INFLATIONARY DAY

by Larry Levin


I’m not sure which is a bigger story today; the large stock market decline or the incredible rally in all that is inflationary? The Dow greeted us with a helluva “Happy New Year” greeting today – it was slammed 1.7% today. The NASDAQ is four for four in a sense; it is down over 4% in 4-days. Commodities, however, were all green on the tape today. The big movers were; wheat +3.30% (limit up), gold +2.61%, beans +2.84% (almost in the teens), cocoa +3.39% and OIL…whoa OIL…finally reached $100.00 per barrel. Oil closed at 99.32, +3.48% today.

So why did stocks drop today? Well, traders don’t really care: we just trade the move. Once I’m in my office, after the pit has closed, it is fun to read all of the excuses. Did it drop because there were more sellers than buyers? Perhaps there were just BIGGER sellers than buyers? Or maybe it was this morning’s ISM data?

The December ISM, which reports manufacturing data, came in at a terrible reading of 47.7. When it is south of 50.0, it indicates a contraction in the manufacturing sector. Today’s report was the worst reading in four years. But who needs manufacturing anyway? Right? That’s what I hear on the financial shows, anyhow. From the sound of it, the hosts and guests on these programs would be just fine with a nation of Wal-Mart greeters and Starbucks coffee servers. We’re a “services” industry now they say.

"As we start off the new year, the first piece of economic data that catches our attention is a disaster, as it shows a slowdown in economic activity; this is no way to start a party," said Art Hogan, chief market strategist at Jefferies & Co. I would agree, if you are long. I wonder if Mr. Hogan ever rides a trend down for profits…or just rides it down praying for a bottom.

I’m not an economist (praise the Lord), I’m a simple trader. But I happen to remember a few things from my economics classes, like higher inflation + slower growth = stagflation. Although the US is certainly not there now, it has been on the road to that end for some time now. Peter Cardillo, chief market economist at Avalon Partners, agrees. He said the aforementioned rise in commodities, along with the dollar extending its losses, "is certainly putting some jitters into the market. High inflation could lead to stagflation in the first quarter."

Ok, so Mr. Cardillo and I agree…but don’t expect to hear that from the usual suspects on the financial shows. Between visits to “the show” (the S&P pit), where real traders put their money where their collective mouths are, I heard this subject on a financial show. Of course, the pontificators from the Ivory Tower set, those who would never risk any capital in a CME pit, scoffed at the idea of stagflation. Should we listen to the egg-head scoffer? Let’s look at their recent history of scoffs, shall we?

Let’s stroll down memory lane with oil first. The scoffers (economists & buy-only stock analysts) scoffed at the idea of $30.00 oil, then $40, then $50, then $60 oil, then $70 oil was certainly the top – right? They scoffed at $80.00 oil, then, when it traded north of $80 they said $90 would be the top. Today it traded $100.00-barrel for the first time in history. They sure were wrong all the way up.

In a similar fashion they scoffed at a rising gold price, and still do today. Although they said it could never trade north of $400, it is nearly at $900 today. Wrong call again boys.

Search your memories for the nonsense you heard at the top of the 2000 NASDAQ bubble. Do you remember the, “who needs profits, it’s a new paradigm” nonsense? They encouraged you to buy in 2000, 2001 and 2002 when $8-trillion in equity was lost. They scoffed at the very notion of a market correction, let alone a real bear market. Wrong!

I remember them scoffing at the notion of a housing-led economic decline. “Housing only represents 5% of GDP,” they said. “It could never happen.” Wrong again! And these same scoffers (read idiots) conjured up themselves, or blessed from afar, the CDO scam that started the housing led decline.

Now the idea of stagflation and recession has been let out of the barn. The Ivory Tower eggheads say it can’t happen. You don’t have to believe me & Mr. Cardillo, but please don’t listen to the usual suspects (scoffers) on the usual financial shows.

Real Time Trading Signals*for

Trade Date: 1/02/08

E-Mini S&P Trades*
(before fees and commissions):

No Trades Today

E-Mini Russell Trades*
(before fees and commissions):


1) Sell @ 8:42am at 770.1 = +.5 & -1.2

2) Sell @ 9:09am at 764.5 = +.5 & +2.8

3) Sell @ 10:00am at 760.0 = +4.7 (1 lot)

4) Sell @ 11:30am at 754.1 = -1.0 & -1.0

5) Buy @ 12:25pm at 754.6 = b/e & +2.0

6) Buy @ 1:20pm at 763.5 = -.8 (1 lot)

7) Buy @ 1:36pm at 759.1 = b/e & -.3

8) Sell @ 2:17pm at 754.4 = +.4 (1 lot)

9) Sell @ 2:54pm at 756.0 = +.5 & +.5

Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!

Log in for Larry's Daily Trading Tip each day too!