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%

Ireland
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.

Sectors
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!

Stocks
Microsoft
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?

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.

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

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

New Highs – 1
Transmeta

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!

http://mrmortgage.ml-implode.com/wp-content/uploads/2008/11/cmbx-aaa.png

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.

852

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…

I’m just going to show you pictures today

On a day with a move of this magnitude, I want to take a step back and look at the big picture.

Today’s move started because Australia couldn’t take it any more and had its Central Bank go in and Buy Aussie Dollars and sell Japanese Yen. The selling of Yen makes it cheaper to borrow in Yen, which allows investors to borrow in Yen and buy risky asset in other countries (the Yen Carry Trade).
The Aussie Dollar (FXA) and The Euro (FXE) had nice moves today, but they are merely blips on the big picture. FXA has to get up through all of that volume in the Green Box. That is going to put a cap on the value of the Aussie Dollar for a long time. It could bounce all the way up to 75, but it is still in a Bear Market and any purchase is just a trade.
The Euro looks like it is consolidating the last leg down, before the next leg down. Another Bear Market.

The US Dollar ($USD) put in what may be a decent top today. Again, it was on Central Bank intervention, so take it with a grain of salt. But it could easily pull back towards 82 or 80.

Sectors
I want to look at individual sectors, because the market is just a group of sectors.
Banks are on the brink of another Major leg lower. Everybody can see the chart and knows where the big boys will come in and protect price (the Green Line). So everybody has got their buy orders in place for a trade and the market has a huge, quick rally. Right into massive volume (Green Box).
I don’t think banks will be rallying much from here.

If you want to see a textbook Bear Market, then look at this chart of the Finance Sector (XLF). It is all sharp drops, followed by consolidation patterns into declining moving averages and then new legs down to lower lows.
Now there is that massive overhang of resistance (Red Dashed Line). But the red line is at 18 and price is at 13, so there could be some money to be made here in the near term, IF buyers show up. You could just as easily see a reversal of today and you get your head handed to you.

Here are Consumer Staples (XLP) (Food, Toothpaste, the stuff you use every day). They are just wedging up into massive volume and declining moving averages. That is one scary chart!

Energy (XLE) is no different. It could still rally a few more percent from here, but it looks very Bearish.
Same goes for Utilities (XLU) .
Basic Materials (XLB) look like Energy. Materials could rally sharply from 24 to 30ish, but the trend is down.

Same goes for Technology (XLK), Industrials (XLI), Consumer Discretionary (XLY) and Healthcare (XLV).

So what I see right now is an oversold market with the potential to rally back up into declining moving averages and gigantic volume.

The only thing that may have changed is the size of the next bounce may be bigger than the size of the last bounce. So I may be looking to buy some things for trades, with tight stops.
We’ll see how it plays out. I’ll take what the market gives me.

4 New Highs today and 1,075 New Lows

4 New Highs today and 1,075 New Lows
Maybe you have heard of a few of them – Berkshire Hathaway, General Electric, Citigroup, Microsoft, Bank of America, Intel, American Express, Goldman Sachs, Yahoo, Motorola, Applied Materials, Nokia, Micron, Dell, Disney, JA Solar, Freeport McMoran, Dow Chemical, International Paper, eBay, Amazon, US Steel, AK Steel, Google, Nike, Sears, Lockheed, Deckers, The Gap, Whirlpool, ConocoPhilips, Boston Properties, Black and Decker,

Remember when a bunch of these were the high fliers? The names Cramer told you that you had to own? Didn’t he have a $1,000 target on Google? Opinions are destructive. All they do is offer hope to those without a discipline for what and when to buy or sell. I deal in facts. I made a killing today. Remember those wedges that were breaking on Utilities and Energy? There was also one on Gold. Take a look at how SDP, DUG and DZZ did today!

The guys on TV must live in a parallel universe, because all I hear them talking about is how you need to buy. What planet do they live on? Almost 1,100 companies hit new lows today! The markets were down about -5.2% across the board! That’s the average annual return of the stock market over the last 108 years. And you lost it in a day.

All the clues you needed to keep your money safe were right there in front of you.

I will post on potential risks over the weekend.

Why are the Markets Crashing, Yet Again?

The government needs to cut the bull, because the markets have already figured things out.

The sickening incompetence or outright graft which led to the handling of the likes of AIG, Freddie and Fannie by the US Government has led to a collapse in the economy – in consumption, in lending, in asset prices and in production. A clean sweep.

AIG
The US Government does not want to bring the debt of AIG onto the books of Uncle Sam. So what did they do.

What did this do? It hurt the taxpayer. The Government had the ability to just take over AIG. That would offer the taxpayer two benefits –

1. You will know how much you need to put in to make AIG solvent
2. You will own the entity after it is capitalized and you will be able to sell it to make up for some of the losses you sustained while getting the company healthy again

But what did the Government do? They played their typical accounting games. They bought the most of AIG they could buy (79.99%), without having to actually take over the company. This allowed the Government to –
1. Overpay for AIG’s assets
2. Keep the debt of AIG off the balance Sheet of the US Treasury
3. Stick the taxpayer with an open-ended obligation for untold $100’s of billions

I think it also allowed the management of AIG to hide a bunch of the illegal stuff they did, which got the company into its mess in the first place.

Who benefits from this? The shareholders. The US Government not only left them with 20% ownership in the company, they also guaranteed ALL of the Preferred stock! Are you freakin kidding me?

The markets are crashing, because this is idiocy. Idiocy! All it does is put in a middle man who’s goals are polar opposites from those of the taxpayer. The taxpayer wants to get lending going again in a manner which costs them as little as possible. The banks want to suck as much cash as they can out of the taxpayer to prop up their “earnings” and their stock prices.

This is failure by definition. I haven’t been in an Econ class in 20 years and I could write a book on this stuff. But you’re telling me that there isn’t somebody smart enough in Washington to fix what is wrong?

What do the markets want?
They want the Government to fix the problem.
The citizens voted for Obama to fix the problem.

What is the problem?
Insolvent banks can’t lend money, because nobody is buying their worthless debt anymore (more on this in a minute).

How do you fix it?
Simple. TAKE 100% CONTROL OF THE INSOLVENT BANKS WHO ARE TOO BIG TO FAIL.
Cut the accounting games.
Stop promising payouts on shares of preferred stock in companies that are worthless.
Put the taxpayer first! The goal of this plan should be minimize the cost to the taxpayer, while getting banks solvent and lending again.

This is simple. Take over the banks and take all the bad debt off of their books. Give them a bunch of money and tell them to start making good loans immediately.

What does this do? It creates a network of healthy banks. These banks wont need FDIC to bail out their money market funds. They will become safe havens for peoples’ safe money. You don’t have any risk if your bank is solvent and backed directly by the government.

This will allow the banks to make money and rebuild their businesses. At some point, you sell the banks to the public markets and use the proceeds to repay the taxpayer for the staggering losses they will take for bringing all that toxic debt onto the balance sheet of the US Government.

The big problem with that solution is that you need to change the culture of the banks. They can’t operate anymore like they want to. The markets just aren’t buying what they are selling.

So what does the Fed do? You’re not going to believe this one. Instead of fixing the problem, it promises to buy what the banks are selling, with taxpayer money. It promised today to do so, even though the Fed knows it won’t work.

What do the markets do? They crash, yet again!

American Express
The other day, American Express became what is called a “Bank Holding Company”. Funny, I always thought they were a credit card company. You know why they did this?

Let me explain how Amex and the other credit card companies work. They lend money to card holders. Say they loan $100 million today. In order to make loans tomorrow, they either need to raise new cash by borrowing themselves, or they need to package up that $100 million and sell it. This packaging process is called “securitization”, as in you create a security to trade.

There just isn’t anybody willing to buy these bundled credit card loans from Amex. Just as there aren’t buyers for bundled mortgages or car loans or student loans...

So what happens, Amex becomes a “Bank Holding Company”. They do this, so that they can the credit card loans nobody else want to the taxpayer, via the Fed checkbook.

Do you see why I am so mad? We are getting stuck with a bunch of worthless (stuff) that nobody else wants, and we’re overpaying for it.

Did you see the other day that Bloomberg sued the Fed to get the Fed to tell them what they did with the first $2 trillion it has already used to buy toxic debt from banks, hedge funds, and other countries?

The Fed won’t tell us what they bought or what they paid for it. A news agency is actually suing them to get them to divulge the information. With the markets crashing, you know the numbers aren’t good.

The markets are pricing in several potential scenarios –
1. Obama tells the banks to get in line behind the taxpayer and just flat out nationalizes the banks (my preferred route)
2. Congress gets enough heat from voters that is forces the Fed to divulge what it did with the first $2 trillion and the game of buying toxic debt from banks ends
3. There just isn’t enough free capital floating around to buy all the new debt we need to sell. The US Budget Deficit is now $6 billion A DAY!!

I think there is a seismic shift coming and it will at the expense of the banks and their stock and bond holders.

I will buy assets when somebody, anybody, other than the US Government is willing to buy an asset, any asset.I still think that stock prices are too high and will need to fall further to find a place where investors are willing to buy stocks and hold them for more than an hour. That has been my overall thesis and it has been very profitable, so I will stick to it until I start to see evidence that the markets are changing.I think that bond prices are too high and rates will have to increase substantially to compensate bond investors for the risks they are buying.I think that real estate prices are too high and will need to fall down to a level where they are actually affordable relative to average levels of income.Prices will start to go up on a sustained basis, after they have fallen down to levels where investors are willing to buy them.One more thing on Real Estate
Yesterday, the Government made a proposal that would effectively make the US Government a vender of exotic mortgages.

The bottom line is that housing prices are still too high. You know this, because the goal of the Government plan is to break mortgages of defaulting homeowners into two parts, charging zero interest on one part and an artificially low rate on the other.

So by definition, the amount of the mortgage is so big, relative to income, that the government has to effectively write off part of it, and lower the rate on the other money to several points below the rate of inflation.I think the question that everybody but the media is asking is why isn't this being done on the back of the shareholders of the banks who made these loans? Why should the taxpayer be stuck with the liability?I'm telling you, people are irate! The truth is percolating to the surface. The stuff I have been writing about has been on target. At some point, there will be a change in policy and the shareholders and bondholders of banks will be left with nothing but maybe a handful of warrants.

Market Internals - At Key Support

The markets were on the precipice. They were staring into the eyes of yet another leg down. But today the cavalry rode to the rescue, in the form of the Freddie/Fannie mortgage restructure package. The Dow Jones Industrial Average held up for about an hour and then sold off 280 points, before rallying 140 in 14 minutes to close down about 170. The same think occurred on Monday, when China announced a $586 billion government spending package. That rally also lasted for about an hour.

This is the 6th or 7th time the Fed/Treasury/SEC has come in with a bullish plan designed to get the markets rallying, just as they coincidentally sat at key support. Each plan has had less and less of an impact in propping up the markets. The markets are wise to the game and the bottom line is that there just aren’t any real buyers at this level!

The Dow
Take a look at the Dow. All this rally has been is a reversion back into key moving averages after a crash. It is classic Bear Market action. Today we in the process of testing the support line (Green Line) and then the Fed came in to save the day. Look at how this is the fourth consolidation pattern to follow a plunge in prices in 2008 (Green Lines) and notice how each rally stopped at the 50-day (Black Line) or the 200-day (Blue Line).

If you have been reading my posts for a few weeks, then you know by now that that is not bullish. In the next few days, the Dow may retest the high of Election Day, at the Black Line at about 9,700 or it may crash. It sure looks to me like if it rallies, then all it will be doing is setting up for the next plunge. I think today’s announcement was supposed to induce that rally into 9,700. The fact that buyers just didn’t show up is very ominous.

Energy (XLE)
Energy stocks have been leading the markets recently. So I want to look at what is going on with energy. It is more Bearish plunges, followed by sharp rallies into key averages, followed by plunges to even lower lows. What is worse for energy is that line at $63 is now massive resistance, and will serve to cap any future rallies for a long time.
The charts of Exxon, Chevron and Total Fina look better, but similar to the XLE. The charts of the Oil Service companies like Schlumberger look substantially worse.

Healthcare ($HCX)
You already know my feelings about Johnson & Johnson, but here is the Healthcare Index. Yikes. Do you see why the Fed stepped in today? This index broke support. The Freddie/Fannie announcement saved the day for the time being.

Utilities (XLU)
Does this remind you much of Healthcare? The Fed might have been too late on this one. It looks like it already broke. We’ll see how it acts over the next few days.

Real Estate (IYR), Financials (XLF) and Retail (XRT)
These all look the same. They are retesting the lows of late October.

So for the most part, markets and sectors are either rallying up into declining moving averages (Wedges), or they are retesting the lows of late October. Individual stocks are no different.

Wedges - Wal-Mart (WMT), 3M (MMM) and Apple (AAPL)

Retesting Lows - Microsoft (MSFT), Bank of America (BAC) and Google (GOOG)

The markets are set up to crack or rally sharply in the near term (a few percent either way over a few day period). I see so many companies failing and hitting new lows, but they are oversold and could see sharp rallies at any time.

New 52-Week Lows Today (635 in total) – Google, Goldman Sachs, Nike, Northern Trust, Boston Properties, Hormel, Lennox, Cleveland Cliffs, Abercrombie & Fitch, Gamestop, Disney, Carnival Cruise, Bed, Bath & Beyond, Autodesk, Harley Davidson, Time Warner, Conagra, Urban Outfitters, Ethan Allen, J Crew, Nokia, International Paper, Nordstrom, eBay, Echostar, Dry Ships, Yahoo, Royal Caribbean Cruises, Applied Materials, Corning, Limited, New York Times, Jones Apparel, Cheesecake Factory, Anntaylor, Xerox, Goodyear Tire, Seagate, Tyson Foods, Cooper Tire, General Motors…

New 52-Week Highs Today (4) – 99 Cent Store, US Tobacco, Eagle Test Systems

635 to 4! That is not good. But it is a typical day in a Bear Market. My concern is that the new lows are in retailers, travel/leisure, technology, real estate, consumer staples... These are key groups. You should not be seeing this in a new Bull Market.

The bottom line is that either buyers are going to show up or sellers are going to show up. Whoever shows up first will dictate the short term direction of the market. After reviewing the evidence today, I may have to keep shorting bounces.