Today is the day.
In my morning Alert to Members yesterday, I said “To a large extent, we are bouncing as dip buyers anticipate something coming from tomorrow’s Merkel-Sarkozy meeting or something like QE3 coming out of the Fed – if those events do not come out as hoped – then all hope may be lost and that is NOT going to be pretty.” We went with SQQQ Sept $25/28 bull call spread at $1 for protection, offset by short puts like the RIMM Sept $22.50 puts for $1, which already fell to .70 for a nice 30% gain on the day. There were 6 other short put trade ideas to offset the long spread as we looked to lock in the gains of the past two days.
Later in the afternoon, Art Cashin sounded like he was reading my Morning Alert to CNBC viewers saying: “Everybody’s sitting on their hands waiting for the Merkel-Sarkozy meeting and they may have their hopes a little too high.” Cashin sees parallels between the current market and the 1987 crash, and he even closed with: “you want to be very careful here.” You also want to be careful about the retail sales and consumer data we’re seeing. As David Fry notes:
Consumer Metrics, a painstakingly reliable organization reported some interesting data Monday. First they attributed the rise in consumer credit primarily to Student Loans. Further, on a “back of the envelope” estimate they suggest roughly $100 billion of consumer stimulus is in the economy from “rent free” mortgagees’. So with many homes in default banks aren’t pursuing foreclosure as a remedy thus providing those folks with disposable income. It’s that pesky Moral Hazard thing again. It’s unfair to all paying their mortgages faithfully knowing their neighbor and others aren’t. For those living rent free it’s more rationalized cash for iPads and other stuff.
That also helps to explain the incredible divergence of Retail Sales vs. Consumer Confidence (chart via Zero Hedge). I had postulated this weekend, as we were discussing the chart above with Members, that the divergence was a reflection of forced or compulsory spending. In other words, consumers used to have discretionary income which they would use or not use depending on their mood. Beginning in 2008, consumers had less money but the price of commodities shot up and that has kept consumer spending…
