Monday, November 24, 2008

852 Revisted ( This Time From Below)

The markets have had their best 2-day rally since the Crash of 1987. So you’d think that US Treasury Bonds would be sold off hard, as investors moved money out of areas of safety and into areas of risk. But that was not the case, as the 3-Month Treasury Yield ended today at 0.01%. People are in cash.

Longer Term Treasuries fell some, but not a lot (20-Year down -1.56% and 7-Year down -0.94%). In my opinion, US Treasury Bonds are merely pulling back into support.

Corporate Bonds had really poor rallies today. I would have expected much better bounces, with stock indexes having such sharp rallies. That needs to change immediately, if stocks are to continue this rally.

Last week, $19.5 billion was taken out of Stock Mutual Funds and $13 billion was taken out of Bond Mutual Funds. Those are really big numbers. I follow big money flows and big money is getting out and buying 3-month Treasuries.

The Crash is now about Alt-A Mortgage Defaults
The last few weeks, the FDIC and JPMorgan commited about $50 billion to renegotiate mortgages. Now Citigroup had to be bailed out. This is all the result of Alt-A mortgages starting default at alarming rates. The Alt-A holdings of banks (Level II) are on average 10 times the size of their Sub Prime holdings (Level III).

Citigroup’s Level II holdings are over $1 trillion. Take a look at this chart and you can see how much money they are losing on these holdings. Citigroup was bankrupt. Period. Don't let anybody tell you otherwise. It seems inevitable that JPMorgan and Bank of America will collapse and soon need Government bailouts of their own. The size of the rally in Citigroup tells me that the taxpayer got screwed today, bigtime!
On to the Markets
You know the drill by now. Each time the Dow rallies 1000 points in 2 hours, I take a look at market internals.

I covered all of my shorts on Thursday and Friday morning. I also sold my holdings in the 7-year Treasury (IEF). Things had sold off too far, too fast and were due for a bounce. Bounces today are of epic proportions and play themselves out in hours and not days or weeks.

All I wanted was a rally up into resistance that I could short, and I got my wish today. The charts below show how much volume has traded at each price. They register how much buying was done. So when you break below those prices, everybody who bought there is now under water. When you rally back up into it, that volume becomes people who are desperate to sell once they get back to breakeven (resistance).

See how the Dow (DIA) has rallied right up into massive resistance (volume Green Arrows)?

The S&P 500 (SPY), The NASDAQ (QQQQ) and the Russell 2000 (Small Caps - IWM) have also been able to rally up, and are now at massive resistance.

I like to look at sectors to see what is going on in all parts of the markets.

Basic Materials (XLB), Industrials (XLI), Technology (XLK), Healthcare (XLV) and Consumer Discretionary (XLY) have all rallied up into the teeth of strong resistance.

Financials (XLF) have bounces, but are not even close to the old breakdown point. This weakness is a red flag. Continue to avoid Financials if you haven’t figured this out yet.

Consumer Staples (XLP), Energy (XLE) and Utilities (XLU) were in wedges and broke down as the markets hit new lows. They have now bounced. After evaluating the daily and weekly charts, I think these offer the best short setups. I may be dead wrong on this, but we will see how it shakes out.

So we have had yet another Government-induced multi-hour moon shot, on low volume.
I have been asking the question “why sell at the lows, when you know that a futures-driven rally of 500 to 1,000 points is right around the corner and you can sell tomorrow at 5 to 10% above where you are today?”

The rally arrived and the Dow was up 850 points in 2 hours of trading. I have started building short positions again.