Monday, July 14, 2008

State of the Market - 7/14/08

Same old story today in the stock market - a lot of wild and crazy, but mostly negative action. Things looked good for the bulls early on as the government came to the rescue last night and affirmed they would save FNM and FRE after saying a bailout wasn't needed on Friday. And we wonder why people don't trust politicians??? Unfortunately for the bulls, the gap open marked the highs of the morning, as stocks steadily sold the opening bounce throughout the morning and into the lunch hour, with only a few weak bounce attempts along the way. The market stabilized a bit into the afternoon, trading in somewhat of a range until around 2:00, when they tried to bounce and almost got flat on the day, but that lasted for a little less than an hour, and stocks sank back into their range heading into the close. Around 3:20, they were able to spike stocks back up, getting some shorts to cover and allowing the market to come up near the flatline once again, but they couldn't do much more than that, and stocks fell back into the close, finishing off their lows but still with modest losses.

Technically, the major indices are all still in the steep downtrend channels I showed this weekend, although the Nasdaq and Russell 2000 tried to pop above them briefly this morning but were rejected once again at their 9 day moving averages. Today is another example of why trying to catch the exact bottom in the stock market can get you into trouble, as the early buyers were likely stopped out of positions later in the session. I did think about entering a few longs today - I had my long watchlist up at the open - but am glad I passed. I sound like a broken record, but until they break above and out of these channels and over their short-term moving averages, there is no reason to be going long here in my opinion.

I was kind of surprised at the bullishness I read pre-market on a few of the websites I follow. It was as if people just assumed that a rally had to happen, and that we were about to take off to the moon. I had a problem understanding this, because if the government comes out and says Friday that FNM and FRE don't need a bailout, but then two days later reverse their position, doesn't that tell you something about the current state of affairs in this credit crisis? Does this sound eerily similar to the Bear Stearns fiasco, where the CEO told CNBC that they had absolutely no liquidity problems only three or four days before they were taken under by the Fed and JPM? All of this, along with the lack of true fear in the market last week, made me wonder why so many people sounded ready to buy.

This was the statement from IBD on Friday and I thought it was a good reminder that we STILL aren't quite at the extreme fear level that usually signal a turning point in the market.

"The sell-off — Nasdaq has lost 22% from its October high, the S&P 500 21% and the Dow 22% — does not seem to have hit the sort of panic or capitulation that often can mark the bottom of a long, painful decline......The put/call option volume ratio rose to 1.24 during Friday's session. Yes, that shows a pervasively bearish sentiment, just as you would expect in a crummy market.......But it's not as dire as the 1.41 seen on March 17, as the market put in the bottom to that correction."

During today's trading, the put/call ratio ranged from 1.04 to 1.13, and the VIX was higher but didn't exactly spike with the morning reversal and closed in the middle of its range again. There may be more fear out there in the general market, but the indicators aren't showing it. The selling continues to be almost systematic, and as long as it stays like that, I don't know if that bottom I'm looking for will come any time soon.

This morning, I did cover my SQM short pre-market at $42.80 for a 1.2% loss. I figured there was no point in waiting around, especially when this short really didn't fall like I expected it to do. It rallied up to over $44, so I am glad I cut my losses early, but I will still keep this on a short watchlist. When the open was sold so quickly, I decided to look for shorts again, so I took a small position in BIDU @ $296.93 as it broke below support around $303, and XIDE @ $14.42 as it hit its 9 day MA and reversed in a bear flag pattern. Both of these were stocks I highlighted this weekend. I am leaning to take any profits I may get in these a little quicker than normal, but as always I will keep my stops tight on them. It's just too volatile out there right now to let stocks run a lot.

Right now, my thesis from last week about the commodity stocks being done is not turning out to be a good one. I didn't get hurt shorting a few of these, but I also wasn't very successful in terms of gains. This is a tough call for me right now because all of the charts I see, especially of the steel and oil stocks, look extremely bearish - light volume rallies up to resistance levels that look like bear flags. At the same time, it seems like they just won't give it up and sell off hard either. There are other factors as well, such as the U.S. dollar's likely continue decline thanks to various factors, which will support high commodity prices. I will be watching them closely, and probably have some of these up tonight, but I am torn as to what the best way to play these is right now - try to short them or just sit them out.

Overall, the story hasn't really changed - stocks continue to get stretched to the downside and are very oversold, so a rally is possible at any time. However, with the fear levels not being at extremes, there is a good chance that any pop we get will quickly be sold just like today. This week should prove to be volatile with some economic numbers along with earning reports and options expiration. Right now, I personally don't know why anyone would be interested in buying stocks ahead of all this data, but that doesn't mean they won't. The name of the game remains the same - stay in cash, short selectively if you want, and don't think of buying until the market shows it might be able to hold a rally. Best of luck Tuesday.


Anonymous said...

Keep up the great work Mac, love the blog.

One quick question, where do you get your put/call ratio data? Could you post a link? Thanks.


Mac said...

Thanks Scott.

Here's the link.

bmbull said...

Agreed on the commodity stocks. Though the charts look nasty, they might just be going through yet another corrective phase, rather than a turnaround and collapse. These things have had umpteen lives.

Mac said...

Nasty is a good word, and they look like absolutely perfect short setups. It is going to be hard to stay away from some of these - if we got some panic selling, I think these would drop like a rock, but how long have we been looking for that panic selling and still haven't gotten much.

Anonymous said...

Reading your occasional thoughts on the Fed and bubbles etc (which I very much agree with) I thought you might get a good laugh out of today's article in The Onion:
"Recession-Plagued Nation Demands New Bubble To Invest In"

Mac said...

Thanks for the link - I will check it out.