Daily Market Report: Sharp Sell-Off Could Occur In S&P 500 Index

What started yesterday (Wednesday) in Europe with concerns about HSBC (HBC) and Deutsche Bank (DB), carried over to North America, and now today to the equity markets of Asia-Pacific. Although the futures are not looking negative here, traders are watching closely for signs of deteriorating confidence.

Yesterday, in relentless selling for the first 75 minutes, followed by sidetracking the remainder of the session, the major market indexes closed well down in NY. The DJIA (^DJI) (-248.42 -2.94% to 8200.14), S&P 500 (^GSPC) (-29.17 -3.35% to 842.62) and NASDAQ Composite (^IXIC) (-56.82 -3.67% to 1489.64) all were hit hard on increased volume.

In Asia-Pacific equity markets today, Tokyo (-4.92% to 8023.3), Australia (-4.07% to 3476.8), Shanghai (-0.45% to 1920.2), Hong Kong (-3.37% to 13243.0), and India (-3.45% to 9046.7) were hammered. After noting they had been stronger the previous day, I opined, “That will likely not be the case tomorrow” and certainly what followed was expected.

Earlier this morning (6:55am ET), the European bourses were absolutely flat. By 8:10am, they had dropped an average of about -1.0%: French CAC -0.89%; German DAX -1.84%; and UK FTSE -0.88%.

In NY yesterday, all equity sectors were quite negative with Financials (XLF -5.8%) being the worse, as expected. The Utilities (XLU -1.2%) and Healthcare (XLV) were the best off, but were still big losers.

In the industry groups, everything was down, but Oil Services ($OSX -6.2%) and Banks ($BKX -6.0%) were down the most.

In the Cara 100, there were just two (2) winners: Bristol Myers (BMY +0.9%) and Walgreens (WAG +0.3%). The 98 losers were led south by TCK -14.1%, BC -11.9%, BBD -9.5%, GGB -9.3%, and DB -9.2%.

Deutsche Bank (DB) reported a disastrous quarter.

(From THE WALL STREET JOURNAL)
By Carrick Mollenkamp and Serena Ng

German banking giant Deutsche Bank AG warned that heavy trading losses would force it to take a 4.8 billion euro ($6.3 billion) loss in the fourth quarter, reflecting how badly the world’s biggest banks fared in the weeks following the demise of investment bank Lehman Brothers Holdings Inc.

The profit warning from Deutsche Bank, which led the bank to cut its dividend in half and helped trigger a drop in bank stocks throughout Europe, suggests that the market turmoil of the fourth quarter took a bigger toll on banks than previously thought.

Deutsche’s in-house debt and equity units, which make bets using the bank’s own money, accounted for a sizable chunk of the bank’s losses. These so-called proprietary traders lost some $2 billion in 2008, a good portion of which was incurred in the final quarter, according to people familiar with the situation.

In a conference call, Chief Executive Josef Ackermann said the fourth quarter simply proved too much for Deutsche’s traders. The bank has said that one star trader — Boaz Weinstein, who lost more than $1 billion during the financial crisis — will be departing to launch his own hedge fund later this year.

Interesting that a trader could blow a billion of the bank’s capital, be fired and named by the CEO, who said that the terminated employee was starting his own hedge fund. There must be more to this story.

The $USD strengthened further to 84.45 at the close. This morning the $USD is quiet.

Yesterday, the only currency that got hammered was the Canadian Dollar, while the $USD gained +0.29%, the Euro +0.03% to 131.88, the Yen +0.56% to 112.52, and the Pound +0.72% to 146.12. The Loonie lost -2.04% to 80.04.

The US long bond ($USB) was very strong in the safe-haven play of the day, lifting +1.52% to 136.88. The yields on the 30-, 10-, and 5-year Treasury bonds and notes are now down to 2.895, 2.213, and 1.361 percent respectively. T-Bill yields lifted to 0.110 percent.

Crude Oil futures closed down -$0.58/bbl yesterday to 44.19, and were trading at 44.84 at 6:40am ET today.

Gold futures ($GOLD) lost -$11.90/oz to close at 808.80.

The spot gold, palladium, platinum and silver this morning at 6:51am ET were softer than yesterday morning, but marginally down from Tuesday at that point: 812.82, 176, 917, and 10.50, respectively.

The DJIA futures were up +8 at 8167 at 6:40am ET but, following the JP Morgan (JPM) reporting of profits down -76%, are now down -46 at 8113 (*:30am).

Our previous concerns about the lack of leadership and lack of volume on up moves had already caused us to cut back long exposure and move to a defensive position as you could see in my post yesterday. Unfortunately overnight Tuesday a couple more banks played true confession as Deutsche Bank (DB) and HSBC Holdings (HBC) announced more write offs and earnings issues going forward. DB (-9.15%) and HBC (-7.98%) derailed rallies in the overseas markets and caused S&P futures to drop nearly 20 points from overnight highs to the opening in Chicago.

We have discussed the importance of the 850 level on the S&P and it was taken out early this yesterday afternoon closing beneath it. This area coincides with previous chart support and also the 50% retracement of the entire November to January rally. Serious technical damage was inflicted on many chart patterns, and unless the S&P recaptures this level quickly a swift, sharp sell off could occur, probably challenging multi-year lows.

Even with our defensive posture, a 2.5% gap down inflicts damage on a portfolio. We were not spared today - we were down a little over -1.2% vs. S&P down- 3.35% - and were forced to bail out of some positions we think eventually will be big winners. We bought in the USO (USO) Jan puts at a loss of .20 cents, and sold a diagonal Feb 25 Jan 27 call spread creating a synthetically long stock (with our short Jan 27 puts) in GG, bought Jan 22.5 puts to backstop our position for the next few days. GG (GG) and GLD (GLD) are at critical levels; if the PPT wants to push gold lower it is a very vulnerable position right now.

Buy set ups are still nonexistent. We have a lot of cash and will move quickly once opportunities present themselves. They say good traders know how to make money, great traders know when to take a loss. As much as it pained us to buy in those USO puts on the report of higher oil inventories, we have a predetermined level to stop out the trade if violated. Plan the trade, trade the plan.

We bought a little BRCM (BRCM) and QCOM (QCOM) near the close, and RIMM (RIMM) is on the watch list for today as it exhibited superior relative strength Wednesday as it has for the past few weeks. Not all the techs are looking ok. After the close, AAPL (AAPL) said Steve Jobs was taking a leave of absence through June, causing the stock to plummet -10% in early after-hours trade.

The mood has clearly changed from uplifting to negative. We’re deep in cash and the market is coming to us. Yes, we significantly beat the market yesterday, but like all pro traders we hate to lose; we gotta do better today.

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