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us stock market, trade stock
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10/09/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: FCX; MA; MON
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Early bounce fades, then is crumpled in the last hour.
- Massive margin call overriding all the positives from Fed and central bank action.
- Some very interesting positives to consider when all looks black.
- Seeing some relative strength even as the market burns
Bounce attempt loses its starch and then gets ripped.
Futures were up after some buyers came in on Wednesday. Asian central banks cut interest rates, following their western counterparts. IBM pre-announced earnings and they were not bad. Jobless claims improved, falling to 478K from 498K; still high but the hurricane Ike jump in claims looks to be absorbed. On the downside the demand for refined products is the lowest since 1999. Now that means a tax cut for consumers much in need of some help (saw gasoline at $2.99 this afternoon), but it also shows how the crisis effects are spreading. More same store sales numbers were released and they did not reverse the course they showed Wednesday.
Nonetheless the market started higher and rallied through the first half hour. Stocks tested back and turned negative, but the selling came under control and they bounced into lunch, extending laterally into mid-afternoon on low trade. Not great but not bad. Then Standard & Poor's issued another 'you heard it last here' report, reducing GM and GMAC debt to negative watch. GM, already beaten down at the open when most other stocks were up (no inside information played a role there, huh?) dove lower. That was trigger that broke the back for the session.
When the consolidation did not hold and when the Dow lurched below 8900 on the news a new round of margin calls hit, requiring hedge funds to pony up more cash to meet Fed liquidity requirements. They have no cash so that means selling. As they are already under cash pressure to meet redemption demands (mutual funds as well) the margin calls splashed more gasoline on the fire. DJ30 collapsed 500 points after that news. NASDAQ 85 points. SP500 44 points. All lost the vast bulk of their gains in that late afternoon selling.
TECHNICAL. The old high to low to really, really low. As noted above, it did not get bad until late in the day when the margin calls and the forced selling took over. I talked with some hedge fund traders and managers and it was pretty grim. They were going through that forced selling to meet Fed calls and they had the sound of that sick feeling in the pit of the stomach that comes from feeling as if there is nothing you can do but what you have to do. Been there, done that. Multiply that over thousands of hedge funds, thousands of mutual funds (facing redemptions), and millions of individual investors feeling the same thing though not for the same reasons. As with Frodo's single-minded compulsion to don the Ring when the Nazgul were near ('The Lord of the Rings'), an investor's compulsion to push the sell button as the 7+% decline (22% the past week) unfolded was equally consuming. That is how you get a 7+% selloff that spirals out of control.
INTERNALS. Massively negative once more as they should be on such a dive lower. -10:1 NYSE breadth, -5.3:1 on NASDAQ. 1800 new NYS lows, 1058 on NASDAQ. Volume was mercifully lower, but that was a difference without distinction as trade was still well above average on both big exchanges.
CHARTS. The biggest 7 down day period on the Dow's history (21%). SP500 and NASDAQ lost 22% over the same 7 days. The Dow is down 40% putting this as the third largest bear market loss in post-war history. 1973-1974 (50% on SP500) and 2000-2002 (49%) surpassed this one. Maybe not for long the way the selling is going. SP500 is now down into the 2002 to early 2003 bottom, breaking through the hump in that double bottom. Another 140 points and it is to the low. DJ30 is making the same break into that former bottom with just 1000 points to cover. All in a day's work. NASDAQ is still well above its 2002 bottom while SP600 is even higher, still over the 2002 peak, the pre-selloff high for that index. The small caps are in full frontal decline along with the other indices, but their better technical position prior to this selling leaves them much less damaged to this point. If the selling stopped tomorrow they would be in very good shape to recover.
Indeed, if the selling stopped tomorrow all of the indices would be in good shape to advance as they are still holding some key levels. That seems a rather obvious point, but if they fall through those prior lows we are looking at a much more sinister decline, a market forecast more of a Great Depression 2 than just your ordinary, every 6 to 8 year run of the mill bear market. If they fall to those levels that would be a 50% decline, matching the 2000-2002 bear. A significant fall below those levels suggests much worse times ahead, more like the 1970's malaise.
LEADERSHIP. There are some stocks that continue to hold up under the withering fire of the overall market selling. It is not that they are way up near their highs. No, they have sold off and are holding the line, just plain sold out. What else can you say about a stock that is flat as the indices are down 7% in a day? MU, SNDK, MA, FCX. Not all were flat on Thursday but they are bouncing around in a fairly tight range, not breaking to fresh lows. Some big techs, some base metals, and even some transports such as rails have sold and sold hard, but they are not selling further over the past week or more. You know it is a tough market when you look for relative strength leaders as your leaders. The interesting thing about these stocks is that they have already sold off and as they hold the line on further selling they indicate a bounce is coming, one that they will lead.
THE ECONOMY
Why the stimulus is not stimulating anything or anyone.
The federal government has $700B to buy bad assets and inject directly into individual companies. The Fed has put in place huge swap facilities allowing pretty much any financial institution to swap bad assets for hard currency and allow them to get the liquidity needed to operate. The Fed is paying interest on interbank loans. The Fed is paying interest on both secured and unsecured bank assets. Commercial paper can now carry the US Treasury's seal of guarantee. Interest rates were cut another 50BP. The money supply is rising 16% annualized. The FDIC is insuring larger amounts of deposits.
A dizzying amount of action and money is involved here. Yet the stock market continues to fall, bond spreads continue to widen and rise, and credit remains frozen. People are asking why this $700B baby and other measures are not working.
First, the plan is not in operation yet. Paulson said this week it would be 'several weeks' before any assets under the bailout plan were purchased. One of the reasons Paulson wanted $700B was the 'big stick' or 'bazooka' factor, i.e. that if the markets knew the Treasury had that kind of coin to work with there would be a psychological floor put in the markets. If it did put in a floor, it must be several stories lower as the market has fallen steadily and shockingly in a very short period. So much for that theory. Kind of like the Iraqis rushing to us as liberators in this last war.
Second, the facility simply is not in position yet. Instead of being ready to move as soon as Congress passed the bailout bill the Treasury did nothing. It had not even crafted a plan as to how it would conduct the purchases, how to review or get with those requiring the help, and who would be in charge. The old Washington hurry up and wait movement. Thus while everyone sweated out a bailout that 'had' to be passed in a matter of days to prevent global economic thermonuclear meltdown, once it was passed nothing was in place to use it. Great move guys. Hope you show more gumption when you actually get to the point where the $700B can be used.
Other reasons. As noted there are margin calls still forcing massive selling by hedge funds. By some measures we hear it is the largest aggregate margin call since 1929. Looking at how rapidly the indices have fallen in this bear market, particularly since September, there is clearly massive forced selling.
The selling has to unwind before this is over. After several months of selling, we are seeing signs it is reaching that point. As noted above, there are sectors that were crushed in the initial selling as hedge funds liquidated the commodities, energy and agriculture plays. Those sectors are holding in this selling, indicating that parts of the market are getting sold out. Has to happen.
THE MARKET
MARKET SENTIMENT
VIX: 63.92; +6.39. Surpassing the early 2000 highs and all of the 1990's levels. Only the 1987 level surpasses it.
VXN: 69.66; +6.39
VXO: 75.96; +7.95
Put/Call Ratio (CBOE): 1.35; +0.17. Another day over 1.0, closing in on three week's worth.
Bulls versus Bears:
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: 33.7%. Big drop from 37.5% and below the 35% threshold considered bullish. Now with the bulls down and the bears up big there is plenty of pessimism here. Down from 40.7% on the high during the rally off the July lows. Heading back toward the 27.8% on the low this round. Hit 30.9% low hit in March. In March the indicator did its job with the dive below 35% and the crossover with the bears. 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: 47.2%. Surging from 40.9%. Closer 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 move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is 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. 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: -95.21 points (-5.47%) to close at 1645.12
Volume: 2.986B (-16.3%). Lower but still strong volume.
Up Volume: 199.618M (-998.393M)
Down Volume: 2.777B (+414.274M)
A/D and Hi/Lo: Decliners led 5.34 to 1. Of course it was picking up to the downside.
Previous Session: Decliners led 2.57 to 1
New Highs: 7 (+1)
New Lows: 1058 (-126). Impressive again.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher then rolled over and sold to a new 2008 low. Still in the dive straight down and 42% off of its high, 22% of that in the past week. Massively oversold and at the mid-2003 consolidation level that followed the initial run off the early 2003 test.
SOX (-3.02%) showed relative strength as it slows its selling and indicates it may try to hold and help lead a bounce.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -74.82 points (-7.6%) to close at 910.12
NYSE Volume: 2.014B (-4.38%). Lower but still strong volume as the NYSE indices dive lower.
Up Volume: 95.35M (-619.802M)
Down Volume: 1.916B (+531.491M)
A/D and Hi/Lo: Decliners led 10.73 to 1. Definitely impressive though not higher than what we have seen on this selling the past week.
Previous Session: Decliners led 3.27 to 1
New Highs: 6 (-7)
New Lows: 1804 (-237)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After showing a big of backbone Wednesday and even Thursday through early afternoon, SP500 rolled off a cliff in the last 2 hours of the session. An impressive drop straight down this month that has SP500 cracking the top of the base that formed the 2002 bottom. This level down to 768, the bottom of the 2002 bear market, is a critical test for this index and the market. If it breaks below this level the bear is worse than the worst post-war, and that indicates a serious economic struggle for quite some time.
SP600 (-8.20%) was obviously not spared. It has fallen sharply along with the other indices but because it made a higher high on its run than the other indices and held the line to the downside longer, it is well above the prior bear market lows and indeed the peak in 2002 at 255 before the bear market took it down into late 2002. As noted above, if it hold at 255, that prior high, that is a good indication for the economy and thus the market.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
GM didn't help the Dow Thursday as it burned off a gain and put in the second largest point decline of this selloff in the third leg of the downtrend. As with SP500, DJ30 has cracked the top of the 2002 double bottom, closing at some support on Thursday. There is another shelf of support at 8060 with the next at 7530 before the 2002 bear market bottom at 7331. It is just a matter of seeing where this selling checks up. As noted Wednesday, this kind of selling intensity or pace cannot be maintained, and with this kind of drop the rebound is typically explosive.
Stats: -678.91 points (-7.33%) to close at 8579.19
VOLUME: 436M shares Thursday versus 479M shares Wednesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
So much for the bounce we were looking for after Wednesday that saw some buyers move in. That got slapped back. There are still positives, indications this selling will stop. We just have to watch and be ready when it does. No one we know, not even the hardened shorts, have been generating new shorts of late given the massive selling.
What are the interesting positives? Oil prices are down and gasoline is falling, acting as a much needed tax cut for consumers. It won't turn the tide itself because it didn't cause the problem itself even as it spiked higher. There are only two worse bear markets than this in the post-war. Of course that could change . . . Insider buying is at its highest ever and that is often a positive upside indicator. Warren Buffett and others were buying on Thursday. Further, in a market plagued by a lack of trust in valuations of assets, Citi and WFC are fighting over a financial asset. There is at least a view that financial assets do have a value on the other side of this financial crisis.
None of those suggest the market will turn up Friday. Indeed as we have discussed the past few weeks, Thursday and Friday selling typically leads to Monday and Tuesday selling. We are not sure if many want to step into positions ahead of the weekend given the history of selloffs and how they work on the calendar.
That said, there are those stocks that are acting sold out during this last round of selling. They were some of the first stocks taken out and shot in the selling. They are already down so there is no fear they are going to fall from any great height. Early leaders upside, early leaders downside, and now they are holding up and looking sold out.
With the indices still hitting new lows in the bear market and the close near the session low Thursday, there is still no bottom on this leg. It is hitting the 2002 bear market base where it will try to hold and put in some kind of bounce and go to work on a new bottom. If nothing else, the indices are massively oversold.
We will still look to play these emerging relative strength leaders to the upside on the move as the make their upside breaks. We took some positions on them Wednesday and Thursday though we were a bit early. We will look to add to those positions on a market bounce as well as move into other similar stocks that showed relative strength during this selling and bounce as well. We play the move higher, take some gain then see how it tests. There will be another test so we book some gain, look at some downside on the test, let it test. During this time we watch to see what bases are forming to see if leadership is emerging. That will tell us what the success chances are for a successful bottom. Long way from there right now.
Support and Resistance
NASDAQ: Closed at 1645.12
Resistance:
1752 from 2004
1782 from August 2004
1882 from October 2003
The 10 day EMA is 1887
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October
The 18 day EMA at 1991
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
The 50 day EMA at 2165
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.
2300 is some resistance
2340 from the March 2007 low
The 200 day SMA at 2340
Support:
1644 from August 2003
1620 from the early 2001 low
1521 is the late 2002 peak following the bounce off the bear market low
1387 is the 2001 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low
S&P 500: Closed at 909.92
Resistance:
965 is the 2003 consolidation low
995 from June 2003 consolidation peak. Below this level on the Wednesday close.
The 10 day EMA at 1057
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
The 18 day EMA at 1110
1133.50 is the September 2008 low
The 50 day EMA at 1194
1200 is the July 2008 intraday low
1242 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 90 day SMA at 1254
1270 is the January low
1285 is the recent July peak
1313.15 is the August 2008 peak
1317 from the February low
The 200 day SMA at 1318
1324 is the April low
1326 is an ancient trendline
Support:
889 is an interim 2002 peak
853 is the July 2002 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
Dow: Closed at 8579.19
Resistance:
8626 from December 2002
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
The 10 day EMA at 9889
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
The 18 day EMA at 10,301
10,365 is the new 2008 low
10,459 is a September 2008 low
10,827 is the July 2008 intraday low
The 50 day EMA at 10,931
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low
The 90 day SMA at 11,353
Support:
8521 is an interim high in March 2003 after the March 2003 low
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7282 is the October 2002 low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 7 - Tuesday
FOMC Minutes, September 16 (2:00)
Consumer Credit, August (3:00): -$7.9B actual versus $5.0B expected, $5.2B prior (revised from $4.6B prior)
October 8 - Wednesday
Pending home sales, August, (10:00): +7.4% actual versus -1.2% expected, -2.7% prior (revised from -3.2%)
Crude oil inventories (10:35): +8.1M actual versus 2.3M expected, +4.2M prior
October 9 - Thursday
Initial jobless claims (8:30): 478K actual versus 475K expected, 498K prior (revised from 497K)
Wholesale Inventories, August (10:00): 0.8% actual versus 0.4% expected, 1.5% prior (revised from 1.4%)
October 10 - Friday
Export price ex-ag, September (8:30)
Import prices ex oil, September (8:30)
Trade Balance, August (8:30): -$59.0B expected, -$62.2B prior
End part 1 of 3
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