Tuesday, September 30, 2008

Brown Monday - Aftermath

Well the poo hit the fan, the markets reacted as expected with a headline making 777 point decline for the DJIA. What caused this market debacle? My sources hint at the possibility that certain market participants were anxiously reacting to the results of the house vote on the proposed 'Bailout Bill'. The house voted it down and the markets crashed.

Wall street is in a panic, but you already knew that. Main street, the Baby Boomer IRA holders, are also in a panic and threw in the towel yesterday. After the markets staged a brief rally leading into the final minutes, the "sell on close" orders swamped everything, pushing the DJIA down an additional 200 points at the finish. This type of selling pressure can probably be attributed to the squaring up of mutual fund sell orders at the close, I'm not positive but that's what I think happened. The boyz knew we would rally today and bought the close.

Who is to blame? John McCain said earlier in the fracas "I went to Washington last week to make sure that the taxpayers of Ohio and across this great country were not left footing the bill for mistakes made on Wall Street and in Washington," If we assume the idea was to pass the Bailout Bill, John McCain failed to deliver his party's votes.

Predictably, McCain is trying to cast his failure to lead his own party by blaming it on someone else. It stretches the imagination to see him trying to outdo Bush in the misrepresentation category. Isn't this how we got into this mess in the first place?

That old adage that statistics never lie...

Republicans 66 for + 132 against = 198 voters
Democrats 138 for + 95 against = 233 voters

Republicans vote 66/198 = 33.33% FOR
Republicans vote 132/198 = 66.67% AGAINST

Democrats vote 138/233 = 59.23% FOR
Democrats vote 95/233 = 40.77% AGAINST

Percentages of the Total Votes Cast (198+233 = 431)

Democrats 138/431 = 32.0% FOR
Democrats 95/431 = 22.0% AGAINST

Republicans - 66/431 = 15.3% FOR
Republicans - 132/431 = 30.6% AGAINST

The indecision pattern I mentioned previously, resolved itself sharply to the downside. The McClellan Oscillator is oversold enough for a bounce which looks like it will occur today.

Never the less, the 10% Index went well below -500 again indicating that market breadth, hence market sentiment, is extremely negative. Before I am willing to suggest we have seen a bottom, we need to see a price retest of the recent lows which is not accompanied by the same extremes of negative breadth. Typically this will not happen for another two or three months and any intermediate term rally which may occur here is doomed to fail.

Sunday, September 28, 2008

The Week Ahead

Short term, for traders, I'm looking for a turn higher sometime in the next couple of days.

Longer term I am bearish. I wouldn't say "more bearish", rather I trust the basic indicators I'm using and they are not giving the right kind of signals I want to see at a bottom. Conservative investors should remain on the sidelines.

Additionally, I see the current fiscal crisis as being very different from any other similar event in my lifetime.

I just watched Paulson on 60 minutes. Whatever you think about him, I believe he is really concerned, concerned enough to resort to actions he would normally consider unthinkable. The fundamental risks to the US economy are unusually high. If you read through the lines in Paulson's remarks tonight he expects "continuing volatility in the financial markets" even with the current bailout package.

Uncertainty has been one of the primary causes of the credit freeze up, financial institutions refused to lend to one another. Apply the same psychology to main street, individuals and small businesses. I suggest they will behave the same way and act in a conservative manner, reducing spending and deferring expansion. This will cause a contraction within the economy putting increasing pressure on earnings.

Add to the above mix, the aging baby boomers who have been watching the value of their IRA's decline steadily over the last year. Fear will induce them to shift money from riskier investments like stocks and mutual funds into safer instruments. The money being diverted from the stock market will not return over the next few years at best.

This means that the high cash levels on the sidelines cannot be viewed as it was in the past. Some of this money will never return to the equities markets and should not be counted. In other words the "cash on the sidelines" number is fudged, or over-valued since it is counting funds which are no longer actually available to the markets. As a result I expect the "cash on the sidelines number" to go higher.

Conservatively, I expect the final lows will be values 30% to 50% off the last market highs.
For the SPX 30%= 1100, 40% = 950, 50% = 800 (rounded to nearest 50)
For the DJIA 30%= 10000, 40% = 8600, 50% = 7200 (rounded to nearest 100)
I realize that at the moment, my lower values may seem extreme but the sizes of these decline are within previous ranges.

I also will be on the lookout for evidence the government is rigging the markets. I expect this to happen, it is the only way to re-capitalize the financial system by inflating a financial instrument. If this is to occur, it will have to happen at an appropriate time after the weak sisters have been thoroughly been flushed from the markets. I do not think this has occurred yet.

Palin Implodes

So far, my fave is "Infantile repetition." Just imagining what it would be like, to be one of Sarah Palin's "handlers", brings me to tears. It might even be funny if it wasn't so scarey.

In a world exclusive The NATIONAL ENQUIRER names GOP VP Candidate Sarah Palin's secret lover! If you use words like "extramarital affair" in close proximity to "Sarah Palin" it will get attention, isn't that what Republican politics is all about? Distorting the truth and fear mongering? Heck, I think any red blooded American will understand being cold and lonely, especially up there in Alaska, the land of perpetual night, and come to their own conclusions.

Conservatives Begin Questioning Palin’s Heft FOX News discovers that Palin spent too much time at the gym, too chubby in some places, overly lightweight in others. The problem is not with her positions, it appears she will do whatever you ask.

Palin's Stand on Mining Initiative Leaves Many Feeling Burned in the September 28. Washington Post. Palin makes a politically expedient flip flop over an Alaskan environmental issue, "red is better than green."

Gov. Palin Makes Maxim's Mag's Hottest List but ranked only number two. In all fairness to Sarah, this is about as sexist as calling her a bimbo.

Transcript of Part I. The interview between CBS News anchor Katie Couric and vice presidential nominee Sarah Palin Check out the tart little gems like

"I'm all about the position that America is in and that we have to look at a $700 billion bailout."

Nobody will ever accuse Sarah Palin of talking down to someone. Maybe Maxim got it right and Sarah Palin is "all about positions".

Transcript of Part II. Exclusive: Palin On Foreign Policy where Sarah Palin becomes a the leading example of just how foreign, foreign policy can be.

Palin: I'm not one of those who maybe came from a background of, you know, kids who perhaps graduate college and their parents give them a passport and give them a backpack and say go off and travel the world.

No, I've worked all my life. In fact, I usually had two jobs all my life until I had kids. I was not a part of, I guess, that culture. The way that I have understood the world is through education, through books, through mediums that have provided me a lot of perspective on the world.

Palin’s Words Raise Red Flags by Bob Herbert in the NY Times.

But Ms. Palin has given no indication yet that she is capable of handling the monumental responsibilities of the presidency if she were called upon to do so.

In fact, the opposite is the case. We know that there are some parts of Alaska from which, if the day is clear and your eyesight is good, you can actually see Russia. But the infantile repetition of this bit of trivia as some kind of foreign policy bona fide for a vice presidential candidate should give us pause.

Infantile repetition? Sounds like email spam? Who picked Sarah for a shot at the Vice-Presidency of the United States?

Saturday, September 27, 2008

Bailout Week MCO Update

There is not much to say. In the next few days the markets are going to be volatile and news driven by the unfolding developments to the current financial crisis.

Over the short term, starting within a day or two there is a very good chance of a sharp rally higher. However, the indicators are on the brink, so if the US Congress does not give the right signals about how the current problems will be resolved, the markets will nose dive. The technicals favor a rally but can always be trumped by news.

Regardless of the outcome, the recent lows give no indication that we have reached a final bottom, stocks are still under heavy selling pressure and until this abates the intermediate term trend remains down. IRA investors should remain on the sidelines.

Click to enlarge
This chart is an update of one I posted earlier here

Friday, September 26, 2008

WaMu Whoops!

Checked in with my local bank to discover JP Morgan now has my money.
Washington Mutual Welcome

No Bottom in Sight

While a number of indicators are indicating the US markets could be near a bottom, I still believe it is too soon to be sure. I would accept that some individual issues have made hard price bottoms over the last month but even this is hard to quantify without a decline to retest the lows by the popular averages.

Cash on the sidelines is at record levels. In my opinion it is going to remain that way. The baby boomers are scared to death their life savings, and their retirement, are going to go down the drain, they will stay out of the market.

I've marked some retrace values on the SPX chart below. In addition I've marked the absolute decline off the SPX high (left side - yellow) which I think will be 30% to 40% before the decline is over. On the right in cyan, I've marked percentage declines from last nights close. An additional 20% decline from HERE is not out of the question.

Click to enlarge, sorry for the information overload.

The MCO as of last night could go either way.

Wednesday, September 24, 2008

The Mad as Hell Campaign

"I'm mad as hell and I'm not going to take it any more."

Do current financial events leave you feeling powerless?

Email the "I'm mad as hell" message to your senator.
You can find your senator here. http://www.senate.gov/general/contact_information/senators_cfm.cfm

Select your state from the left pop-up menu.

There will be a link to contact information for each senator, go there and find the email form.
Fill out the form and put the following line into the message box.

I'm mad as hell and I'm not going to take it any more.

Do it. Then, pass this message on to a friend.

Create a USA Sovereign Wealth Fund

An open letter to Congress.

We have seen the enemy and he is us. A couple of years ago it was clear to nearly everyone that the real estate markets were becoming overpriced for most Americans.

Well clear to nearly everyone except for the mortgage lenders who in a greed driven frenzy continued to push new loans as if the money they were lending wasn't theirs. It wasn't.

In June of 2006 Henry Paulson became Treasury Secretary
"The Secretary of the Treasury is the principal economic advisor to the President and plays a critical role in policy-making by bringing an economic and government financial policy perspective to issues facing the government. The Secretary is responsible for formulating and recommending domestic and international financial, economic, and tax policy, participating in the formulation of broad fiscal policies that have general significance for the economy, and managing the public debt. The Secretary oversees the activities of the Department in carrying out its major law enforcement responsibilities;..."
Mr. Paulson had been an employee for Goldman Sachs until becoming Treasury Secretary. He is the consummate insider and assumed his responsibilities right at the time the real estate markets were reaching their peak.

It is highly unlikely Mr. Paulson was unaware of the extent of the risks to the US financial system presented by a real estate market at full boil, yet he did nothing.

Fast forward to September 2008, Mr. Paulson is now about as believable as his boss, the president. Throughout the development of the current fiscal crisis, Paulson has dragged his feet, avoiding any proactive response which might mitigate the growing problem.

The question I ask is why? Either he didn't anticipate the developing severity of the financial problem, or he didn't want to take an action which would be opposed by his cronies in the banking sector.

Whatever the answer, neither response gives me much confidence to "trust him" now for a fix to the problem.

What the Treasury Secretary is asking for is the power to take over the banks bad loans, no questions asked, "trust me"

Well I don't trust him in this rush to judgment for a solution to a problem which is both extremely complex technically and fundamentally simple.

At the core of the technical problems are the derivative instruments which by public acclamation, "nobody seems to understand". This is nothing more than misdirection, something the current administration is very good at. These are complex instruments, if a lending institution doesn't fully understand their implied risks they should have avoided using them.

The fundamental problem is simple, the lending institutions made bad loans on assets which were overvalued relative to what the borrower could pay. By making these unsound loans, the lenders acted as agents which helped cause the price inflation in the real estate market.

The Congress of the United States should not write a blank check for $700 Billion dollars from taxpayer funds.

Congress should take action like it is a USA Sovereign Wealth Fund
The problems can be solved by investing in this country but with the goal of making returns in excess of US Treasury Debt.

The failing lending institutions should be the ones who pay, their mistakes were fundamentally simple, so the solution should be fundamentally simple. It is time the lending institutions receive a referesher course in Capitalism.

1. The bad loans should be assigned an intrinsic value (IV) and a premium.
2. The IV + the premium = the face value, 100% of the loan value.
3. The IV = the marked to the market value at the time of the bailout.

The Treasury should negotiate in behalf of the US Taxpayers to purchase the loans for less than the face value, preferably the presently established market value.

If the negotiated price is greater than the market value, the Treasury should be issued preferred stock or debt from the lending institution at rates similar to those recieved layely by the Sovereign Wealth Funds.

The Treasury should seek board seats on the lending institution which receive financing and use their board votes to oversee executive payments and bonuses.

If all this seems onerous to the lending institutions too bad, if they do not want the financial help let them go bankrupt. No pain, no gain.

The USA Sovereign Wealth Fund should seek to make a profit for the American Taxpayer.

Further reading:
Experts See a Need for Punitive Action in Bailout by Peter Goodman for the NY Times.
Cash for Trash by Paul Krugman for the NY Times.

Text of the $700 Billion Dollar Bailout Bill

The Discussion Draft of the Bailout Bill Before Congress.
From the pdf dated September 22, 2008, obviously this will be changing as time progresses. Interested readers can keep up with the changes as they are posted on Senator Dodds website Senator Dodd, Chairman of the Banking Committee
The following is from the full draft PDF

Wed., Sept.24, 2008 - I edited out the full text which is available at the links above or here at the NY Times in a shorter more readable form.

Tuesday, September 23, 2008

I Feel Your Pain

Washington is saying, "Give me your bucks, they stop here, honest, trust me."

The rescue may save the banks, but thousands of Baby Boomers are watching their IRA's deflate like an old balloon. Wall street is awash in fear, prices will go lower.

I marked some fibonacci retracements on the daily SPX chart. The measures in yellow start at the 1974 low to the recent highs. The measures in cyan start at the 1994 low, the one prior to the bull run. The white measures to the right are taken from the start of the bull market in 2003 to its high in 2007.

Finally, I've included a measure in light-orange (with dots) that is loosely taken for the complex topping pattern made by the SPX. Everything seems to be pointing at the 1000 level on the SPX cash. The 1000 level is a round number which presents a psychological pull on price behavior. With participant psychology as negative as it presently is, 1000 seems like the first line in the sand with any chance of halting the market's current decline.

As noted the daily MACD still has failed to cross the signal line. I suspect it will within a few days but unfortunately any rally will be short lived.

Sunday, September 21, 2008

Whata Week

Here are the final charts for last week. As anticipated the MCO bounced from the extreme oversold levels, aided by a little well placed prodding by the government. This rally off the MCO spike will probably be followed by a pullback before moving higher. Regardless of how the rally develops, I do not believe the final bottom has been made.

McClellan Oscillator - Click to enlarge.

These are extraordinary times in the markets and we must remember that the news (like a 700 Billion dollar injection) will alter the technical indicators. On the daily chart we were starting to see positive divergences in some of the indicators and while this was potentially bullish the fundamental picture has now changed significantly.

I believe the market was anticipating that the problems in the financial sector would be contained AND that the other sectors of the economy, with the exception of housing, would hold their own. As a result the markets were setting up for a rally.

The current problem now is uncertainty caused by the extent of the failure in the financial system. Even though the government is preparing to bail out the institutions which caused the problem in the first place, public confidence is severely shaken. As a result one can expect that the public will become more cautious with their spending and avoid any risky appearing investment. This leads me to believe that we will see continued selling in the financial markets as the investing public moves their retirement funds out of stocks.

With occasional rallies, I expect the markets to continue to trend lower through the end of the year. At that point we should be able to assess the affects of the FED bailout plan and gauge the market activity using the technical indicators.

SPX.X Daily - Click to enlarge.

SPX.X Weekly - Click to enlarge.

Saturday, September 20, 2008

What's happening here?

A repost from another venue...

The immediate problem was liquidity.

Commercial paper is used by banks and corporations to finance the day to day business, to purchase inventory or to manage working capital. [wiki]

The size of the commercial paper market has collapsed 20% over the last 15 months. In addition, CP rates (30d A2/P2 nonfin) which had been stable near 3% spiked to 5%. The system froze up. Access to working capital for non-financial businesses became nearly impossible and very expensive. The whole economy was threatening to grind to a halt. This is what panicked the FED

The capital provided to offset the current liquidity crisis in non-inflationary. It is short-term capital used to finance the day to day operation of businesses, like paying the employees every Friday. Since the economy is contracting, it is not stimulating demand to the point where it can cause prices to rise.


... the still overvalued assets that are now going to be propped up the feds instead of having the transparency of marked to market assets.

Curiously, if in fact, the mark to the market provision was correctly applied we would have less of a problem.

The problem is extremely complicated, but I will venture to say that the majority of the loans held by the Fannies are good (performing), that they will be paid off over the life of the loan.

The problem lies with the non performing loans, both for the Fannies and for those held within CDO's (mortgage bundles). When loans become non-performing, they reduce the value of the CDO's (bundle, or portfolio) and the ratings firms (Moodys, S&P etc) downgrade the instruments making borrowing money on them more expensive. (higher risk => higher rates). When the real estate market drops further, the ratings agencies again downgrade these instruments.

The problem is that the downgrades are made based on the initial collateral value of the instruments at 100%. Initially this is correct because the risk adjusted returns are based on the collateral being valued at 100%. At this point the holder may take the paper loss by marking it to the market, carrying it on the books as only 70% of the original value.

However, assuming another non-performing event occurs or the collateral value again declines, the instrument is again downgraded by the ratings agencies. This calculation is based upon the original face value (100%) of the instrument because at the present there is no easy way to evaluate bundled securities. As a result the security which actually will have a positive return when its collateral value is calculated at 70% is incorrectly downgraded making it again harder to finance the loan.

Of course, at the root of the problem is leverage, the continuing need to borrow short term money to finance the longer term loans, and somewhere within this web of finance, a downward spiral occurred making it impossible for the lenders to raise enough capital to either reduce leverage or finance the loans, Poof.

Over the last year, all the parties have been trying to unwind this mess. My hunch is that even if real estate prices are only half way to their nadir, that most of the fire sale discounted CDO's are going to produce fabulous returns for those who scooped them up. This should include the US government.

Without a doubt the lack of oversight by the government regulators has contributed to this crisis. It points to Greenspan's philosophical failure to realize that greed and fear distort the functioning of a free market.

So we find ourselves gripped in fear, the capital markets have frozen up and without intervention, a problem which is primarily one of a small sector of the economy would have spiraled into a severe recession. People and businesses who had nothing to do with the housing industry would be dragged into the abyss of a financial collapse.

Friday, September 19, 2008

Spy vs. Spy

Manipulator vs. manipulator or the fix is in.

"The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," said SEC Chairman Christopher Cox in a statement.

"The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress."

Given the oversold conditions noted in the previous post a whale of a rebound rally is in progress. Though spectacular, it is only resolving the oversold condition of the last week and will eventually fail and attempt to retest the lows.

My immediate price objectives of 1150 in the SPX were made intraday yesterday. What occurs over the short term remains to be seen. Historically, this type of rebound after a spike reversal like yesterday's are followed by a sag after 3-10 days to retest the low.

However this is not always the case and one shouldn not discount the affects the FED and SEC intervention will have. The markets were very oversold and it's quite possible we could be starting a rally like the one which began in August 2007.

Quote source is MarketWatch

Wednesday, September 17, 2008

Buddy can you spare a dime.

The markets are crashing. Any bounce will be followed by more selling. I don't think the problem is the short sellers. The public has lost confidence in the financial markets and the government which regulates them. This is a wholesale liquidation of equities which has to run its course.

The talking heads are out in force, asking the experts "Is it time to buy?" And, of course, the so called experts, an "economist" who has never seen a bear market, starts talking mathematical mumbo-jumbo which sounds like "well maybe" Now before I became an artist I studied math, I kinda understand this "economist" mumbo-jumbo, and well....

In the normal course of oscillating markets we can talk about "overbought" and "oversold" and use them as points of entry and exit. Statistical and other technical indicators work most of the time, and that's why we can use them. However, every once in awhile things get really out of whack and the general rules do not work and that is where we are now.

In the prior posts I spoke about threshold levels of the McClellan Oscillator's 10% Index. The 10% index is a 10% exponential average of the NYSE Advances minus the Declines. It measures market breadth (how many stocks are going up or down) and doesn't know anything about the prices.

The blue squiggle, the second indicator from the bottom is the 10% Index. It means this: If the 10% index is +100, it means that over the last 20 days (roughly) 100 more stocks were up than were down. That would generally indicate a rising market, on average over the period. Conversely if the 10% index was -100, it would indicate the opposite and that the trend was weak.

In the chart above you can see the 10% index is -635. This means that over the last 20 days, with a heavier emphasis on the more recent data, that there have been 635 more stocks down than up each day. This is very negative behavior and most likely your stocks are going down.

In the prior posts I have spoken about the -500 threshold level for the 10% index. First off -500 isn't a hard number, it's a bit approximate but I need something to quantify the issue. I marked each time the 10% went below -500 in red and drew an arrow to the required retest which follows. In all cases over the last year, not only has the retest failed, but each time the 10% Index also went into the red again (see chart). This is extraordinarily weak market behavior and will not end just because the market is "oversold".

This is just an update of the daily chart. The regular technical indicators are a minimum of 4-5 days away from making a turn higher. (The 65 min chart indicators mentioned in last night post, aborted in the first 5 minutes of trading) Since it is Wednesday, with only two trading days left this week and with September options expiring on Friday, there is little chance of more than a one day bounce here. In addition, the expiration will close out any hedge protection using September options. Players can roll over into the next strike which could put additional downward pressure on the markets Monday and Tuesday.

Meltdown Alert

The possibility for a full fledged financial meltdown exists. It appears that the guiding forces in the Bush adminstration have lost control of the US financial markets.

The potential for a "market holiday" should not be discounted.

Any optimism in yesterdays post has been nullified by todays decline. The conditions required to signal a durable rebound failed, The A-D difference has blown out the 10% below my threshold.

At 12:30 on Wednesday the raw numbers are:
adv 196
dec 3034
A-D diff -2838 <== needs to be above -1400 to keep the 10% above -500

the 10% -635.52 <== whoops
the 5% -371.80
the MCO -263.72 <== bounce level oversold

It is unlikely these conditions will change substantially before todays close. The indicators are oversold enough to cause a snap back rally but any bounce higher is just relieving the oversold condition and not the start of a new leg higher.

Any forthcoming rally will fail and require a retest of the lows later, probably closer to the end of the year than in the following few weeks.

Tuesday, September 16, 2008

Turn Around Tuesday? - MCO Update

The gloom and doom is so thick you can cut it with a knife. Frankly the fundamentals are as foul as I can ever recall but maybe enough is enough, for a little while at least. If the indexes don't collapse tomorrow (still a possibility) then todays low is looking like it marks an important reversal point. Yes, prices will possibly retest today's lows, maybe even exceed them, but if the the positive divergences remain, today was a turning point. (see the chart notes) Of course, if not, then it's not.

Annotated chart - click to enlarge

Initially it is best to consider any reversal here as just the start of a
trading rally. While the 65 min indicators (MACD, STO, RSI etc) reversed
yesterday, the dailies are still negative and need to be watched closely.
Note the steadily increasing volume on each of the major lows over the last year. The 10% component of the MCO made its lowest reading at the July 15 low, I think this was the capitulation point, making the current low the retest.

If breadth can hold up over the next few weeks, during what will probably
be a backing and filling period, then we can be more optimistic over the
future direction of the market.

The fact that the 10% index didn't go any lower really surprised me,
especially with the current market conditions and news. I actually didn't
think it would happen until late yesterday afternoon as I was running the
numbers. It's still not a done deal, that will take more time.

The McClellan Oscillator is the first indicator I ever used, I hand charted
it for many years (including intraday during the 87 crash) so I really
understand how the numbers work. The -500 level I've been referring to was
once -200, it has been creeping upward as the number of issues increased.
So the exact number isn't important, it is relative, but if you look at my
MCO chart over the last year, all the deep plunges have turned the market but
failed to produce a bottom.

So, if yesterdays low in the 10% index holds up it would be very encouraging.
Second, this can produce a good rally which later breaks down with the
10% index going below -500 again, that wouldn't be so good.

Monday, September 15, 2008

Crunch Time - MCO Update

Well, tomorrow's going to be a critical day, everything's marked on the chart:

Click to enlarge

Sunday, September 14, 2008

SPX weekly Cycles - 08/09/12

I find the cycles interactively with a piece of software I wrote that allows me to draw them on the chart, and fit them visually by eye. I use the Yahoo data set going back to 1987 and try to find the best match visually.

In the chart I've posted below there seems to be a dominant weekly cycle period of just over 13 weeks (13.016), double this is 26.032 weeks which is close to what Tim calculated (26.286).

The nominal 26 week hits 3 weeks from now

I also found a good fit using the 5X multiple, or 65.016 weeks. This should hit in the first week of January 2009. (Tax loss selling)

The span of 57.75 weeks is a bit rougher in the overall match accuracy but hits this week and is symmetric with the July 2006 - Aug 2007 lows.

Also marked on this chart are the retrace levels for the entire move since the 2002 low. With the markets under stress, a 50% retrace to 1172 seems highly likely with a very good chance the 1150 area will be penetrated as well.

This is an ugly market we are still on a crash watch.

Click to enlarge

Thursday, September 11, 2008

Spx Cycles 9/11/08

A simple update to the post on Sept-9, the turn came half way through the range (Blue). The Cycles were redrawn since the last chart but before todays trading.

Wednesday, September 10, 2008

Gold Stocks - Close to the buy point?

Could be that this sector is setting up for a huge run higher.

Tuesday, September 9, 2008

Turnaround Tuesday

Oops, wrong direction.
The 65 minute chart breakdown will take a minimum of a couple of days (about 12 bars) to stabilize and turn.
The cycle bars are just extensions of the ones from last May, they look like they are in the ballpark.

Generally closing below the BB's is good for a bounce, except when it's the start of a crash. I do not discount a crash (10% decline) here. The markets are under extreme pressure, like a hedge fund is liquidating OR the Volatility Hedge Funds are pushing prices around as we go into options expiry next week. Whatever the cause, the selling today felt panicky, the pressure on the downside was relentless.

Now, I would really like to see a bounce but the MCO is at -125 which is hardly oversold enough to start a runaway on the upside. So far the MCO metrics are holding up and potentially we could see a positive divergence develop between price and the indicators. So far I don't think it's going to happen over the next couple of weeks and any rally will fail taking prices to new lows.

While I generally pay little attention to the fundamentals, I do think it is difficult to understate the difficulties present in the current economy. I also believe that the Fed (G5, M9 and whatever spooks there are left) will do whatever it takes to try and save the economy.

FIRST IN LINE to be BILLED for this rescue is the common shareholder, the FED has essentially said that the Common shareholders of FNM and FRE are screwed, just like the shareholders of Bear Sterns were. I read this to indicate that any other financial institution which falls down the debt rat-hole will suffer the same fate. This uncertainty is rubbing off on other equity issues in a mad rush to convert assets to cash, or at least protect profits and equity.

I've been watching the markets since the late 70's and of all the spooky declining cycles I have seen this is one of the worst. Generally speaking I have a bullish mindset but the current market feels like an exception to the general technical rules in the sense that some of the events are "out of limit." This means that one can be trapped by assuming the charts will behave like they have before, and this is true, IF you have enough data to see what CAN happen because it did one before, 25 or 30 years ago.

On the other hand, when it does bottom, whoop-de-doo!

Monday, September 8, 2008

Fannie Pack Monday

Well, it was exciting day but not a whole lot changed except for some momentary relief from the banking panic. If one is thinking about bottom fishing in the financial sector, the Fed has made it clear that the majority of the risk is being carried by the common shareholders. If something bad happens the common shareholders will be thrown to the wolves.

On the more positive side, there is some evidence that the general market decline is starting to slow. I still feel that todays upside activity was not the start of a new leg up and that tax loss selling will put further pressure on the markets as we near years end.

Saturday, September 6, 2008

SPX Cycles

The chart below is a SPX weekly plot with a 65 week cycle starting from the October 19, 1987 crash low. I've shifted it 1 bar to the right which realigns it to the 2007 high and adjusts for the 911 truncated trading week. The span of 65 weeks is 5x13 weeks, where 13 weeks is 1/4 of a year. The subdivisions of the 65 week span (lighter color) are the common fibonacci divisions of 65 weeks (0.09, 0.146, 0.236, 0.382, 0.500, 0.618 etc)

The October 2002 low was 780 weeks from the Oct-87 low (65*12 repetitions) and the following October 2007 high occurred at the 65*16 repetition bar (1040 weeks) The next 65 week count is 17 (1105 weeks) and occurs the first week of January in 2009. Ideally this would be a low and preferably a secondary low after the low I expect the first week of November.

I seriously doubt that any rallies which occur prior to the election will have significant force to do much more than work off oversold conditions. There is a considerable amount of fear in the markets and we are entering the tax loss selling period which should put additional pressure on just about all the issues trading on the major exchanges. In case you haven't noticed, hardly any stocks are in uptrends.

Caution is warranted.

S&P 500 Weekly

S&P 500 Daily

Thursday, September 4, 2008

Fall la la

This market is in trouble and looks like it is starting to freefall lower.

The MCO, 10% components and SUM index shifted to the sell side today.

The daily SPX MACD is breaking down from the neutral area, and the 60 min MACD show nasty downside momentum as well.

Indexes closed below the lower 20 day 2stdev Bollinger band, the indexes need to bounce tomorrow or a crash lies ahead.
The downside looks like it could be about 70 to 100 SPX points lower from here.

Smells like forced liquidation, no need to be a hero.