Archive for November, 2008

What a week!

Friday, November 28th, 2008

What a week! The “Geithner rally” I mentioned last Friday certainly grew more legs as additional member’s of Obama’s economic team were announced. The perception of his seemingly centrist picks has pleased a lot of people. Most surprising, there are no Robert Reichs anywhere to be seen. Further, it appears this team is already in control of policy, acting as a shadow group within Bush’s Treasury, apparently with the full support of the President, Paulson, and Bernanke. They are definitely not waiting for January 20 to get things going as witnessed by the new stimulative initiatives announced right after the appointments. The markets produced another significant statistic for the score keepers: the second biggest weekly jump in history, as the Dow Jones Industrial Average added +9.7%, the NASDAQ +10.9%, the S&P 500 +12%, and the NYSE composite a whopping +12.9%. Does this mean we really did see the selling climax I alluded to in my notes of 11-21-08? If so, the recovery was much steeper and faster than I expected. We have moved up to, even across in some cases, the declining tops line that has held sway since September. So we are at one of those crucial points in technical analysis. If the market falls hard this coming week on increasing volume, the earlier downside target of the DJIA below 7,000 is still in place. If we can move up convincingly in the next couple of days, the drop we saw on the 19th and 20th looks more like a cutoff low and new support lines will be drawn, or old ones reconfirmed. Having waited roughly seventeen months to see the market put together five up days in a row, let’s hope to make it six on Monday.

The S&P 500 fell more than 6%

Friday, November 21st, 2008

The S&P 500 fell more than 6% on both Wednesday and Thursday of this week, something that hasn’t happened since July 20 and 21, 1933, in the midst of the Great Depression, when panic selling was brought on by collapsing commodity prices. While many commodity prices are again in free fall, I haven’t seen definitive signs of panic selling. Rather it seems we are seeing persistent redemptions and reliquification trades stemming from margin calls. The pronounced double top that has been formed by the S&P 500 will probably cast an ominous shadow for quite some time. Eleven years ago and just eight points lower than the S&P 500’s close yesterday, Fed head Greenspan warned against irrational exuberance. I wonder if today he would point to irrational pessimism? With this week’s violation of the potential support at the 2002 lows and the obvious penetration of the long-term support evidenced by a rising trend line for this index which dates back to 1975, we face the potential for a protracted, multi-year period of trendless markets. First, of course, we will need to find a bottom. Once there, I expect sideways trading within a fairly broad channel as demographics overwhelm the engines of recovery and growth that have been in place for the last sixty years, and won’t appear again for ten to fifteen. Perhaps today’s big move up on robust and expanding volume is the start of something positive, but I tend to think it is more a relief rally, call it the Geithner rally, as a bit of uncertainty is removed from the marketplace. My guess is that much more progress in price levels and elapsed time will need to be seen before we can break out of the declining channel formation now in place. A similar strong follow-through on Monday, perhaps a 90% up day, would be nice. Let’s hope we get it. If we do, we may begin referring to the declines of Wednesday and Thursday as the final selling climax for which we have all been hoping.

We’ve all been looking for signs the markets are finding support.

Wednesday, November 19th, 2008

We’ve all been looking for signs the markets are finding support. We hoped for the traditional election year bounce but the market has fallen 15% since the November fourth. We hoped for the annual Santa Claus rally but it looks more doubtful all the time. He didn’t come last year, after all, so why expect he’ll show this time? Markets hate uncertainty and that is the one thing in abundance. We have been grappling with discovery issues relative to the extent of “toxic” assets like Credit Default Swaps, CMOs, CDOs, CLOs, SIVs, and Interest Rate Swaps. Now Paulson says he expects to halt applying TARP funds until the next administration has a chance to get involved, so now one of the remaining slender hopes is on hold for a couple of months. Hedge funds lost 4.5% in October and another wave of liquidations driven by withdrawals is anticipated. In the last few days we have seen new lows made by at least one major index relative to intraday activity, opening futures, and actual closing levels. It all spells one thing to me: the markets are going to head lower in the near term. Personally, while I’d love to be disappointed, I expect we are about to enter the second major leg down, bringing the DJIA into the 6,000s.

Last weeks trading was very schizophrenic.

Monday, November 17th, 2008

in California: Last weeks trading was very schizophrenic. All five days were down hard, with one of them rebounding about half way through the session to produce spectacular gains. It’s dazzling to see the S&P 500 move up off its lows by over 11% in roughly three hours, but we mustn’t lose sight of the fact it first put in a new bear market low. In addition, little comfort can be gained from the rally based on a comment from Investor’s Business Daily that ” the prevailing evidence pointed to that big up day being the product of technical triggers going off, rather than any great underlying fundamentals in the market.” Still, the four days that closed down did so on below average volume, implying the sell off isn’t showing signs of absolute panic. Only Thursday’s rally produced enough volume to rise above the 50-day moving average.

Is there a big difference between retro and retarded?

Friday, November 14th, 2008

Is there a big difference between retro and retarded? At home last night I was feeling pretty good about the rally and decided to catch some tunes. I grabbed a 33 by The Who and put it on the turntable. I was rocking out as best a man my age can when they started singing, “We Won’t Be Fooled Again.” That‘s when I remembered one day’s rally doesn’t change all the fundamentals in the economy. So I flipped to the next record in the stack and started listening to Dylan’s “The Times They Are A’Changin’” instead. Now here we are about three hours into Friday’s trading session and the market seems determined to take it all back. So the tentative testing of tenuous low persists. They were undercut yesterday on the S&P 500 and NASDAQ (though the DJIA held). We now have a definite declining channel formation. This suggests we can expect further tests, with the likely outcome failures and lower lows. Caution and short term treasury ETFs (e.g. BIL, SHV, and SHY) still seem the best strategy to me.

The support lines I suggested last week bent, but didn’t break

Wednesday, November 12th, 2008

The support lines I suggested last week bent, but didn’t break at the close on Monday. They were shattered Tuesday morning. Interday, the DJIA fell roughly 300 points, recovering a bit less than half the drop by the close. It feels to me like all supports are now moot; they may even be becoming resistance levels! Lacking any convincing short-term data, I don’t see much value in declaring new support lines, although the lows of 10/10 (DJIA 7882) would be logical. However, one day hardly constitutes a base so we’ll have to wait until the market draws one for us. Given the market’s weak opening this morning, down about 180 points in short order, we may find out if the 10/10 lows can hold sooner rather than later.

Silver Linings:

Monday, November 10th, 2008

Silver Linings: Bad news hasn’t been hard to find. The market wallows in it, spreading the contagion to clients, analysts, quarterly reports, annual projections, and even us individually. But now, when all the news seems bad, I occasionally uncover silver linings. In the future, when I do, I’ll share them with you. Here’s one: The markets as a whole seem to have seriously overestimated the risks caused by Credit Default Swaps (CDSs). This is important because it they have been a lightening rod for the weakness on Wall Street that resulted in radical changes the likes of which have not been seen in 60 years, including the bankruptcy of Lehman Brothers. Once thought to total $62 Billion, the first truly catastrophic event was presumed to be the failure to clear some $270 Billion of Lehman’s CDSs that were due a couple of weeks ago. When nothing actually went wrong, analysts started trying to discover what went right. It turned out the true cost was grossly exaggerated; instead of $270 Billion, the settlement payments appear to have totaled just $6 Billion! Why? The lack of transparency in this market has been blamed for causing it. This same lack may have caused our industry to panic from the inside out, inflating the problem well beyond the borders of sustainability, resulting in the incredible turmoil we have seen of late. Further, it turns out that some swaps were essentially “long” bets while others were “short” the risks involved. The attempt to clear up the sector’s opacity by creating a central clearing house for CDSs has allowed the plethora of contracts to begin being matched up and, as offsetting trades are offset, we are seeing a compression in the absolute magnitude of outstanding obligations. According to The Economist, some $25 Billion have been torn up just in the last month. While the CDS market will continue having a large outstanding balance, estimates that 40% of the whole might prove to be a phantom no longer look impossible