Monday, November 24, 2008

State of the Market - 11/24/08

Bailout nation added another chapter in their newly found history today, and the stock market responded positively. Futures were up early, faded a bit during the pre-market, but the market did move higher in the first few minutes of trading. It pulled back from there, forming a bull flag, and then broke out around 10:00 and moved higher for the next half hour. They consolidated into the lunch hour, moving sideways to slightly higher, and pretty much stayed in that sideways pattern throughout most of the afternoon. Every breakout attempt was weak, but so was every breakdown attempt. They finally did move higher when the final hour started and at one point was up huge once again (Dow +500), but there was a sharp late pullback that took stocks off their highs for the day. The gains were still very good however, and I think it was an impressive day for the bulls. Volume however was mixed - it looks to be close to the same on the S&P but lower on the Nasdaq.

Technically, the Dow is the best looking index but the late reversal was right off its 20 day moving average. The S&P 500 closed slightly above the 840 area I thought would be important but not by much and is right at a month-long downtrend line. The Nasdaq and Russell 2000 look the worse and still have some overhead resistance to overcome. One bit of good news for the bulls is that the VIX broke down today and looks poised to test its 50 day moving average again. There are also some possible Moneystream divergences (positive) for the indices that would bode well for further price appreciation. We'll have to see if they play out that way.

Dow and S&P
Nasdaq and Russell 2000
All Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

When I woke up and saw the news of the Citi bailout, my first thought was that the gap would be faded. I expected a bigger reaction via the futures - I really didn't think up 150 on the Dow was a big deal given the circumstances. So I was a little cynical about the "rally". As the market broke out around 10:30 and climbed higher, I did notice that the momentum indicator I use in Scottrade continued to weaken as stocks rose. I also noticed volume was very, very low. That, along with some heavy technical resistance I saw around 840 on the S&P, made me look at taking some inverse ETF's. I did try SDS at $104.14 as the market consolidated, and put a stop at new lows for the day. My stop however was hit around $101.97 for 2.1% loss. I thought it was worth the risk there.

As much as I was tempted, I resisted the urge to buy stocks today. I can't chase here - I just can't. The time to get in was late Friday as the market started taking off, but as I said last weekend, the action looked so flawed to me that I didn't think much of it. What bugs me is that the type of action I was looking for took place November 13 - it had all the signs - and that amounted to nothing. I played that well, but it didn't turn out well. Hopefully I'll learn something from this, but I don't know right now. It seems like the lesson is to take big risks and hope things work out. Unfortunately, that's not really sound advice, at least from where I sit.

In terms of the bailout, is anyone getting a little sick of this, or am I the only one? When I see the markets move higher simply because of this news, a big part of me just loses interest in trading. I've said this before, but it is becoming quite obvious that our government is leading us down a one-way street right now, and there is no place to turn around. First Bear Stearns, then Fannie and Freddie, then AIG, and now Citi. You can rest assured that something will happen to the automakers as well. What about Bank of America and J.P. Morgan? I'm sure bailouts for them are in the near future. After that will come bailouts for student loans, car loans, and credit cards. The moral hazard that was created by bailing out the first company (Bear Stearns) is coming home to roost now, and it is scary. If our government had all the money to do these bailouts, it might not be as big a deal. Since they don't have any money, I think it is a big deal.

So far, we have experienced massive deflation with the price of commodities and stocks falling drastically. At some point (although I don't know when) that dynamic is going to change, and all of this debt and fake money that is being created to monetize all that debt will get the inflation fires started again. I really hate to think what that will be like, but I think it is inevitable. And once again, we will have a situation where the people who did right (saved, lived within their means) will be punished and those who did wrong (overspent, built up huge amounts of debt) will be rewarded and helped out. That sucks.

Ok, that's my rant for the day. Back to stocks. So where do we go from here? The only game plan that has worked recently is to short strength and buy weakness (and get lucky with your timing) and I don't really see a need to change that strategy. Volume was somewhat low today and with the holiday trading schedule this week, volume will likely continue to be low. So it will be interesting to see what pushes stocks higher from here after the big moves of the last two days. We need volume. We need leadership. We need buyers coming in off the sideline instead of just shorts covering their positions. We need all of those things in order to get a meaningful rally that lasts for more than a few days. I don't know for sure that we will end up getting any of those things however. So as it is, I would be very careful chasing longs here and instead would look at some inverse ETFs soon. Timing will be the issue on those.

With the holiday, anything is possible. Common sense says that we should pullback soon after moving nearly 1000 points on the Dow in two days. None of these violent bear market bounces have stuck so far - we'll have to see if this is any different. There continues to be no leadership to speak of so that will make things tough. I'll see if my scans show me some stocks but the three leaders I mentioned last night (COGT, ASEI, and STRA) didn't do that much today. There were a little under 800 breakouts today above 4%, but the number was 1200+ Friday and remember, the selling on Thursday had over 2300 4% breakdowns. Those aren't the greatest numbers and don't give me a huge amount of confidence in the moves of the last two days.

I am still pretty confused overall. I hope I am not the only one. Lots of crosscurrents here - I see both bullish and bearish signs. The earliest we can get an IBD follow-through day is Wednesday, but with the holiday volume, I doubt it will happen. We remain in a volatile market and I wouldn't be surprised for us to be up again tomorrow and I wouldn't be surprised to see us pullback. I lean toward pullback here, but as always, I could be wrong. Good luck Tuesday.


Anonymous said...

Maybe these short term bear market rallies are better for playing short-squeeze setups than to buy into possible leaders (Look at some of the solars for example, JASO and SPWRB made about 70% since Friday afternoon). You can always buy into the leaders on a pull back if it turns out to be a longer term rally.

Mac said...

You're definitely right that those stocks can move quickly. Buying beaten down stocks is not a strength of mine right now. Maybe I will develop that skill as I become more experienced, but for now, it doesn't fit my temperament, because it is hard to time those bottoms exactly.

Samy said...

GDP and consumer confidence numbers will guide he market tomorrow. With the retail numbers from companies reported uptill now it seems the confidence will come out much lower than expected and GDP number will be low too ..i am betting on bearish tomorrow..bought 1/3rd of my sds at closing today and will kee loading up if it goes other route tomorrow..

Anonymous said...

In terms of your rant, you are correct that these bailouts are going to continue. I, for one, thing that the companies who failed should be allowed to fail, but the middle class workers, who had nothing to do with the poor management decisions should be bailed out. How? That all that money and build the U.S.'s infrastructure back up. Hire all those GM workers and other workers to rebuilt our country. Hire all the Citi workers who lose their jobs by letting Citi fail to teach or to work at real banks (banks that use money to expand profitable businesses and finance people's homes and schooling, not banks who create derivatives that don't create value.)

Did you know that 25 percent of India's children are more educated at every grade than their American counterparts? But that's not the kicker. The kicker is that that 25 percent is more than our entire student population. That bailout money need to address problems like this.

Anonymous said...

Seeing your becoming more aggresive with the QID bet so early on in this rally. I agree tomorrow could give us more clues regarding the mkt. But uncertainty will not take any rally too far.

Mac said...

I got stopped out of the SDS so I am 100% in cash.