The Editor’s Rant:
The Deal is Done, well,
that’s what the headlines say this AM. I’ll allow you to gather
the details from another source. Oh, and by the way, if you
stumble upon an answer to this question, please pass it along
to me. Once said purchased securities are sold, several years
hence and possibly at a profit to the tax payers, what will
become of the proceeds? Will the proceeds be used to retire the
debt originally created to fund the purchase? Or, as I suspect,
has a measure of the behind the doors horse trading really been
about who and how the spoils will eventually be divided into
new pork like pet projects?
In hind sight, let’s
quickly review how we got to this point. After the great crash
of 1929, authorities closely analyzed what happened, who, how,
and why. Using their newly found 20/20 hindsight they set about
with a number of new initiatives to prevent it from ever
happening again. The
Glass-Steagall Act along with other measures such as
The Uptick Rule, are just a few of the step taken along
the way. In 1999 Clinton removed Glass-Steagall, and I am
confident everyone remembers my comments on the stupidity of
the removal of the Uptick Rule in summer 2007.
In short, we decided that we are much more sophisticated,
smarter, and more caring that those idiots of the early 20th
Century. Well, well, well, nothing ever changes but the date,
the weather, and the speed of global communications.
OK, the deal is done. That means the market is
supposed to rally. First, let’s remember that all the
Governmental event driven rallies to date have quickly fizzled.
Will this one be any different?
At the end of the day,
the new Government Plan will allow financial companies to more
accurately estimate their condition, which in turn will provide
greater transparency. And, since they will be able to get the
unknown off their balance sheets will be less inclined to fail.
The process of restoring confidence, the true goal, has begun.
Oil: The pain of not being able to take delivery
or worse yet, not being able to deliver was felt this past
Monday, the last trading day for the October contract. The
October contract spiked close to $30. November oil caught a
small bid, but someone was caught short October oil and had to
close out the positions when the folks on the other side wanted
delivery (read: didn’t want to sell.)
The only way to close out a short contract is to buy that
contract back. The financial risk of being short a contract can
be offset many ways, but when it comes to the end of trading
and deliver, take deliver is the only option left, the only
alternative is to buy it back.
And so, this is the only reasonable explanation for the radical
price move on Monday. Perhaps some oil contracts were locked
up, frozen in some Lehman account.
The important take away,
overall open interest continues to contract. While it is clear
someone made an expensive error last week, in the grand scheme
of oil, the shorts continue to hold the upper hand.
I still expect open interest to fall another half million to
million or so contracts. Without the impact of Hurricane IKE,
prices would likely be lower.
An ongoing bull argument
for oil relates to Inventory levels, which have fallen below
the lower boundary of the historical range.
This one is pretty simple. How much inventory do you keep on
hand when oil is $65? How much does it cost to carry the
inventory, and how does that cost impact your overall operating
margin?
OK, now bump the price up to $120, nearly double. How much
inventory do you keep? How much does it cost to carry the
inventory and how much does that cost impact your bottom line?
Oh yea, and does you bank have the capacity to extend the
credit you need to support your now significantly more
expensive inventory?
I’m not in the oil business, but I think I would consider
reducing my inventory carrying cost too. The trick question is,
will inventory come back up when the costs return to their
historical norm? Or, will another terminal impact of the great
passive oil investment debacle leave the country subject to the
risk and volatility of running with reduced inventory should
another disruption transpire?
Note: The knee bone is connected to the….
McCain Obama: Not to be
political, but sometimes it is fun. I read an article talking
about a meeting between Sara Palin and an Islamic Diplomat and
or head of state. It seems he was quite taken by her looks,
which resulted in some, shall we say, unprofessional and
apparently disruptive comments. Now there is a call for Sara
Palin to resign from the ticket, because she is too hot.
I doubt the McCain campaign trouble shooters and problem
solvers ever saw that one coming.
The Market Internals:
Strange Days Indeed:
No confidence: This week
we saw the lowest level I have ever seen on the CQI.
The NYSE 21-Day STIX
again reached an extreme oversold level. However, despite new
price lows, the STIX registered a higher low. A multi-week
rally is expected to follow.
Consistent with the
divergent STIX, we have a major positive divergence in the
number of New 52-Week Lows. Yes, the level reached at last
week’s low was excessive, but notably improved relative to the
extreme July low. (Note congruent time scaling with chart
above.)
The improving technical
backdrop continues. Notice the increase in buying pressure.
Yes, it’s a new low, but buying pressure is much healthier now
that at previous lows. The point being, there are some Big
Money Runners that are gaining some buying confidence. Think
Warren Buffett taking a stake in GS. Then again, 10% Perpetual
Preferred, Yea, I would buy that too.
What is interesting is
that 10-day Up and Down volume metrics are virtually on top of
one another and have been for close to two months now. I have
been unable to find a historical example of this sort of
behavior lasting more than a week or two.
That said, I believe it indicates market participants are not
adding or withdrawing funds to the market. Cash raised from
sales is quickly put back to work. Note: The condition is less
prevalent at a 5-day interval.
At the end of the day
when looking at all the indices, the Russell 2000 remains the
more attractive in terms of technical behavior. It is also
worth remembering that what the Dow was range bound from 1966
to 1982, the Russell 2000 (read: its equivalent) maintained
steady upward progress during the 16 year period.
Final Thoughts:
Provided that the Deal
is Done, we are supposed to see a pretty healthy rally. The
phrase, never short a dull market, well, last week was really
dull. From a technical stand point, a big up day on Monday on
strong volume should qualify as an O’Neil Key Follow through
day. This will suggest an important low has been reached.
As far as the cycles go,
watch for a potentially disruptive sell off into October 6,
give or take a day. But a low should form around the 6th
and be followed by a measurable move higher.
Jim
Jim Patterson
Editor
Tactical Trading Outlook
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