. One day they are pricing in rate rises, the next day they are taking them out. The truth is that the fiscal stimulus that consumers are getting right now is doing the trick. When this wears off, look out below! To top it all off, a respected analyst at RBS called for a major crash within the next 3 months. All of this is not conducive to putting more money to work. For the last 1000 points in the DOW, this site has been saying to stay defensive. So STAY DEFENSIVE!

BA

The bulls would call Friday’s action a bounce, but the bears would point out that while the market was up, the volume was down. While the Nasdaq managed to claw its way back above its 50 day MA, there there is still plenty of overhead resistance.

It was a tough week for bonds thanks to higher inflation expectations, thanks in part to a 0.6% rise in the CPI index. Since most of that was due to higher food and energy prices the bulls think that means we do not really need to be concerned with inflation. If the consumer only has money to buy food and gas, that can not be good for the economy. Last I knew if the economy was having a tough time, that can not be good for the stock market. Friday’s move might just give you a better opportunity for some bearish options trades.

JD

The Nasdaq joined the S&P 500 and the DJIA in their tail spin by crashing though its 50 day MA. It was only a matter of time. Oil failed to break Friday’s high, but that did not provide any relief. The DJIA is on its way to 12,000 and the S&P 500 will certainly find 1325. If higher oil prices were not bad enough, flooding in the Midwest gave grains a big kick start today. The March lows are within easy reach, especially for the DJIA. The probability of that level being tested looks like it will happen before we ever get a shot at passing the May highs. Say by the end of this week maybe?

Hold on for the ride. Its not likely to be smooth.

JD

Unfortunately, the DJIA won its battle with the NASDAQ, leading the markets down this week. It blew through prior lows like they were not even there on Friday. The only thing seemingly holding up the DOW was the low end of its Bollinger Bands, but on recent charts that has done nothing more than slow it down. While we might get a slight bounce on Monday because of this, I certainly would not count on this.

While the NDX chart doesn’t look as bad as the DJX or SPX, it certainly does not look like a safe haven. Keep your eyes on it though. Its recent strength point to the fact that Technology stocks are likely to lead the markets back, just do not hold your breath waiting for that to happen.

There were two major news items that led to the carnage on Friday, a 5.5% unemployment rate and $139 oil. People losing jobs, and higher inflation are certainly going to take their toll on consumer confidence.

As Bob would say, no reason to be a hero now. Use any bounces to lighten up on your long positions.

JD

The market got hit again today after rumors started flying in the afternoon. First, it was a rumor of a bank in California having problems. Then, Lehman had to come out and deny that they had tapped the Fed for cash. The bottom line is that risk aversion is in full swing. The yield curve rocketed steeper for a second day in a row as people ran for the 10 year again. I don’t know whats going on, but things are smoking so there must be a fire somewhere. Bernacke briefly helped things in the morning when he made some comments to support the dollar. Hopefully, everyone took advantage of the rally we had a few weeks ago and either did some selling or bought some protection.

BA

Are technology stocks and the NASDAQ going to succeed in pulling this market up again, or will the DJIA lead this market back down?

The NASDAQ chart looks strong with its second close above its 200 day MA in the last month.

The DJIA, on the other hand, is still being held back by its 50 day MA, never mind its 200 day MA.

The SP 500 is stuck in between the two after weakly bouncing off its 50 day MA earlier in the week.

The one thing that does seem to be apparent is that bonds are taking a hit since the FED pretty much confirmed that interest rates will not be getting any lower.

The bear call spread ideas I suggested 10 days ago still look good.

JD

Any way you slice it, this was not a good week for the stock markets. While record high prices in oil started the equity market tail spin, it was the news from the minutes of the last FOMC meeting that really knocked this market down. The FED now seems to be more concerned with inflation than with the stability of the financial markets.

After touching its highest level since the first week of the year at its 200 day MA on Monday, the DJIA blew right through the support of its 50 day MA. The next stop for support will be the April low at 12, 250, but it certainly would not surprise me if the market pays a visit to the March lows of 11, 750.

The SP 500 is not doing quite as bad, since it is still being held up by its 50 day MA. The NASDAQ still has a way to go to reach the support of its 50 day MA. The question stock market traders have to ask themselves: Is the DJIA leading the market down, or will the broader market and technology stocks help the it to reverse course.

The markets were led south by Financials, Real Estate, Consumer Discretionary and Retail. While the former two have been wreaking havoc with the markets for quite some time now, the rough week by the later two seem to be a confirmation that the consumer is feeling the pinch of inflation a lot more than the government has been leading us to believe.

No reason to close out the bear call spreads we suggested earlier this week, unless you have picked up 75% of the potential profit already. In that case, you might want to take your profits and move on to your next trade.

JD

Two more strikes against the stock market yesterday. Oil opened higher, and kept on going, rising over 3% to close over $133 per barrel. If that was not enough, the FED released the FOMC minutes from its April 30 meeting. They pretty much confirmed that Uncle Ben is done cutting rates and now is more concerned with inflation. Glad to see he finally stopped at the gas station on the way to the grocery store.

Not surprising that the stock market reacted poorly to this news. It doesn’t look too good from a technical perspective either. We already mentioned that it had been stopped by overhead resistance at the 200 day MA earlier in the week.

Yesterday’s drop blew right through the bullish trend line established after the March lows. And thanks to Tony and Eric for pointing out several indicators showing that pricing momentum is definitely running out of gas.

With two big down days in a row, you should probably wait for a pull back to before taking more aggressive bearish positions or adding some protection on your long positions.

JD

SP 500 May 12, 2008

While the PPI actually came in lower than expected at 0.2%, the core PPI was up more at 0.4%. This was a solid indication that increasing food and energy prices are starting to impact the rest of the economy.

It did not help that oil made another record high at $129 thanks to the falling US dollar. Can anything stop this commodity’s attempt to reach the stratosphere? I realize that oil is extremely over bought, but I’m certainly not going to bet against it.

To make matters worst, indications from the FED are that it is ready to take a break from interest rate cuts, which seems to confirm what many have thought.

Our cautious attitude towards the markets is not going anywhere. You might even consider a bear call spread on your index of choice while the market heads down to test support.

JD

No, I’m not talking about the Presidential Election, that’s a topic for a different conversation, just the US stock markets. We are still sitting at the 200 day MA for the DJIA and the S&P 500. A move above this level that holds for more than a day might just be enough to remove the air of caution around here. With options expiration out of the way for this month, the market is free to move in its preferred direction. We will soon see what that turns out to be.

JD

The first drop in the price of Oil and some good news in the Technology sector inspired the stock market today. The DJIA decided to bounce off of the support of its 20 day MA and the 12, 750 level it was sitting at on Friday’s close. The S&P 500 and the NASDAQ both bounced off of their 20 day MAs as well. Volume was nothing special, so we’ll have to wait and see if the bulls have enough energy to push stocks through their 200 day MA and change the tone from a bear market rally to a new bull market.

JD

The DJIA closed at 12, 745 yesterday, just a couple of points below support. It is the first index to retrace back down to test its new found support at 12, 750. On Monday we should get a good indication if the Dow is going to lead the market back down, or if it can bounce back and kick start the bullish crowd once again.

Oil has entered the parabolic phase of its accent.  It was up almost 10 dollars last week just settling below $126.  After-hours on Friday, FDX came out and warned because of this.  Does anyone else hear the footsteps of the bogeyman called Stagflation?  The market has faked out almost everyone.  It managed to get the shorts to cover based on the breakout and the bulls to commit new money.  I wouldn’t be surprised if the next move is lower.

BA

The unemployment number came in at a better than expected -20k.  The Dow is up over 100 pre-market.  Bonds and the curve are taking it on the chin.  Who cares if people can’t pay their mortgages.  Let’s party like its 1999!  The big test will be if we can keep this momentum on the upside.

BA

The DJIA spent the day taking back all the ground it lost after the FED meeting yesterday to close above 13,000 for the first time since the first week of trading in 2008. The S&P 500 closed above 1,400 for the first time in 4 months as well. While these indices made intermediate term highs on less volume than yesterday, the NASDAQ is trying to lead the stock market higher. It closed above its 200 day moving average for the first time since early in the year, and even did it with slightly more volume than yesterday. As we said a couple of weeks ago, we’d be more optimistic if there was a little more follow through on these rallies.

JD

The Fed cut rates 1/4 point yesterday as expected down to 2%. The most likely scenario for rates going forward is a long pause. The Dow sold off on the news. After being up triple digits for most of the day, the market closed with modest losses. We probably won’t do much today with unemployment looming tomorrow.

BA

Even the largest monthly decline in home prices in the history of the S&P Home Price Index could not get the stock market moving very much today. The DJIA lost only 40 points, the S&P 500 fell just 5 points, and the NASDAQ actually picked up a couple of points. Seems the market almost stops while everyone waits to see what Uncle Ben is cooking up in this week’s FED meeting. Stay tuned tomorrow afternoon. There is sure to be a lot more action than we’ve seen the last couple of days.

JD

The DJIA closed at 12,720, just below the 12,750 support level. The S&P 500 closed at 1375, just above its support at 1370. While the market appears to be holding steady at support, we haven’t really had strong follow through to the upside, so proceed with caution on any bullish plays you may be looking at.

JD