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world stock market, us stock market
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9/29/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: GDI; JOYG; NEM; SDS
Buy alerts: GLD
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Market starts lower, tanks to new 2008 lows as bailout bill fails.
- Fed and world central banks inject more billions though it is lost in the headlines.
- Should the Fed cut? Maybe it should hike. A radical, non-bailout idea in an environment of bailout mania.
- Sentiment getting extreme.
- Market got a lot of angst out of its system on Monday. How much angst, however, is left?
Welcome to a serious market selloff precipitated by economic worry.
The line going around Wall Street Monday after the close was the two primary positions traders and money managers were in: cash and fetal.
The news was not that bad on this side of the ocean with takeovers, buy outs, and take unders - - pick your favorite description. Citigroup, with the FDIC's aid, bought Wachovia's retail banking business. WB will continue its other business activities, it just won't be a bank. C agreed to accept up to $42B in risk on the mortgage backed securities, but the federal government took anything over that. Gulp. And there is a $700B proposal up for vote later in the day? Where does it end?
Not there. The world central banks acted in unison, injecting massive amounts of liquidity into the world money markets overnight. $620B in dollar swaps, up from $290B, was the headliner, but it wasn't all. The 84 day swaps level went from $75B to $225B. Huge, huge intervention, and despite all of the downside on Monday, it did help as credit spreads were narrower and LIBOR was lower. Some positives after all the carnage. Oil was lower (95.62, -11.27) on the world slowdown fears and the money running from the oil pits ($8B Monday versus 10 times that amount as oil was running to $147/bbl). Gold was up on fear (911.30, +22.80), but it was an up and down session, making a late strong run.
Europe was in turmoil, following the US. Fortis Bank was bailed out by 3 governments. The UK nationalized the landlord/rental mortgage lender Bradford and Bingley. Germany's Hype Real Estate Holdings was rescued by a 'consortium.' Those were enough to keep the futures lower on a day that likely would have seen US futures up on the news and in anticipation of a 'yes' vote on the bailout package. Perhaps the market sensed the bill would not pass. OR perhaps it felt it would pass and did not like that prospect. Stocks gapped lower and all they could manage ahead of the vote was flat lining laterally. Once the voting started and it was apparent the votes were not there the market gapped lower again. It tried to recover the next 1.5 hours as it moved laterally, but then collapsed as the last hour started. A late bounce could not salvage it the worst 1-day loss since Black Monday. The market may not have liked the plan but it really didn't like it failing. The stock market lost $1T today, much more than the $700B proposed bailout. Hmmm. That kind of puts it into perspective: a trillion dollars in one day versus $700B over years. Oh yes, bond yields tanked as investors ran for cover, driving the 3 month treasury yield to about one-third of a percent (1.67% 2 year, 3.59% 10 year after they closed at 2.11% and 3.85%, respectively, Friday).
TECHNICAL. The influence of the federal 'will they or won't they' with respect to the bailout, and the 'they won't' decision is exerting a lot of outside force on stocks. Nonetheless that is the environment in which it resides, and throughout history federal intervention is a tradition in crisis times and the technical indicators still hold true. Thus we have to give them a rundown, and many are they extreme, about the worst we have ever seen. Of course I was not around for the Great Depression and they didn't keep a lot of these statistics, so . . . there is some uncharted territory here.
INTRADAY. Gapped lower, flat lined into the vote, then collapsed lower in the late afternoon session. A modest late rebound, but that was crushed in the last few minutes of trade as market on close orders were massively to the sell side. Stocks that were in really quite good shape heading into the close (e.g. WFC, ESRX) were slaughtered in the selling. There was panic dumping late, a 'positive' longer term, but that does not mean the selling is over near term. It just indicates that the climate is ripe for bottom formation, but it takes awhile for the bottom to harden.
INTERNALS. Massively weak and they were even weaker before the late rebound. Breadth was a mere -16:1 on NYSE. Made NASDAQ's -6;1 a piker. New lows exploded; makes sense as the indices closed at sharply lower lows for the year. 3300 on NYSE, 2560 on NASDAQ. Volume surged well, well above average, but not nearly as strong as the action preceding the announcement two weeks ago about a bailout and the immediate selling just before that announcement. Hey, what a coup. Down volume was massive; -31:1 on NYSE and -34:1 on NASDAQ. Surreal. All of this extremism (not Islamic extremism; just want to be clear) typically leads to a vicious rebound in a couple of sessions, but again, this was caused by federal action, or in this case inaction. Still as noted above, that is part of the process; may not ring the bottom bell by itself but worth keeping an eye on particularly as other sentiment indicators are turning ballistic.
CHARTS. New 2008 lows. Third leg of selling on the NYSE really gets underway. NASDAQ is really just on its second leg lower (they usually run in threes) as it breaks lower from its head and shoulders top. SP600 is not at 2006 lows thanks to its relative strength, and even with a 5.85% loss on that index that was 1.15% better than the best large cap index. Wow, wonder if that means the economic recovery is safe? Ha! Well, maybe not; many consumer stocks outperformed the market even if that meant just a modest loss. Very interesting. The process is not nearly over, but you have to continue watching how the various indices, growth and large cap, react. Once again the consumer/growth tend to perform better. Not saying this is a buy, just something to watch and see if it germinates.
LEADERSHIP. Already let the cat out of the bag on this. Strong financials held up until very, very late. Biotech held up well. Consumer stocks such as CHTT held up well. Homebuilders held up very well. Some retailers lost ground but are holding support nicely (e.g. TSCO). You would not want to bet the farm on them but if they hold the line and break higher that is telling us there is a bottom trying to form; it just takes the market overall a longer time to get there.
SUMMARY. Very negative across the board with the exception of some leadership refusing to give up. The incredibly negative readings along with some leaders holding up tell you to stay alert. These indications don't mean a bottom is at hand; they tell you to be looking around and searching for stocks that are holding up nicely. Don't rush in and buy them, but once the rest of the market tries to rebound, then you can move in.
THE ECONOMY
So the bailout plan needs a bailout. What should the Fed do now?
Conventional wisdom says since there is no bailout and we face financial anarchy (a bit of poetic license there), better cut some more. The Fed Fund Futures indicate a full 50BP cut by November.
Wow that will fix the problem. The Fed has just injected the past couple weeks more than our national deficit for a year and that has not fixed the problem. That money goes right to the source, i.e. the banks needing the liquidity in order to make loans. Are they making loans? Not at all. Credit is something we all used to have, and just a few weeks ago.
The Bernanke Fed is liquidity addicted and so its response will likely be to cut rates as it keeps to form. But liquidity injections are not working. Should it make the Greenspan mistake and take rates down to 1% or actually negative? Think Japan; its effective rates were negative for years and that did nothing for its economy. Nothing (Al Capone in 'The Untouchables.')
Should we massively liquefy the economy and the world as we have done ever since Greenspan has been Fed chairman, at least after he stepped into the position and helped bring about Black Monday with his massive rate hikes? Isn't that just adding to the house of cards that has been build for the past 20+ years? Every time the market and economy has tried to correct and go into recession it has been propped up. In 1998 during the Russian Ruble crisis massive amounts of liquidity staved off the problems. But it was not just Russia. As we found out problems were building up from over-regulation and excessive liquidity that massive rate cuts and liquidity could not correct in 2000 and 2001. Of course there are other circumstances there as the Fed was too tight at the wrong time and too liberal at others. Thus when the collapse came it was massive.
But the Greenspan Fed could not just let things deflate and start from a health foundation. It kept rates at 1% for two years and now we have the housing problem. Again, too much liquidity to allow things to deflate to a rational value.
Bernanke, after starting well, has reverted to the Greenspan mode and indeed is now once more 'Helicopter Bernanke' as he and the Fed dump bundles of money from the sky. Let's go back in time. Remember 1980 and 1981? Reagan introduced his Emergency Economic Recovery Act of 1981 with tax cuts, tax credits, accelerated depreciation, etc. At the same time the Federal Reserve, mostly out of fear of further inflation than insight (a famous quote is from one FOMC member telling Volcker 'do you want to be the Fed Chairman who let inflation explode given Reagan's tax policy?' I paraphrase some, but that is the gist. Volcker raised interest rates again and again as the US ended the 1970's stagflation with a year of really nasty recession.
Then, the tax cuts unleashed a huge, huge amount of investment in business. Supply exploded. Money was pushed into new ventures such as a few college dropouts in Berkeley who had this idea for a personal computer. It later became an insanely great computer and epitomized the surge in prosperity and the recovery from the 'failed experiment' as the US was referred to in the 1970's.
What was different from now? The foundation was solid. We came from an absolute washout or cleanout of all the bad debt, bad businesses, bad everything that built up during the late 1960's and the 1970's. We need to get there again. We need to get this bad mortgage debt out of the way. We need to let some of these, and I know this is heresy to many Wall Street types who worked their and love it and thus think it is the world in itself, financial institutions go down and have these bad loans go to what they are worth, and that is zero.
In short, we don't need to bail out institutions that should fail and foreclosures that should happen. Housing prices need to find their true value without the feds intervening and creating artificial values. Companies that be a livin' by bad loans should be a perishin' by bad loans (bastardization of a line from 'Sergeant York'). If we bail them out then the value will all be artificial, and we go through this again at a later date.
Notice how each time there is a bailout the stakes get higher and higher. We needed to let a recession happen before when things were not so skewed by intervention. The government intervenes and creates imbalances and then intervenes again when the imbalances try to correct. After a series of such events over 15 or so years and the crash sets up to be ugly. We are there. Do we intervene again and try to pump things up once more and thus set up another day of reckoning with even more at stake with China being the world economic leader, or do we clean out the system now, get a real foundation beneath us, and then build the newest strongest economy the world has ever seen?
Radical ideas that will get me ridiculed by my colleagues, but we are staring into the abyss right now. Raise rates right now and cut taxes in such a manner that encourages investment in the US in terms of capital equipment, employees, start-ups, basically what Kennedy and Reagan did. After all the intervention the best way to fix the system, as history shows, is to recreate an environment conducive to real growth and not just paper growth that we have seen for 12 years. We need to get back to what makes us great, and that is ideas, entrepreneurship, and the basis here at home to carry all of that out without shipping it overseas. So, the Fed should raise rates right now and support our dollar rally. Bush, the presidential candidates, and Congress should crack open the history books and see when we have had our truly great economic booms: they all followed liberalizing the environment for investing in America. What better time to do so when the rest of the world is falling down behind us. It once again gives us a lead to the top and we should take it.
THE MARKET
MARKET SENTIMENT
Heard some floor traders talking about how they saw the massively negative up to down volume, breadth, and new lows, knowing they usually indicate a bounce higher in a couple of days, but they just did not trust them. That is getting close to the 'it is different this time' mentality.
VIX: 46.72; +11.98. Hit 48.30 on the high, the highest since the 49.48 close in October 2002. Definitely getting there but remember that after VIX hits its high it takes a few weeks for the turn to take place.
VXN: 49.56; +12.71
VXO: 51.84; +12.43
Put/Call Ratio (CBOE): 1.38; +0.37. What a jump. 11 of 14 days over 1.0 on the close.
Bulls versus Bears:
For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 37.5%. Not much of a drop from 37.9% last week. Down, but just edging lower, indicating most don't understand the gravity of the credit situation. A dive under 35% would be a positive given the inverse nature of sentiment indicators. Down from 40.7% on the high during the rally off the July lows. Turned back up before it got down to 35%, below which is considered bullish for the market as the number of upbeat investors is relatively low. A long way up from the 27.8% on the low this round. Hit 31.9% two months back and the 30.9% low hit in March. Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 40.9%. Bears fell from 43.7%, apparently on the belief a bailout will immediately cure the market's woes. It won't but these guys will apparently need to be convinced. Unfortunately, they will likely get that education over the next several months. If the bulls turn over and crap out below 35% again that would be a strong signal. Interestingly they are still 'crossed over,' i.e. more bears than bulls. Moving toward 50.0%, the high on this move, but a long way off. As the NYSE indices test the lows you would want it higher. Still above the 35% threshold so still a bullish indication. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: -199.61 points (-9.14%) to close at 1984.73
Volume: 2.843B (+43.13%). Big but not huge. Definite dumping.
Up Volume: 79.755M (-841.244M)
Down Volume: 2.759B (+1.718B)
A/D and Hi/Lo: Decliners led 6.1 to 1. Impressive.
Previous Session: Decliners led 1.38 to 1
New Highs: 420 (+407)
New Lows: 2560 (+2353). Wow.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Undercut the 2008 lows with ease, closing on the low. It even undercut the 2006 low and is right at the 1998, pre-Russian Ruble bear market dive. The move takes NASDAQ out the bottom side of its 9 month head and shoulders and if it sells the height of the pattern that puts NASDAQ down near 1800, another 185 points or so to the downside. At this rate that is just a session. At that point we look for a bounce.
NASDAQ 100 (-10.52%) was detonated its prior low just over 1600, closing just below 1500. Some support here at 1500 from 2005. Hard to hang your hat on that, but there are other support levels at 1460ish.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -106.85 points (-8.81%) to close at 1106.42
NYSE Volume: 1.97B (+68.38%). Big volume but as with NASDAQ, not as bit as just over a week back.
Up Volume: 63.328M (-386.981M)
Down Volume: 1.905B (+1.2B)
A/D and Hi/Lo: Decliners led 16.77 to 1. Worse than it was at the 2002 bottom.
Previous Session: Decliners led 2.01 to 1
New Highs: 199 (+192)
New Lows: 3337 (+3060). That is high.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Swan dive past he prior September low as SP500 pushes what looks to be the third leg down in this decline that started at the October peak that roughly matches the 2000 peak. As pointed out last week, that is a rather ugly picture as to what SP500 could do if things really melt down. It could be that this time the gains from 1995 are finally given back if bailout plans fail. That would be incredibly painful, the true Great Depression 2 scenario as SP500 would go back to roughly 450. That is also a far, far out 'what if.' Right now I am looking at 1000ish and 940 as serious support levels, not to mention 1060ish that is pretty solid.
SP600 (-5.85%) was the leader Monday. That tells the story of the market right there. Well, not really. It was a terrible day but the small cap index was a relative strength leader as it sold but held easily above its January, March, and July triumvirate of lows at 340 intraday (closed at 351.66). If the small caps hold there or above that level once more that continues their big base and keeps the idea of a true meltdown in indices such as SP500 part of a fiction hair raiser destined to make the best seller list. We will keep our eyes on this puppy.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
After holding up the best of the large cap indices, the Dow fell below its 2008 low in a quick, impressive 777 point selloff. That was nowhere near the other indices with only SP600 showing more 'strength.' As with SP500, DJ30 is now into its third leg in earnest, giving up any pretense of a double bottom off the July low. Maybe it does so at the prior September low but no one is holding out much for that move.
Stats: -777.68 points (-6.98%) to close at 10365.45
VOLUME: 386M shares Monday versus 232M shares Friday. Strong but as with the other indices not as strong as the last selloff and rebound on the bailout hope.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Futures were horrible early after the close as many solid stocks were sold in the undertow of the market on close sell orders. As of this writing, SP futures were up 4 points. High praise indeed, but at least not down 40 points.
Now that is not necessarily a good thing. It would be more constructive to see another massive selloff early and then get a recovery. Historically that is how horrific selloffs typically end. Of course any bounce is like to get tested by sellers so an early bounce doesn't mean a whole lot. All in all after such a selloff a modest bounce is not going to alter the market's character and leaves open a further selloff as sellers move in on any upside.
The market will remain in a state of limbo while Congress talks of another bailout plan. Work will be done Tuesday and Wednesday, but no official action as many are off for the Jewish celebration. Thus there is that 'will they or won't they' question hanging over all of the action, and when the feds move it will move the market given the massive disappointment after the bailout failed Monday.
That aspect adds to the normal market issues anytime you have a selloff. Not too wild about chasing the downside here though the market could easily sell more. Unfortunately many downside plays gapped lower and did not rebound as we anticipated on the vote, setting up the shorts. Thus we are inclined to let them set up again and not chase them after a 5+% downside day. Go figure. Now if stocks rally back with some decent upside gains through midmorning and then start to look ragged, well then we can look at the downside plays on the report. Just have to adjust our buy points but given the massive moves, that is something we will just have to do on the fly. So, a solid bounce higher early will have us looking at the downside say if the indices fail at the prior September lows on the bounce.
As for upside we are going to continue to scan for the leaders that are holding up despite the market weakness. They are out there and as noted above, in some surprising areas. If they continue to hold up and fight off selling after a higher Tuesday open, they are definitely showing their strength. Now the problem is, even with strength if the bear market gets nasty enough it will take them down as well. What we have to do is look for these stocks and keep the list ready to go for the 'bottom' and in the short term we look for relief bounces that can be viciously upside for several days to weeks. Those can make us serious upside gains even in a bear market. We be cautious, take gains as we do on downside plays when we get a good move, and then look to see if we can play some downside for an equally wicked selloff after a bounce loses its pop on the move higher.
Still looking for more selling Tuesday whether it is a straight resumption of the Monday close or if there is a bounce first as the futures are weakly suggesting. A good bounce and we can see if we can get into the DIA, SPY, CEDC, etc. downside plays as the bounce runs out of gas. If things continue lower out of the gates then we look to take more of the SDS, JOYG, etc. downside gains and then look for a bounce late Tuesday or Wednesday as the extremely negative internals historically suggest a bounce is coming whether it is just a sharp relief move or, unexpectedly, it turns out to be a significant bottom.
Support and Resistance
NASDAQ: Closed at 1983.73
Resistance:
2070 is the recent September 2008 low
2155 is the March 2008 low
The 10 day EMA is 2156
2167 is the July 2008 low
2202 is the January 2008 low
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
The 50 day EMA at 2275
2300 is some resistance
2340 from the March 2007 low
The 90 day SMA at 2338
2370 from the April 2006 peak
The 200 day SMA at 2370
2378 is the mid-February peak; 2379 from the October 2006 peak
2379 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
Support:
1912 from April 2005
1900 from August 2004
1882 from October 2003
1782 from August 2004
S&P 500: Closed at 1106.39
Resistance:
1133.50 is the September 2008 low
1200 is the July 2008 intraday low
The 18 day EMA at 1222
1239 is the 2002/2003 up trendline
1244 is an August 2005 peak
The 50 day EMA at 1253
1257 is the March low
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1286
1313.15 is the August 2008 peak
1317 from the February low
1324 is the April low
1331 is the June low
The 200 day SMA at 1336
1362 is an ancient trendline
Support:
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1107 to 1011 from a June and July 2003 peaks
Dow: Closed at 10,365.45
Resistance:
10,459 is the recent September 2008 low
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
The 50 day EMA at 11,321
11,388 is the prior August low
The 90 day SMA at 11,584
11,635 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,700 is the 2004/2005 up trendline
11,731 is the March 2008 low
11,867 is the August 2008 peak
12,050 from the March 2007
12,070 from the early February 2008 lows
The 200 day SMA at 12,152
12,250 from late March 2007 lows
Support:
10,215 from Q4 2005
10,127 is an April 2005 low
10,100 to 10,000
9937 from May 2004 low
9814 from August 2004
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 29 - Monday
Personal Income, August (8:30): 0.5% actual versus 0.2% expected, -0.6% prior (revised from -0.7%)
Personal Spending, August (8:30): 0.0% actual versus 0.2% expected, 0.1% prior (revised from 0.2%)
September 30 - Tuesday
Chicago PMI, September (9:45): 54.0 expected, 56.9 prior
Consumer confidence, September (10:00): 55.0 expected, 56.9 prior
October 1 - Wednesday
ADP employment survey, September (8:15): -53K expected, -33K prior
Construction spending, August (10:00): -0.5% expected, -0.6% prior
ISM Index, September (10:00): 49.5 expected, 49.9 prior
Crude oil inventories (10:35)
October 2 - Thursday
Initial jobless claims (8:30): 475K expected, 493K prior
Factory Orders, August (10:00): -2.9% expected, 1.3% prior
October 3 - Friday
Non-Farm Payrolls, September (8:30): -105K prior
Unemployment rate, September (8:30): 6.1% expected
Average workweek (8:30): 33.7 expected
Hourly earnings (8:30): 0.3% expected
ISM Services, September (10:00): 50.0 expected, 50.6 prior
End part 1 of 3
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