Monday, September 22, 2008

Breakdown in Leadership (Again)?

I played a baseball game one time with some kids from the neighborhood. I hit a homerun to right and while rounding the bases was informed that I was out. They told me that in their game a homerun was an out because the outfielder didn’t want to have to retrieve homeruns.

Last week I was short and in a position to clean up. Then, halfway through trading on Thursday, I was informed that the rules had changed and I could no longer short what turned out to be approximately 800 stocks.

I was upset. I my world, I don’t get to change the rules halfway through the game because I am losing. But in the financial markets of 2008, if you run a bank or the Fed, you can change the rules to suit your interests.

Clearly I was not the only one upset. Today, Oil was up over $20 a barrel and the US Dollar had its worst day ever against the Euro. Today, foreigners voted with their money and they voted to sell corrupt assets (the US Dollar and US Stocks) and go into something “real” - as in Gold, Oil, Platinum and Silver. This trend will probably accelerate.

The moral to the story is that the markets are bigger than the delusions of the Technocrats in Washington. They can try to manipulate things, but if people want to sell, they will sell. If the markets become inefficient because of cheating, they will take their money somewhere else.

I actually saw Barney Frank on TV today say the following – “I have no idea why Oil is doing what it is doing today.” So, either he is telling the truth and has no idea what is going on (that is a major problem), or he is lying and thinks we can’t figure it out (that is also a major problem).

Let me show you what is going on. Big money (mutual funds, pensions and the like) sold hard the last two days. Take a look at how the leaders opened up above resistance on Friday, only to close well below their opening prices and then got sold off hard today. That is really bearish. A solid bar (a down day) opens at the top of the solid red or black area and closes at the bottom of this area. A hollow bar (an up day) opens at the bottom of the hollow area and closes at the top. The tails (vertical lines) are trades during the day above the open and below the close.

Blackrock, Inc (BLK) broke above $230 on Friday, only to get sold off hard into today’s close. It traded up to almost $250 on Friday and closed today at $188.75.

Johnson & Johnson (JNJ) has been a market leader for several months. It opened up strong on Friday and has sold off hard since. It has now broken down below a 2-month trading range and the 50-day moving average.

Wal-Mart (WMT) broke out to new highs Friday and failed on big volume. It is now testing the 50-day moving average and had better hold here.

Pulte Homes (PHM) broke out of a 1-year base on Friday, only to fail miserably on decent volume. Today it fell another 11.72%.

Kohls (KSS) looks a lot like Pulte, breaking out of a 1-year base and failing miserably the next two days.

So, individual leaders are failing. Take a look at the likes of past leaders like Apple (AAPL), Mastercard (MA), Google (GOOG), Bidu (BIDU), First Solar (FSLR). This is not how things trade in a Bull Market.

Retail (XRT) and Housing (XHB) have led as Oil prices fell the last few months. Now, not only are the leading stocks in these sectors seeing distribution, the sectors themselves are seeing selling in very bearish fashion.