Wednesday, March 12, 2008

State of the Market - 3/12/08

A down day today in the markets, as an early attempt to build on yesterday’s huge gains ended right around lunch, and the indexes sold off for the rest of the session, finishing at their lows. As it is, the losses were not that large, especially compared to yesterday’s gains, so I don’t think it is a big deal. Volume was lower as well. Technically, all indexes reversed right at their 20 day moving average, which has been pretty consistent resistance the past month or so. The reversal day today does looks bearish, but I don’t necessarily think it will be a big deal. Actually, like I said yesterday, I don’t expect any of the next few days to be a big deal because of the Fed decision coming up.

Right now, after thinking about things for a night, I wouldn’t be surprised for us to continue to rally into next week’s Fed meeting, even after today’s action. Traders are still expecting at least a 50 or 75 point cut, and why wouldn’t they? The Fed has pretty much given in to the whims of Wall Street so far, and seem to show no concern about the falling dollar or rising inflation. So with that carrot dangling in front of the markets, a rally up to the 50 day moving average or even a little past it is a very good possibility in my opinion. However, if we do melt-up to the decision, I will be staying out of the market until after the cut, when I think there is a pretty good chance of another prime shorting opportunity occurring. I hate to be negative, but there are many reasons I feel this way:

  • No meaningful leadership developing other than commodities
  • Recent rallies have only begun because of rumors or Fed intervention, not good news or good earnings.
  • Lack of strong follow-through day – one has already failed. Perhaps this will happen soon.
  • Economic evidence all points to an economy that is slowing, not strengthening.
  • Heavy-volume breakdowns on former leaders followed by weak volume rallies.
  • Lack of extreme levels of pessimism/fear – the VIX, Investors Intelligence, Market Monitor – none hit extreme levels on this downtrend.
  • Overall trend is still down and has been since October, 2007.

The most important of these is the lack of charts. I use Telechart and their Balance of Power indicator to judge whether a chart is “nice” or not. Lots of green BOP on a chart shows systematic accumulation, yellow shows neither accumulation or distribution, and red BOP shows systematic selling. Here is a chart from Summer of 2007 that shows perfectly the power of BOP in predicting strong price moves, along with an example of the type of chart I am currently seeing:

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Right now, the charts I see forming decent technical patterns are mostly yellow, some red, and very few green, and again, are mostly in the commodity sector. Volume patterns continue to be backward on most charts I see. IBD pointed out the lack of leadership yesterday in the Big Picture:

“Leading stocks would also need to show strength, ideally by building and breaking out of sound price bases, then spurting to new highs.

Curiously, Tuesday's big rally didn't include as many big moves by top-rated stocks as you might expect, given the size of the broad market's advance.

Much of the money flowed into beaten-down investment banks such as Goldman Sachs (GS) and Morgan Stanley, (MS) along with other huge industry names like Citigroup (C) and Bank of America. (BAC)

Such stocks are highly liquid megacaps which are heavily weighted among the broad indexes. As a result, the market was able to score big gains without heavy participation from many of its top-rated leaders.”

If we get a huge up day next week on monstrous volume that has many new stocks busting out of nice patterns, then I will change my tune. I really don’t have an agenda. I would love to be a bull here and make money going long. Until I see that, however, I have to remain bearish and stay out of things, only looking for some shorting opportunities as we get past more Fed nonsense. Unless you are a risk-taker and very short-term trader, I would advise doing the same.

Maybe I am wrong about things right now. Maybe this plan of our government systematically reducing the value of its dollar in order to save businesses that took on way too much risk and now don’t want to pay for their greed and short-sightedness will work and bring us a new, robust economy. Maybe our government continually spending billions and billions of dollars they don’t have each and every day, running up a huge national debt, won’t be that big of a deal. Maybe what the Fed is doing now, continually creating more and more money out of thin air and throwing it at the problems in our economy won’t lead to massive inflation for all to deal with. Maybe all of these economic issues we are facing right now will turn out to be nothing more than a bump in the road of our economic powerhouse. I hope I am wrong – it is going to suck as the repercussions of our government’s current fiscal and economic policies become apparent to all of us. Unfortunately, history tends to tell us that the measures being taken right now will only lead to more severe trouble down the road.

To wrap up, I found this article about Jim Rogers and his current view of things. (Please excuse it being from CNBC - I hope it doesn't lead you to having to read any other articles on their website). He has been on the mark with the movement in commodities for the past four to five years, and is someone whose opinion many people respect. If only what he says here could actually come true in real life. Good luck out there.

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