"How wonderful it is that nobody need wait a single moment before starting to improve the world." -- Anne Frank
The "Take 'Em" Boys
I know some of you old timers out there remember the "take 'em" boys. Once upon a time, there was a place where traders would meet at a centralized point of sale. They would have to bid and offer out loud to be recognized in the crowd. Either that, or they failed to actually accomplish anything. Their word was their bond. Hundreds of millions of dollars were transacted. No contracts. Best of all, they identified themselves by their firm and by their badge number. Transparency at the point of sale that led to actionable information. It also led to a book fully stacked on both sides of the market.
I look back at those markets as the time of my life. An athletic job, not really made for the meek or the mild mannered. Did you have to be bright? Yes, but not egg-head smart. You had to be sharp, which is different. The crowds were physical, as well as fast. You were always too busy. Too busy to eat, too busy to sit, too busy to use the restroom. We were even too busy for the celebrity guests who would often stop by. I fondly remember the day that I had no time to speak to Michael Jordan. I wasn't very polite. He was.
Way back, when just about 5,000 human beings used to crowd that trading floor and another 2,500 packed the one on the other side of Trinity Church, every once in while, buy programs would hit the market in waves; you might notice the S&P futures move a bit ahead of the broader indices. If you were the first one in your part of the trading floor to see it happening, you would call out: "The 'take 'em' boys are here". The "take 'em" boys were not real traders, of course. They were the very beginning of an electronically-driven marketplace. It was as if riders had come to town. It was as if the call was a warning. This is October 2017, and those boys have been at it for quite some time now.
Riders on The Storm
A monthly Bank of America Merrill Lynch poll reports that a rough 30% of asset managers considered long trades on the Nasdaq to be at saturation levels for the fifth time in 2017. That might be true. Heck, it is true, but one must ask oneself: "What's not to like about a market environment where the economy grows above trend, with a central bank that is unable to create sustainable inflation?" Hmm. I think I heard you say "Take 'em".
I admit to being one of the optimistic ones, at least for now. It is easy to see room to the upside, if the already mentioned environment continues to evolve as it has. Many readers, or those of you may think of me as something of a perma-bull, as I have been bullish for so very long. That's not really the case. My friends and colleagues will likely remember a time when I was bearish, but I will gladly admit to that being quite some time ago. Then again, the markets have enjoyed the bull run for the ages, so really what is there to admit. Being sort of perma-bullish has been the correct call for many years now. Is there now a storm coming, though? The case for a cloudy day in our future can now realistically be made. I, too, saw those low cash levels. That does cause for some concern.
If you read the Recon often, then you already know that elevated valuations do not scare me all that much. However, what does catch my attention is the tightening of monetary conditions. Will the Fed succeed in accomplishing this mission over the next year or two? Right now, the bond, currency, and futures markets are all betting against them. Hence, the primary reason why I am not close to changing what I've been doing.
There really are only two things that do actually scare me. One is waking in the morning with the realization that something is in my sleeping bag with me. The other could be North Korea, or maybe just any geopolitical event that strays from manageable to unmanageable. That would be the game changer. This would be the negative catalyst, and why you hedge at least part of your portfolio through the sale (not purchase) of appropriate equity-related options, and of course through the allocation of a small portion of your book toward gold. I know some of you are dragging your feet on that one.
08:30 - Fed Speakers:New York Fed Pres. William Dudley, and Dallas Fed Pres. Robert Kaplan will speak together from New York City. Though the focus is expected to be on the states of New York and Texas as centers of economic growth, both of these policy makers will vote in December. Dudley has been a steadfast hawk this year, while Kaplan has wavered over the lack of consumer level inflation.
08:30 - Housing Starts (September):Expecting 1.17 million, August 1.18 million SAAR.
08:30 - Building Permits (September):Expecting 1.24 million, August 1.27 million SAAR. August ended up being the weakest month in this space since last December. How much of an impact did Hurricanes Harvey and Irma have on those numbers? The Census Bureau reported at the time of that release that responses from impacted jurisdictions were not lower than normal. Keep in mind that Harvey did not impact Texas until the last week of that month, and Irma will be part of the September story. In other words, a flat to slightly lower headline number today would be a positive from a macro perspective.
10:30 - Oil Inventories (Weekly):API -7.13 million, Last Week -2.7 million barrels.
10:30 - Gasoline Stocks (Weekly):API +1.914 million, Last Week +2.5 million barrels. The American Petroleum Institute handed out a couple of surprises Tuesday night when they released their inventory counts. On the one hand, the build for crude was far larger than what had been expected. On the other, a build was also reported for gasoline when a small draw had been projected. Traders working the after-hours session reacted very favorably to these numbers, pushing WTI back above $52 after the commodity had failed to hold that level during the regular session.
14:00 - Beige Book: With two weeks to go until the next FOMC policy meeting (albeit one with no scheduled press conference, nor economic forecasts attached, meaning that no policy changes are actually in play at that time), we'll get an economic health check in the form of anecdotal evidence from across the 12 districts. Markets can move on this release if traders are looking for an excuse to act, so keep your helmets on for this one.
14:00 - Federal Budget Statement (September):Expecting $2.5 billion, August $-107.7 billion. August is historically one of the ugliest months of the calendar year from a federal budgetary point of view. August 2017 carried on with the tradition. The deficit is now running more than 10% above 2016 levels, largely due to costs related to Social Security, and interest payments. Higher interest rates are a good thing for the banks. They will also depress the value of assets currently held by the Federal Reserve, as well as increase borrowing costs for the Treasury department on new debt -- a lot of new debt.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2578, 2571, 2563, 2558, 2549, 2541
RUT: 1515, 1508, 1500, 1492, 1484, 1477
Today's Earnings Highlights (Consensus EPS Expectations)
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Oct. 28 in New York
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When: Saturday, Oct. 28, 8 a.m.-3 p.m.
Where: The Harvard Club of New York, 35 West 44th St., New York, N.Y.
Cost: $250 per person.
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At the time of publication, Stephen Guilfoyle was long URI, although positions may change at any time.