Monday, February 23, 2009

State of the Market - 2/23/09

Despite very, very oversold conditions, traders sold stocks off once again on Wall Street today, as a strong open was quickly reversed and stocks fell steadily and methodically throughout the entire morning session. Stocks hit a temporary low around 1:00 and did bounce for about 90 minutes, but it was weak and at 2:30, stocks quickly fell back down to their lows and broke through them as the final hour approached. I was not around my computer for the final hour but it looks like a volatile hour in which stocks could not hold a bounce and they finished at their lows for the day. Volume was not as heavy as Friday, but that was options expiration so it is hard to compare the two days.

Technically, the picture is still the same as I showed in the video this weekend - we are EXTREMELY oversold on a number of measures but there are times where being oversold doesn't matter (October 2008 was one of those times). I am not going to over all the indicators because they are all in agreement with the oversold condition of the market. It just seems the market doesn't care about the condition. The S&P came very close to touching its November low this afternoon and a powerful break of that low could lead to much more selling, regardless of how oversold we are. 741 is a number that must hold or we probably get another major move over the next few days.

The thing that is scary the more I think about it is that there still seems to be very little fear out there. I look at the VIX nowhere near its highs of October 08 with the market breaking to new lows and I say to myself "what is going on here?" Heck, we haven't even cleared the January highs on the VIX. I said this weekend that if we don't bounce soon, we are probably looking at a mini-crash and that possibility seems to be presenting itself very clearly here. A bounce is always possible, but the longer it takes to develop, the more likely people that were expecting one (and there are a lot of them out there - me included) will start to question whether it actually will happen and turn fearful. That fear will then feed on itself, leading to some major, panicky-type selling, even worse than we have seen lately.

I went into the day expecting a bounce due to the futures being up so I looked to play a financial or two if the opportunity presented itself. I went into FAS at $5.30 after it pulled back from its opening gap and set my stop underneath the lows for the day. Perhaps I should have waited for a breakout, but I went with my gut. Obviously, it didn't work and I was stopped out at $5.14 for a 3.3% loss. It was a small position though so it's not too big of a deal.

When we reversed, my attention turned to the bearish side as I saw the financials setting up in pretty clear head and shoulders patterns on the five minute charts. Because of this, I went into FAZ at $75.40 as I believed it was breaking out. Much like this morning when my gut expected a bigger move up, I was anticipating a real bad afternoon and anticipated the breakout just a bit. It did pullback right after I entered but my stop was not hit and it did break to new intraday highs in the afternoon. Those highs didn't last, however, and a sharp reversal took me out at $74.52 for a 1.37% loss. I moved my stop loss up as it brokeout so that limited my losses, but I am guessing a lot of people got shaken out at that point. I am disappointed that I missed out on the later selling, but I also know that this market can shoot up super quick, so I can't take the risk right now of a position going against me big.

We'll have to see what happens over the next few days but things look very, very bad right now. The question I asked this weekend - What will the government do? - is still valid and will likely cause a very volatile rest of the week. I got this itinerary from Yahoo Finance today -

* Monday: Starting at 1 pm ET, President Obama is hosting a Financial Stability Summit featuring his economic aides, cabinet members, Congressional leaders and think tank-types.
* Tuesday: President Obama speaks to a joint session of Congress in a prime-time (9 pm ET) address that some are calling a de facto State of the Union address.
* Wednesday: Following Treasury Secretary Tim Geithner's recently announced plan, the nation's largest banks are slated to undergo a "stress test." (I believe expectations Citigroup would "fail" the test prompted discussion of the government upping its stake in the back to as much as 40%, as discussed here.)
* Thursday: President Obama is scheduled to unveil his budget and provide a blueprint that will "tip the president's hand on his plans for near-universal health care, changes to entitlements such as Social Security and Medicare, tax policy, and a budget deficit widening into territory never seen in peacetime," The WSJ says.

Sounds like a very busy week and it's not only these news events that matter but what the market's reaction to these events also matter. My basic outlook is that we could certainly bounce hard at a moment's notice anytime over the next week (mainly if the market hears something it likes), but we could also trade down another 5-10% from here over the next week (if the market doesn't hear what it wants to hear). We could theoretically do both of those things in a matter of days. Sounds like fun, huh? I may try to play some moves over the next few days but as I said this weekend, they will all be short-term trades and they will all be smaller positions. More than likely I will just watch. The bounce will be very powerful when it occurs but I have no way of knowing what the specific catalyst will be. There is just too much risk on both sides of the market right now to do much else in my opinion. If you feel like making big bets right now, you are better off going to Vegas - you would probably have better odds. Good luck.

1 comment:

szaman said...

Stopped out of my FAS position from friday at 4.94. Wasted whole day looking for a reentry. I guess i was looking at the wrong side. The best move today would have been buying FAZ @72 around 2:30.