Wednesday, November 19, 2008

What happened today? The sellers finally showed up!

I wrote the following on November 6, 2008
"If I am right on this one, then you are not going to want to read it
I think the markets have experienced this massive intraday volatility, because nobody wants to buy stocks for the long term at these prices. That tells me that prices are too high to find buyers. If prices are too high to find buyers, then they need to fall to a level where there will again be equilibrium between buyers and sellers. That is not a good thing if you bought recently or are fully invested in your accounts."

How far do we fall before supply equals demand? I have no clue how far we fall. Nobody does with certainty. I can only guess. But at some point the selling will give clues that a low is coming and I will be ready for it.

I want to review the markets, so that you can see what happened today, with your own eyes -
New Highs – 0
New Lows – 1,588
Berkshire Hathaway, Citigroup, Goldman Sachs, Bank of America, Merrill Lynch, Blackrock, Northern Trust, Charles Schwab, e-Trade
Google, Bidu, Microsoft, Cisco, Intel, Applied Materials, Yahoo, Amazon
Sears, Target, Macy’s, Best Buy, The Gap
GE, Alcoa, DuPont, Boeing, Lockheed, Honeywell
Freeport McMoran, Dow Chemical, US Steel

New Index Lows
NASDAQ, NYSE, S&P 500, S&P 400 Mid Cap, S&P 600 Small Cap, Russell 2000

Again, losers remain losers until proven otherwise…

Did you see the Bond Market today? The trends continue -
US Treasury 20-year Index (TLT) +2.56%
High Yield Bond Index (Junk) (HYG) -3.42%

It appears that Ireland is the new Iceland. Ireland offered 100% government guarantees on all bank deposits. The problem is that the total deposits in Irish Banks are worth more than Ireland is and Ireland is now using the Euro as its currency, so they can’t print money to back out of the mess they are in.

Here is the Ireland (IRL). You know what is going on here. The stock is rallying into the declining moving average (Black Arrow). If you have learned anything from what I have been posting, then you know that there is a real high probability that the next leg is down.

Zero Interest Rate Environment
A few weeks ago, I showed you Ben Bernanke’s gameplan for how to “cure inflation” when interest rates were at zero. We are at zero right now, so you know that Bernanke’s plan is to print enough money to inflate our way out of the problem.

Today, the Fed released the notes from their October 2008 meetings and they basically said that they are committed to doing anything to prevent deflation. That means inflation, potential nationalization of the banks and a potential overnight devaluation of the US Dollar. Can you say 1932? More on this in the next few days.

New Lows – Basic Materials (XLB), Financials (XLF), Industrials (XLI), Technology (XLK), Consumer Discretionary (XLY)
Broken Wedge – Healthcare (XLV)
Holding Up – Energy (XLE), Consumer Staples (XLP), Utilities (XLU)

I expect the sectors that are holding up will soon play catch up to the downside, because in Bear Markets, everybody gets hit!

I wanted to revisit Microsoft. I wrote the following on 11/10/2008 (the beauty of archives) –

“$20.68 is the key level for Microsoft. It is the 62% retracement level from the 1994 low to the 2000 high. It has tagged this line on several occasions over the 8 years of its current Bear Market. You can see how much volume has traded in this range (Green Arrows). If Microsoft takes out $20 on volume, then you need to be very concerned if you hold it, because at that point single digits become a very real possibility in a short period of time. Man, what would that do the NASDAQ, the Dow and the S&P 500?”

Microsoft took out $20.68 like it didn’t matter and has fallen 15% in 9 days! Now that red line had better hold, or single digits look real probable.

Semiconductors ($SOX)
Semiconductors are now at critical support. 175 needs to hold, or the 115 range looks like the next stop.
The Dow Jones
From November 10, 2008
The Dow crashed in September and October on gigantic volume (Red Arrows). You know the drill. That is institutional investors running for the hills. The fact that they didn’t buy last month’s bounce with any conviction tells me that they are probably waiting for lower prices before they commit more money. The obvious target is the 1998 and 2002/2003 lows in the 7200 range.That massive volume in the 10,000 – 11,300 range will take a long time to work through (Green Lines and Green Arrows)

My story is unchanged. The Dow needs to find support soon or it may retrace the entire 1994-2007 move. I will be looking for signs of buying at or slightly below the 7,200 range.

Painful Stuff
Bear Markets are always far more brutal than you believe they can be.

I have the fortune and misfortune of experiencing the Technology Depression first hand. I saw what destruction it did to portfolios and promised myself that I would study and learn how to avoid the next one. I have been fortunate enough to avoid the carnage of 2008 and for the rest of my life I will be able to look people in the eye and tell that I sat out the Bear of 2008.

I have witnessed this Bear from the sidelines and protected a lot of families. But, sadly, I have seen other situations where people lost decades of savings and I had no authority to help them. I know that a lot of people won’t be able to retire they way they wanted to, or send their kids to an expensive college or pay to have their parents cared for in a care facility. That is absolutely tragic.

If this has happened to you, then don’t let it happen ever again! You have control. Either study or find somebody who has, to help you. That is part of why I put the blog together – to educate people who are getting less-than-timely advice.

There are no excuses for getting hurt in the next Bear and you know darn well that at least 2 more will occur in the next 8 to 10 years. Are you prepared?

Tuesday, November 18, 2008

852 Revisited

I wanted to rant about the 4% pop in the last hour of trading today, but the markets will get their revenge on all the crazy futures trades in due time.

I need to keep my eye on the ball and focus on what really occurred today.

There was a lot more Down Volume today than Up Volume, so the conviction was on the move down and not the move up.

For every 2 stocks that were up today, there were 3 stocks down.

New Highs – 1

New Lows - 1161 (including these key names)
Berkshire Hathaway, Intel, Cisco, Qualcomm, Applied Materials, Bidu, Amazon, Corning, Costco, Target, Macy’s, Sears, JC Penny, Polo, Nordstrom, Deckers, The Gap, Goldman Sachs, Citibank, Bank of America, Northern Trust, Blackstone, UBS, Metlife, CIT, Prudential, Lincoln Financial, Principal, Dryships, Freeport McMoran, Dow Chemical, DuPont, International Paper, Boeing, Medtronic, Vornado, Public Storage, Avalonbay, Simon Properties, Equity Residential, Crude Oil

Do you see how the same names keep showing up on this list? Once you are being sold off by institutions, you continue to be until they have exhausted their selling and only after these stocks have had months or years to repair themselves do you buy them again.

You must identify and avoid losers. The problem is that right now, virtually all stocks are losers!
New Index Lows
NYSE, Russell 2000 (Small Cap), Commercial Real Estate (REITs), Materials, Oil, Banking (KBE), Semiconductors, Retail (XRT)

The Bond Markets
The key to what is going on right now is the Bond Markets. Paulson talked about how the credit markets are freeing up, but you know better. If there were any buyers for corporate debt right now, then the automakers, credit card companies and insurance companies would not be begging for money.

The bottom line is that until the government nationalizes the banks and wipes their bad debt away, we're just chasing our tails. No lending will get done as long as the banks remain insolvent. Now the consumer is terrified and has stopped borrowing and stopped buying. Sure sounds like a serious recession or worse to me...

US Government Debt
US Treasuries had a huge day today. You would expect to see a lot of selling in Treasuries on a day when the Dow is up almost 2%. But that was not the case today. That is not a Bullish sign.

Here are the charts of the stocks which track the 7-10-year (IEF) and 20-year (TLT) US Treasury indexes. IEF looks like it is destined to retest the 92.50 area. TLT has pulled back into massive support (Green Arrows and Dashed Line). It will take a long time to break that level. If resistance is broken (Blue Line), then look for TLT to explode to new highs. If this occurs, then by definition, Interest Rates will also implode...

Corporate bonds are imploding
HYG is the tracking stock for the "High Yield" (Junk) Bond Index. It is the inverse of the Treasury charts, as nobody wants to own JUNK. PFD is a bond fund focusing in Preferred Stock. Think of these as risky bonds with the ability to be converted into stock down the road. Does PFD look like a chart you should be owning right now? VVR is a leveraged, Junk Bond Fund. So not only do you own bad stuff, you are borrowing to buy even more of it. VVR looks like the chart of a bankrupt bank.

Just like in stocks, you want to stick with what is working in Bonds. I don't know when these trends are going to reverse, but if I keep doing my homework every night, I will have a real good chance of seeing the turn occur and then be able to react to the changes.

In order to see just how bad the pricing has become in bonds that aren't US Treasuries, you need to see the chart on this link. This is the yield you must pay above the yield of Treasuries to get somebody to buy your AAA Asset-Backed Bonds. Remember, this the 2nd best rated paper in existence. That's great paper. Yields are up 3% in a week!

I told you all that this was going to happen. There was no way that Obama was going to walk in and guarantee all the debt and preferred stock of the banks who got us into this mess. Because there is no upside to the taxpayer if he does. So you are seeing Junk and Mortgages crack.

The reason for the sudden change in the markets is that Paulson stated he would not use the TARP to buy Asset-Backed Bonds. And today it became real clear that at least 1 of the 3 Automakers will not survive.

This is not the type of stuff that drives markets up. This is the type of stuff that leads to another round of panic.

Monday, November 17, 2008


I think the guys who need to sell see the Fed propping up the market each time the S&P 500 (SPX) gets down to 852 and, in anticipation of prices popping up quickly on futures-induced rallies, they stop selling. Why sell at 852, when you can wait an hour and sell at 900? We have already seen it happen today, as SPX touched 848 and then rallied 30 points (3.5%) in 90 minutes.

It seems like the market moves like this –
1. A leg down on heavy selling
2. A bounces on futures-driven trading, where there just aren’t any sellers
3. A hard selloff, as sellers come back again to unload more shares.

I expect this to continue until either the sellers are exhausted or support at the 852 area is broken. I think this week we either take out the 852 range or 852 finally proves itself to be a tradable bottom. I think a tradeable low will be in if SPX can fall to the 850 range and just sit around at that price for a few hours or a few days, without the need for the Fed to support the price. That would prove to me that sellers are exhausted for the time being and would give me confidence to look for a few trading positions.

The bottom line is that the trend is still down, but I have to see what the institutions do and make sure that I am not on the wrong side of how they are deploying their money.

More late nights of homework this week…