Testy Tuesday – Dow 12,000 or Dow 11,500?

June 18, 2011, 8:34 pm

Are we “still too heavy“?

That was what I said about valuations back on May 4th, when we set new watch levels. $96 was our goal on oil, we hit that and went long yesterday. Of course, in our upside-down Wonderland Market, falling oil prices are somehow BAD for the Transports and we thought we accounted for that with our 2,448 target but they failed that last week and fell another 125 (5%) since then. Similarly (easier to write than say), the Nasdaq blew through our 2,700 line and bottomed out at 2,639 yesterday (-2.25%) but the Russell has been the biggest surprise, leading us all the way down to 773 in yesterdays action before bouncing back to lucky 777.

As we expected yesterday, the Dollar was sacrificed on the altar of keeping the markets from going to Hell in a handbasket dropping all the way from 75.20 to 74.80 (0.5%) which gave us only a flat market but the 74.60 line held in overnight and were back to 74.80 and now the pre-markets are wondering why they gained 0.75% in overnight trading. Oil popped all the way back to $97.80 before failing spectacularly back to $96.50 but we have stayed on the sidelines so far, waiting to see if we can establish a new (hopefully lower) range to trade in.

We did take a poke at higher oil prices with the USO July $39 calls at $1.10 and they finished the day right at $1.10 so very dull so far but we figured oil might be good for a pop into Wednesdays inventories. We also shed most of our bearish bets on yesterdays dip and flipped fairly bullish but we havent done a lot of bottom fishing yet as our main plan is to use a fake market rally to cash out the longs we have left and flip short into the holiday weekend. As the moment though, I have noticed that the Dow has been holding up much better than its peers and we have that lovely 12,000 line to use as a stop so lets construct a short hedge that pays big bucks below 12,000:

Notice how the Dow is holding up better than the other indices. Part of that is a flight to safety as several Dow components are considered “safety stocks” like KFT, MCD, JNJ But, in the long haul, they all fall down eventually so we…

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