Market Shoulders Huge Unemployment Spike – For Now!

December 5, 2008
Author: Peter Stolcers, Founder of OneOption

Last week, the market was able to stage its biggest five-day rally since 1933. It shrugged off a horrible GDP number that was worse than expected and it was oblivious to a dismal Durable Goods number. Some of those gains resulted from end-of-month window dressing and a seasonally bullish pattern heading into Thanksgiving. Half of last week’s gains were stripped away Monday. Black Friday yielded better retail sales than expected. However, analysts believe that shoppers are only buying what they need and they are waiting for the big discounts. Credit card companies are tightening lines of credit even for good paying customers. That means that future spending will decrease. With the exception of Wal-Mart, retail sales figures were dismal yesterday. The market ignored retail sales and it tried to rally throughout the day. This pattern was present last Tuesday and Wednesday. Weak ISM numbers, a dismal ADP report and the Fed's Beige Book could not push the market lower. It almost looked like the market would finish in positive territory ahead of today's Unemployment Report. That would have been amazing given that every month this year the market sold off ahead of the number. In the last hour of trading, prices slipped as traders got short ahead of the release. The number this morning was frightening. Analysts had expected a decline of 300,000 jobs and we actually lost 533,000 jobs in November. That is the largest monthly loss of employment in 34 years. As people lose their jobs, the mortgage crisis will quickly spread beyond subprime loans. Many states have blown through their unemployment funding and they will be knocking on the Fed's door for help. The entire nation needs a bailout and we are hoping that the rest of the world will come to our rescue. Unfortunately, the rest of the world is in trouble as well. Shoppers are so desperate to save $5 that they will trample a person to death (Wal-Mart). This level of panic and chaos could just be starting. In China, there are riots as toy factories close. Conditions continue to deteriorate and they will get worse. Our standard of living is about to take a major hit. From a trading standpoint, the market may be forming a temporary support level. In the chart you can see that the decline is starting to lose its momentum. Bad news is not packing the same punch and even today, the market is holding up fairly well (early in the day). Year-end bullishness might help us tread water at this level and if it happens, I would consider that a major accomplishment. I don't think we will see any big declines or big rallies. That sets up well for equity put writing on stocks that have formed a base. I believe the implied volatility will come down during the next few weeks. Next year, I believe we will see a gradual drift lower. The declines will be like Chinese water torture and occasionally we will see a decent snap back rally. This is a very tough trading environment, but I've gone through a few of these in the last 20 years and I know where to look for opportunity. For today, my brain tells me to get as short as possible. This news will have a devastating impact financially and psychologically. The problems will spread and there aren't any solutions. My gut is warning me to be cautious because there are some signs of support. Consequently, I have not backed up the truck, but I am short. image

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