Wednesday, February 18, 2009

No Opining From Me Today, Just Lots Of Pictures

New Lows (454)
Wells Fargo, US Bank, American Express, Capital One, BB&T, Huntington Bancshares, Suntrust, Discover, Synovus, Axa
FedEx, Disney, Alcoa, Nokia, Dow Chemical, Caterpillar, Kraft, International Paper, DuPont, Heinz, 3M, MGM, Unilever, Kodak, Saks, Hovnanian, Ryder, Sony

New Highs (3)
Pegasystems, SI International, Matrixx Initiatives

Take a Look at Bank Preferred Stock ETFs
PFF is The US Preferred Stock Index Fund
PFF holds 84% Financials. Yikes!

HYG High Yield (Junk) Bond Index
Holds no Financials, but also holds only Junk Bonds

LQD is the Investment Grade Bond Index

This is all the stuff that is rated higher than Junk

So you’d think that LQD only held good stuff, right?
Well, you know me and you know that I have to dig a little deeper and see what the real holdings are. It turns out that LQD has MASSIVE exposure to the Bond issued by Financials.

To emphasize just how risky some of the holdings are in the LQD, I used my matrix of the banks with the most exposure to derivatives. The column on the right shows the percent weighting each company has in the LQD.

These nasty companies make up 35.3% of the holdings in LQD. Holy cow! My real concern is that the LQD represents the Investment Grade Bond Mutual Fund universe. So there are loads of people who hold Mutual Funds that mirror the LQD and those investors think their money is safe!

Be really careful if you hold a Bond Fund, because you may have a third of your money in these garbage companies.

Why does it matter?

Because LQD looks like it is about to crack. It is about to crack, because Big Money knows that there is a real high probability that a number of the companies on the above list will be nationalized in the very near future. When Lehman went bankrupt, the bond holders received 9 cents on every dollar invested. So if you are a bond holder in those companies, then you are running a high risk of losing a lot of money.

Be very careful. This is all about preserving capital!

The Stock Indexes
The New York Stock Exchange ($NYA)
has broken below the bottom of the 4-month trading range (Green Lines) and is now at risk of at least testing the November 2008 lows (Red Line)

The S&P 500 ($SPX) the uptrend from its Bear Market Lows (Green Line) and now looks vulnerable to test the Bear Market Lows (Red Line)

The Dow Jones Industrial Index ($INDU) already broke below the 4-month trading range (Green Line) and is at it Bear Market lows (Red Line)

Transportion Stocks ($TRAN) have already broken to NEW BEAR MARKET LOWS! Do you think companies like FedEx, UPS, Burlington Northern et al are important to the US Economy? Not good…

The leader has been The NASDAQ ($COMPQ). It has barely broken the uptrend from the November 2008 lows (Green Line). The trendline may even hold tomorrow. You can goose this index higher by funneling money into a handful of tech stocks.

Hiding Places
Because Mutual Funds have to remain fully invested (usually 95% stocks), they tend to plow all of their money into a few companies that hold up during a Bear Market. This last leg, they have funneled into names like IBM, GOOG, Goldman Sachs, Morgan Stanley, Northern Trust, Chevron and Exxon.

Take look at the charts below and see how the stocks rally up in very narrow channels. That is characteristic of persistent Institutional accumulation. The Mutual Funds buy as many shares as they can each day, without launching the stock to prices at which they don’t want to buy. So the stock grinds higher virtually every day.

Bear Markets have the characteristic of destroying all stocks, so this next leg down will probably be the last and hammer these former safe havens. The trick will be looking for what holds up best during this next leg down, because those sectors will most likely lead the next Bull Market.

Failing Safe Havens
You are starting to see selling in some of the recent safe havens. Utilities (XLU) and Energy (XLE) have broken support and may be starting another big leg lower. Healthcare (XLV) is on the brink, but may need more time before breaking down in earnest.
Huge Tops
Johnson & Johnson (JNJ)
is the single scariest chart in the stock market. If I shorted individual stocks, I would have a BIG short position in JNJ. I would be looking to add a rally into the $62 range and a retest of the highs near $70. But I don’t short individual companies, so this is an academic exercise.

See how JNJ broke the 14-year Bull Market (Green Line)? See how JNJ broke the trendline on gigantic volume (Black Arrow)? See how the stock now trades below key moving averages (Red and Blue Lines)? See how JNJ has been in a tight trading range the last 4 months, right below the Green, Red and Blue Lines? That is about as bearish as it gets!

I have been watching JNJ closely for the last 4 years. I told the people who own it that they needed to sell on a failure of the Green Line, as it would most likely mean that the long-term Bull for JNJ was over. Remember, old leaders die ugly deaths!
Exxon Mobile (XOM) has also broken down and price is now sitting below declining moving averages. I will be shorting Energy soon (via DUG).
McDonalds (MCD) looks like it is putting in a major top. I will drink their coffee, but I will not own their stock.
Take a look at Utilities (XLU). Does the action in Utilities from 2007 – 2008 remind you of the action that McDonalds is currently going through? Charts are just a visual history of price, volume and sentiment. So charts bottom and top in very similar pattern, which visually reflect the emotional extremes of fear and greed.

Utilities put in their top and then crashed. They then sat around for 5 months and appear to be starting yet another leg lower. I will be looking to short Utilities too, via SDP.
These aren’t pretty pictures. I don’t see leadership. I don’t see new breakouts on massive volume. I don’t see any reason to own stocks. And I am now terrified of corporate bonds.