Tuesday, March 11, 2008

State of the Market - 3/11/08

Early this morning, pre-market futures were up a modest amount and the market looked poised to open modestly higher after a few days of above-average losses. That changed around 8:30 or so, when the Fed stepped in again and announced a new plan to add liquidity to the struggling credit markets. Futures immediately skyrocketed and the market action followed, with the indexes gapping higher close to 2%, most likely due to a lot of short covering. The gaps were faded throughout the morning, although the pullbacks looked bullish to me on 5 minute charts. Around 11:10, the indexes broke below some intraday support, rallied back to those levels, and then began to breakdown in earnest. However, the bears couldn’t push things lower than yesterday’s high, and another rally started around 12:30, which brought the indexes off their lows for the day. This rally certainly stuck as stocks moved higher throughout the afternoon and finished with huge gains – over 3.5% on the Dow and S&P, and almost a 4% gain on the Nasdaq. Certainly a good day for bulls and a bad day for bears like me.

Technically, the markets closed over their 9 day moving average, so maybe this bounce has more upside to it. It probably does, especially with the Fed decision next week. There is still a lot of overhead resistance to deal with, so it is not like today is just a free pass to buy anything you want to buy. It is important to remember that bear markets are where you normally see the biggest one-day percentage gains due to short covering, and we certainly saw a big gain today. It also important to remember that we never did have the big washout that leads to true, powerful bottoms. This makes me skeptical about the chances of any rally here. I will watch to see if any nice looking longs form and we get a follow-through day, but not do anything in the meantime. If we get new leadership emerge here along with a nice follow-through day, I will change my tune. Until those things happen, I have to remain bearish.

S&P 500
Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Now for my rant – on days like today, I need to just so I can get some things off my chest and feel marginally better. I hate harping on this, because it really doesn’t do any good, but today was another example of just how much the government is involved with the stock markets. The idea of free markets is just an idea anymore in my opinion. We’ll see if today’s action works or does nothing other than prevent the inevitable free fall for a few more weeks. That seems to be the Fed’s outlook – let’s just do what we can to put this crisis off as long as we can and worry about tomorrow when it comes. I wonder if the Fed is getting to the point where it really doesn’t have that much ammunition left in its arsenal. Although I am trying to educate myself each day about this current crisis, I don’t know enough to understand all of the details. However, by all accounts, today’s move was a very big deal – a worldwide coordinated effort. They also have some rate cuts still to use. What if none of this works? What if the market still heads lower after this Fed rally? How much credibility does the Fed really have any more? It seems like they just keep throwing stuff at the wall and seeing if something sticks. Things will get real ugly if after all of this intervention, the credit market still shows no improvement. We shall see. Based on today, it seems like there are still traders out there that have confidence in these guys.

If you are on the wrong side of an open like today, it sucks. I got a nice big pit in my stomach as soon as I saw the futures jump. It sucks to be on the “correct” side of the market, to be positioned so well, but still not make much money, and the Fed’s interference is doing that for many shorts like me. Not much I can do about it however – I guess one of the many reasons shorting is difficult is because you are always fighting against the natural bias of the market to go higher. I think it kind of stinks for all of us, longs or shorts, because I think the move today does nothing but add confusion to the overall market. Going short here or taking longs here, after today’s action, is nothing more than gambling. Was this just short-covering? Was this the start of a sustained move higher? It is really hard to say what is going to happen the rest of this week, especially with another Fed meeting coming up next week. This is where the idea of a follow-through day comes back into play – so as to keep you from getting pulled in by strong, bear-market, short-covering rallies. I do know yet know which of the two aforementioned outcomes will come from today. I do know there are still very few nice- looking charts that I see, and I do know that this week, damage was done to the only groups left in this market that were doing well, as I mentioned yesterday. We will have to wait a few more days to get some confirmation, and in this market, I think confirmation is quite important. I am still expecting this to be another short-term rally that will soon die out, but who knows the lengths the Fed will go to keep this market up, so I wouldn’t be surprised at anything right now.

I thought hard about covering my shorts this morning but I decided to stick to my plan and wait for my stops to be hit if necessary. Some were hit in the afternoon – I ended up with a 3% gain in MW, a 2.5% gain in CMI, and pretty much broke even with WFR. I ended up going from being up almost 10% in SMN to losing almost 4%. Not too much fun there. After having really nice gains from last week, my account is now only a little higher than it was two weeks ago. Today definitely sucks for shorts, but looking back, I don’t know if there was much I could have done differently. I had no way of knowing that the Fed would step in again – maybe I should have expected it, since the market was looking weak. It is pretty much becoming clockwork now. Maybe I could have covered, but I didn’t see a need to last night. We weren’t at extremes yet. Actually, we never got there and that adds to my doubt about any bounce here. I wish I could at least take a lesson from today, but I don’t know that there is one, other than the Fed has a big hand in this market and is making every effort to prop it up, and that you can never control outside forces and what they can do to the market. Perhaps I got greedy – it is something I will reflect on the next few days. I just have to accept today and move on to fight another battle, so to say.

I will do my scans tonight and see if my attitude changes, but I remain bearish as of now, even after being stopped out of many shorts and having my head handed to me today by the bulls. Many of the stocks I pointed out last night as breaking down (CF, MTL, AKS, MOS, POT) all rallied on weaker volume today – not what you want to see on a ‘bullish rally”. Out of IBD’s “Stocks on the Move” list, I saw a total of two that looked decent. So we still have a lot of work to do if this is going to be anything more than a short-covering rally. Probably best to just sit this out for a few days and see where we go, especially with the Fed decision next week. That is at least what I plan on doing. Good luck tomorrow.

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