Again, this bottom of our range is S&P 850 and the whole investing world now awaits to see what happens when we get there. In a "relatively healthy" market you'd expect a cursory bounce at least on the first thrusts down to 850 - but this market is far from healthy. Further, this is not a double bottom - we are now making a triple bottom. For long time readers you know our calls on triple bottoms - they almost always break to the downside. Each one over the past year has not held and led to further downside. Maybe this will be the first time it won't but until a pattern breaks you keep playing it. Hence, I feel quite resigned that we are going to be testing 2002 lows on the S&P sometime in the next few weeks/months (days?!) This would take us to S&P 760s/770s. That would be 10% down from S&P 850.
The only thing that gives me pause on this scenario is that it seems too obvious - and when things are this obvious, the market has a way of doing the opposite. But if you turned this chart upside down it would look like a bull market breakout ready to test all time highs - so you have to simply respect the fact we can make a very large move to the downside. There simply appears to be a buyers strike - that trade I attempted for a whole 20 minutes yesterday in CME Group represented what I think must be happening across the Street. Why bother with anything on the long side when fundamentals are not respected and your time line has to be 2-48 hours at most on the long side to be a success? More important where are the buyers? Many hedge funds have moved to high cash and the value mutual funds have lost 40-50% in the past year - they are in no position to make a sustained buy. Individual companies mostly are not doing buybacks because they see what happens to their brethren who have low cash on their balance sheet. So why risk using up cash on buybacks when balance sheet strength is job #1? Further, a lot of individual stocks - as we mentioned yesterday - are already back to October lows; if those lows don't hold that telegraphs another large move down in each name. So we've potentially got a big problem coming.
The news flow continues to be horrific - Best Buy (BBY) was the latest to warn today; more important than the numbers if the commentary from management. It paints a very "historical" context - as we've seen in all parts of our economy. We said last year 2008 would be the worst year in auto sales in 20 years - and the worst Christmas in a long time. Both these look like home run calls. Whatever confidence Americans had left, Paulson did a great job of shattering so he could get $700B to bail out his friends.... I mean save the financial system.
- Best Buy Co. on Wednesday sharply cut its fiscal 2009 earnings outlook below analyst estimates amid what the electronics retailer called the toughest retail environment it has ever seen.
- Best Buy's same-store sales dropped 7.6 percent in October. Chief Executive Brad Anderson said "seismic" changes in consumer behavior have created "the most difficult climate" ever seen by the company.
- "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year," Anderson said in a statement.
- Best Buy said that same-store sales between November and February may drop by 5 percent to 15 percent, resulting in an annual same-store sales decline of 1 percent to 8 percent.
- The overall retail industry is facing what many observers expect to be the weakest holiday season in decades as consumers scale back on spending amid a weak labor market and tighter credit. (bingo - now people are getting it)
Back to the foxhole.
15 comments:
I agree with he re-test idea. It seems inevitable.
Bear market bottoms never end with capitulation history shows it. We can't capitulate because weak hands are out already.
But I think commodities have a chance of re-igniting because of weak dollar (not strong economy)
I hear there is a Bretton Woods-like meeting this saturday and there's speculation of new reserve currency....and also a possibility of COMEX default (rumors) because spot gold is trading so much higher than futures so when people want delivery they may not meet it so they may run into difficulty. I just hear it from so many different sources and it makes sense because there IS a shortage of gold. And it wouldn't surprise me if the PPT or other fraudulent organization is pushing down gold because as so as gold spikes people will dump the dollar fast.
again the defaulting of COMEX i heard from many sources but this guy does a good job explaining the common thesis
http://www.gold-eagle.com/editorials_08/willie103008.html
TM: I would rather be a buyer than a seller here; a weekly close below the current range is not good for the bulls and implies too much risk; in other words, going back historically and looking at breaks below support levels while investor sentiment has been bearish has generally led to accelerated moves lower during bear markets and tended to be fakeouts during bull markets. So if you look at the SP500 and the 1972 to 1981 period, there were 6 instances where prices broke below support (while sentiment was extremely bearish); the average loss to the lows was about 14% and this happened over 7 weeks. During the bull market period from 1982 to 1998, there were 6 instances with the average loss to the low (i.e., support minus low) was about 4% and this took about 3 weeks to accomplish. In the last decade, there have been two times where support has fallen; one was in May, 2002 and the S&P500 lost 27% over 8 weeks and the other was May 2006 (which really was a fakeout). The bottom line: breaks below support while there is bearish sentiment is too risky and can lead to an accelerated move lower.
So why be a buyer? I guess I will know quicly if I am wrong and my risk level is well defined.
Bill the black helicopters are going to be coming for you if you keep this up. What weak dollar? It's roaring :)
Actually gold is doing ok in every currency but dollars because the dollar is so (ahem) strong
I am still boggled by it but what does it say for the world when the US is the strongest safest economy? hah
Guy you confused me - everything you wrote in your supporting thesis seemed to be to be very bearish when I read it. Maybe I misread it. And then you go long :)
ANy trade is fine with a defined stop and exit point. All I am saying is the upside to me seems so fleeting nowadays you have to be so quick it's impossible except for individuals who are focusing on 2-3 stocks/ETFs.
I am expecting some defense at S&P 850 and then we'll take it from here. If we close below on end of day basis I just cannot get positive. But if history is of any use anymore we should at least put in a cursory bounce of that first drop to 850.
As Paulson spoke, the SP500 kept dropping. Now that he's finished, we're only 18 points from the 850 target. Maybe we could get Dubya and Bernanke to trot out and talk a bit.... Get it over with...
jegan
When China introduces the $500B stimuli, won't they redeem their U.S. treasury bonds? It's not like their trillion dollar reserve is just sitting in cash. I don't think the market reacted negatively enough to that announcement.
Everytime leadership talks, people see the emporer is more and more naked
They are guessing and making it up as they go along.
Now that the first $250B is used up, they have to ask Congress for the next $350B
Can you imagine the fireworks that are going to go on based on what they did with the first $250B after selling it as A and doing B? I have a damning article tomorrow on some tax implications they snuck into the code as well. Awful. So we're going to be back to watching the incompetent (Congress) grill the devious (Paulson) for a few more weeks.
By the way.. Did you see that Paulson now wants to bail out credit card issuers!?!.... The same people that hand out cards to 17 year old college kids with no employment. I still have a card with a $32,000.00 limit!?! I never asked for it, the limit just kept creeping up. I don't accept this bailout at all. This is just too far from the 'housing problem which caused our economy to collapse.'
jegan
dj, I think they have $2T+ in reserves? Maybe more ... how much of that is in Treasuries is not knoweable BUT we just had a 3 year auction and 10 year that is flying off the shelves - people are seeing it as the safest thing out there... so for now the US can print as much as they want and there appear to be willing buyers.
I think "one day" that will change but the timetable on that is unknoweable - actually wrote a piece on that point last night and will have it up late this afternoon!
If the globe goes to say a 2 year recession I am curious how much of a surplus China will have though say in 18 months. Granted the people have a monster savings rate but the govt surplus is based on exports which should be falling off a cliff. We'll see!
Jegan
No, I don't have time now - will look at it tonight. But are you really surprised? With what AMEX did monday?
Why can't AMEX fail? Seriously. JP MOrgan would take over the customers or whomever.
We are turning into Japan before our eyes. zombie entities everywhere now.
p.s. when you say you won't accept this bailout I need to remind you that Paulson is the President, not you ;) In a totalirian state the people really don't have much say ;) The nanny state will say "we know better than you peons, let us fix this thing and just muzzle yourself"
We're on the way! Just imagine if the election was in 2010 or something or this happened in 2006. We'd have years of these guys running like chickens with heads cut off. Now unfortunately I think a Democratic view would be to be even more protective and not let anyone fail - we'll see if anything changes.
TM: sorry for the confusion; please let me clarify; the current market environment is defined as one in which investor sentiment is bearish; the consolidation of the past 4 weeks is pretty well defined and so are the support levels. So the question becomes: what happens to prices if support levels are broken during market environments where investor sentiment is bearish? As it turns out, it depends upon the investing era. In the last half of the last secular bear (1966 to 1982), breaks of support generally led to much lower prices. From 1982 to 1998 (bull market era), breaks of support were fakeouts. And in 2002, a break of support was disastrous but in 2006 it worked out ok.
So why go long? In the absence of predicting price movements (which I cannot do), I at least know where I am willing to cut my losses if I am wrong. So I am willing to buy at these levels because I know when I will be wrong. A break below support in a bear market is generally a bad sign; it hasn't happened yet but if it does, it is time to pay attention to increasing risk.
I hope that explains it.
got it, thanks. I think we can clearly assume this is a secular bear (one could make the arguement it has been since 2000 in fact or if not, 2003-2007 was a bull) Which means your 2006 parallel would hold well to the 82-98 bull
Anyhow we shall soon see - only 12 points away from 850.
TM.. IMHO, AMX is suffering (apparently) in the same way that GS did when they announced that they were going to become a bank. people don't know what to expect from them when they convert. In this market, confusion is a death knell.
Re: Your expectation that the market cannot test for a third time, i agree with 'guy'... If we sink below the next test and stay, then I will cut my CGMFX and ADVDX loose until we reach a real bottom. Too bad. I really did want to maintain a core holding position to trade around. Just doesn't seem to be in the cards.
On that happy note, as I've stated before,my new Muse is Louise Yamada. She says that if we don;t hold here, we can expect the DJI's next support to be around 6000, She feels that the present market is a carbon copy of 1929. I have overlayed the 1929 and 2008 charts and have to agree. (On a more positive note, we don't seem to have had our expected 30% rebound..) They're carbon copies. Along the same vein is a nice short technical article by Darrell Guppy from Australia. It can be read here, and it's quite an eye opener.
I think we should encourage Websters to include: Em-poor-er
as a new word. I'm sure we can all qualify...
Empoorer (noun) A person or entity that thought he/she was fully clothed only to find that all his/her worldly possessions have been given to AIG and other profligate organizations in order they might hold lavish parties celebrating their latest excesses, leaving the 'Empoorer' without clothes, retirement or future.
jegan
http://www.cnbc.com/id/27653888?__source=RSS*blog*&par=RSS
"Re: Your expectation that the market cannot test for a third time"
huh?
I'd reread the post
I said triple bottoms have rarely held and hence it's probable this one breaks like all the others. Not sure how that is converted to "the market cannot test for a third time"
My only comment is this seems SO obvious right now it almost makes you want to take the other side.
Anyhow, the main point is everyone and their mother is watching these levels and if penetrated will create a wave of stop loss orders across the world. Which might lead to an intermediate bottom :)
Once again: a break of support during a bear market has a high likelihood of leading to much lower prices over a very short time period; but the counter to this argument is that a break below can always be a fakeout (as TM states (knock out stops and then reverse higher). What we know is this: 1) this level is "the line in the sand" 2) traders need to be prepared for both scenarios so if your stops are hit at lower prices you may find yourself buying at higher prices a week later.
My technician informed me that 860 was key..so we will test new lows and probably make new lows. He made out like a bandit in the last week so his T/a is obviously good now that volatility is not as bad as 3 weeks ago
I happen to agree. 885 was another key and we destroyed both in one day....that is bearish
PPT loses this one ;)
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