Is the Market Running Out of Baby Seals?

Friday’s month-end mark-up rally was rather weak, don’t you think? The elves had to struggle hard to get the S&P 500 above 1400, and couldn’t keep the Dow from turning red.

And since every trader knows about this year’s “First Day of the Month Pop” pattern, you would think at least some of them would want to get long ahead of it. Especially that we now have evidence that new retail money has been coming in.

I think a lot of traders came to the same conclusion that I have and decided to exit before the bell. If you look at a minute chart of SPY for Friday afternoon, you will see the sell-off, and then the elves coming in to save the day in a surge of volume that dwarfed the rest of the day’s action.

Jim Cramer was mystified by the action in tech stocks Friday afternoon: “Tech Should Be Dead, but It Won’t Lie Down“. I think tech is staying strong while the S&P 500 is rolling over because the retail baby seals are piling into tech. Who else would be buying tech here? What pro would buy tech ahead of the standard summer plunge in tech stocks?

Both retail investors and foreigners have a reputation for coming into our market at the top and exiting at the bottom. We know that people who fled the market at the bottom in March came back in April, and we know about the Sovereign Wealth Funds eagerly lapping up freshly-printed shares of soon-to-be-gone banks. So, that’s pretty good evidence of a top.

But I also think that the retail investors, the baby seals, are falling in number. Why? Because of the last jobs report. While it was ostensibly a “good” report, only the paid shills tout it. Not even Larry Kudlow with his idiotic economic analysis of late mentions it. That jobs report was widely ridiculed, and retail investors do indeed read Barron’s and they read Alan Abelson’s account of the BS coming out of the BLS. And I think the jig is up.

The propaganda blitz to suck in the naive investors has worked only too well producing an astounding bear-market rally that has even caused the most hard-core bears to doubt their convictions. But even retail investors will only swallow so much. I think that we are seeing the last wave of baby seals flopping around on the ice. If the clubbing looks good Monday morning, I will probably fulfill my quota, completing my 200% short position with my remaining cash.

The economy is clearly slowing and everybody knows it. No matter what the official reports say, when Americans are forced to eat Spam (sales are up 10%), and ride trains instead of airplanes like it was 1908 instead of 2008, and save their $600 tax-rebate checks so that they can heat their homes this winter, it’s not going to be easy to convince them to buy more stock.

The 20% price increases that we saw from Dow Chemical and others last week show that inflation is officially out of control, etc., etc., etc.

The wheels are coming off, and I am betting the farm that this is an astounding, and just maybe, historic shorting opportunity.

Bear Market Ends in January 2010

On November 6th 2001, Alan Greenspan lowered interest rates to 2%. A year later, the stock market bottomed.

On April 30th, 2008, Ben Bernanke lowered interest rates to 2%, but will the bear market end a year later in the summer of 2009? Maybe not.

A huge difference between 2008 and 2001 is that 2001 enjoyed a strong real estate market. That real estate market is now a smoking crater, and it has taken the banking system down with it.

As you know, the Fed’s stimulus works via the banking system. Lower interest rates mean that banks can make more loans and make more profit on those loans. However, the fact that banks are tightening credit shows that this time around, the stimulus will take longer to work.

As house prices continue to fall, banks are making fewer loans because the borrower quickly plunges into negative equity. And that’s only the consumer side. The hard truth is that banks don’t even want to lend to each other.

The all-important Libor rate is literally just a guess right now because banks don’t trust each other and refuse to make inter-bank loans for anything but very short time periods. Since Libor is based on what banks charge each other for 30-day loans, and no such loans are being made, Libor is now set by what banks guess that they would charge each other.

Why are banks reluctant to loan to each other? Because every bank knows that all other banks are a bunch of lying shitheads. We civilians might be outraged over how long it is taking for banks to write-down their losses, but the banks themselves are outraged at how badly their fellow banks have behaved. So, when Shitty Bank calls up Crappy Bank and says “How about a 30-day loan to tide me over?” Crappy Bank says: “Beat it deadbeat.”

A trillion-dollar-a-year Ponzi Scheme of bogus mortgages has collapsed and only two banks have gone under? (Countrywide and Bear Stearns). Are you kidding me? Bernanke’s stimulus will have little affect until the banking industry is worked-out and consolidated, and the sellers capitulate in the housing market.

Note: I have chosen January 2010 because 2010 sounds like such a long time away. The date could just as easily be December 2008, but way too many people are way too hopeful that this recession is already over, and I want to dis-abuse people of that notion because it will cost you money. Here is an example of way too much hope: Jim Cramer wrote this (subscription required) about a sucker’s rally in the homebuilder stocks in December 2006:

“What I don’t understand is how the “rigorous” anti-homebuilding stock folks can justify what has happened with the stocks. What is their thesis? I have a bunch of reasons the stocks are going up. But I never hear from the bears why the stocks went up. They usually give some version of how the market is stupid and overly optimistic.”

Homebuilder stocks have been chopped in half since then. And until there is some consolidation in the industry, the stocks are likely to keep falling. At the time of this writing, Cramer was once again calling for another bottom in the homebuilders – even after he had Bob Toll on his show saying that the light at the end of the tunnel was an oncoming train. Hope springs eternal, but don’t be sucked into it.

The Wall Street Journal has been doing absolutely incredible work on Libor. Go there and search on “Libor” and you will get the real story.

If the Libor stories are in the WSJ’s subscription area and you can’t get to them, go to Bloomberg and do a search there.

To read about how bankers refer to defaulting borrowers as “shitheads”, go to Tom Wolfe’s brilliant “A Man in Full” at, search on “shithead” and start reading at page 33. You will be reading an account of a bank “workout” on a real-estate developer (Charlie Croker). Of course, the irony today is that the bankers themselves are the shitheads. In this story, you can see that Citibank is clearly the shithead. Yet another reason why banks won’t loan to each other: they are busy suing each other!

Jim Cramer, Doug Kass, and Rev Shark over at are calling a bottom in financial stocks. Long financials? Starting to be a crowded trade…and a bad one at that. No workout, no bottom in financials. Sorry guys.

Dell Joins Cisco in Seeing Global Slow-Down

Dell reported good earnings today, but included this warning:

“The company is seeing conservatism in IT spending in the U.S. particularly with its global and large customers…”

Three weeks ago, Cisco’s earnings report showed deceleration in the global economy. See my original post here.

If you look at the QQQQ chart going back to the beginning of the rally in October 2002, you will see a rather large dip each summer. And those were times when the economy was strong. Now we are heading into the “Summer Tech-Stock Selling Season” with a weakening economy. In case you can’t connect the dots, I will do so for you:

Run from tech stocks! RUN!

Don’t say I never warned you…

(Note: I am short tech stocks via QID.)

Third “Fan Line” on S&P 500 Chart?

One of the ways to spot the end of a bear-market rally is to use the chart analyst’s “Three-Fan Rule”. Click on this SPY chart so that you can see it:

I have drawn three trend-lines in blue. The first two have been broken. If the third one breaks, then the bear-market rally will likely be over. The purple line I have drawn may turn out to be the neckline of a downward-slanting head-and-shoulders top. (Keep in mind that not all chart analysts draw their lines the same way.)

Today’s 0.44% rally was remarkably feeble when you consider how much money rotated out of oil and bonds today. In fact, it was less than half the historical average for such days, according to Jason Goepfert at Jason’s analysis shows that the S&P 500 should have caught a 1% rally on average.

If the speculative-bubble part of the commodity boom will now be ended by stricter regulation, where will the next bubble be? Certainly not real estate, probably not tech stocks again, but what about a Cash Bubble? We seem to already have a pretty big one going, and today’s market indicates that it probably just got a lot bigger.

Evidence of Global Slow-Down?

The DBB Base Metals ETF plunged 3.24% today on double its average volume. This thing tracks the boring metals: copper, aluminum, and zinc. If these metals fall, you could conclude that the global economy might be slowing.

Click on this chart so that you can see it:

Notice today’s high-volume “gap down and die” day as DBB plunged below my lower trendline breaking out of its triangle pattern.

This chart reminds me of the Baltic Dry Index, which may also be rolling over. It looks as if these two indicators took their initial dives around January when it became clear that the US economy was slowing down, but then mysteriously rallied back. I’m thinking that the first move was the real move, and that the bounce back was the fake move caused by hot money fleeing stocks for a new home in commodities.

And now that there is talk of stricter regulation of futures markets, the hot-money tide is going out, leaving us with evidence of a weakening global economy once again.

One day, Jim Cramer will look back on his statement that the US economy no longer matters, and he will have to “wear the Post-It” – the biggest Super-Sticky Post-It that 3M makes. Talk about dumb!

Will Banks be First to Test the Oct 2002 Bottom?

That is not a typo. Since the banks will probably plunge through the March low soon, we have to ask: What is the next support area? And that would be the fabled October 2002 bottom that ended the historic bear market back in “ought 2”, as we old-timers say.

Make sure that you are sitting down, and take a look at this weekly chart of the BKX banking index:

Jim Cramer said again today that he thinks the market can rally without the financials. Cramer has been playing a crazy lunatic on TV for a little too long…or maybe he is just doing his part to keep the system from collapsing…

Let me be the first to predict that not only will the banks be the first sector to test the October 2002 low, but that they will also take it out. Why? Where there was a solid real-estate market in 2002, there is now a smoking crater. Banks and home-builders, at least, should go lower, right?

If you are a Sovereign Wealth Fool Fund, don’t despair, there will be plenty more financial shares for you to buy. Many, many more. If you think you can pump out oil or toasters faster than Wall Street can pump out stock, you are sadly mistaken… How do you say “dilution” in Chinese, Arabic, Russian, and Portugese?

Note: You guessed it, I am short the financials via SKF.

Crude Crunches Corporate Profits

For a long time now, a surging PPI has not lead to a jump in the CPI because corporations have been eating the difference. Corporate profits have been falling as America’s lean-and-mean corporations held out on raising prices to their customers.

Some companies, like Starbucks, were forced to raise prices, but overall, it has been a remarkable phenomena until it ended with a bang today. You probably heard that Dow Chemical announced a 20% price increase, and while Dow Chemical is only one company, this is a sign that we have reached the breaking point.

So, this is how it should play out:

  1. Energy costs continue upward
  2. Higher prices deliver the knock-out blow to the consumer
  3. Corporate profits disappear
  4. Stock market crashes
  5. Recession deepens
  6. USA, with help from the Euros, drag down global economy
  7. Oil demand collapses
  8. Price of oil collapses
  9. World ends

Yes, that’s right – the world ends in January 2010. You heard it here first.

Tax-Rebate Rally – a Whole 5 Points?

The S&P 500 rallied a whole 5 points today as the durable-goods report showed that the tax-rebate checks are being spent. Americans can’t afford houses, or cars, so we are blowing our rebates on smaller-ticket items like vacuum cleaners. Will this really end the recession? No, but it will boost GDP just enough so that incumbent politicians can run this fall with campaign slogans reading: “Recession, what recession?”

Lots of people were saying that today’s action was evidence that the market could defy surging oil, and sagging banks. Don’t count on it. Retailers were up big today, and the XRT has clawed its way back above the trendline from the March low, but this sector’s rally can’t last. One of the reasons why is that the credit crunch just got crunchier as regional banks cut off “home equity line of credit” lending to increasingly house-poor borrowers. See the story here.

More evidence that the rebate checks are being spent can be found in the tax-withholding data. If you look at the spreadsheet on this page, you will see that year-over-year growth was negative through April, but is now strongly positive. When the data is in, we will probably find that a lot of retailers extend working hours of employees to handle the increased business. Did they hire new workers? If they did, it can’t be very many, because as we know, continuing unemployment claims are still rising.

If the tax-rebate rally can continue, its legacy will be to set up a fantastic shorting opportunity. It’s only a matter of time before a big, ugly jobs report hits, and that’s probably when we will get the big whoosh down. I can’t say when that will be, but I hope to be all-in and double short on that day.

Cramer Bullish on Crack-House Boom

For the 87th time over the past three years, Jim Cramer has called a bottom (subscription required) in home-building stocks:

“I am banking on a bottom in the HGX.”

Cramer cited the Census Bureau’s estimate of home sales once again. The last time he did that, he got crushed.

While the spring selling season can only be described as a total disaster, there are some signs that home sales are rising. The Wall Street Journal ran a story today titled “Home Sales Rise in Hard-Hit Areas“. Here is a quote:

“For the first four months of this year, home sales in Detroit, excluding suburbs, totaled 3,360, up 48% from a year earlier, according to the Michigan Association of Realtors. The average price dropped 56% to just $20,514. That average is so low because many of the sales involve decrepit homes in neighborhoods with few jobs.”

So banks are finally unloading foreclosed crack houses. Let the good times roll!

I wish Cramer luck, but he really ought to know an over-sold bounce when he sees one. The last two daily bars on the XHB chart look like the beginnings of a bearish “flag” pattern.

Oil Down 2.5%, but S&P 500 Up Only 0.68%?

You call that a rally? The stock market’s recent crash coincided exactly with the “super spike” in oil, but today’s oil crash only produced a feeble bounce for stocks. The market was also over-sold by many measures going into today’s session, so even with no drop in oil, stocks should have been able to put together a rally.

I think it’s safe to conclude that a lot of bulls used today’s oil gift as an opportunity to exit long positions. Good for them.

The last two daily bars on the SPY chart are a good start to a bearish “pennant” formation. If it holds up tomorrow, I will be adding to my short positions at the top of the pennant.

50 More Points Down for the S&P 500?

Yesterday, I posted some ideas about what the S&P 500 might do next. However, I failed to look-up the destiny of a “rising wedge” pattern in the textbook. It turns out that a rising wedge is supposed to quickly fall back to its base.

I first posted about the rising wedge on May 6th. The chart below shows the original wedge pattern that I drew (using the SPX instead of SPY this time.) Notice how the market didn’t plunge immediately when it fell out of the wedge. I think that was because the NASDAQ-100 was actually leading the market. Also notice how the lower wedge line proved to be resistance, and that the collapse came when the market couldn’t recapture the top wedge line:

If this wedge fulfills the textbook pattern, the S&P 500 would drop to 1325, which is the point where the lower wedge line begins on April 15th. That would be about 132 for SPY, though looking at the SPY chart, it seems like there should be some support around 137. Since a wedge collapse is a panicky kind of thing, maybe SPY will plunge right through 137.

This morning, Helene Meisler speculated (subscription required) that we might see a rally to fill in the right shoulder of a head-and-shoulder top on the DJIA. However, now that the Dow has dropped another 146 points, that is no longer possible. The Dow has a similar pattern to the S&P, so I think this failure to make a right shoulder strengthens the case that we are really dealing with a rising wedge, and that we could hit 1325 very quickly.

The S&P 500’s Next Move

The market closed Thursday with a two-day candlestick pattern that is pretty close to a bullish “Tweezer Bottom.” The matching lows from Wednesday and Thursday (around $139 for SPY) indicate that there is some support there.

So, what might be next? Since holiday periods are usually positive, I’m thinking that a consolidation pattern is in order. Perhaps a nice flag, pennant, or triangle. Don’t look for a rectangle; those are not often found in bear markets.

I wouldn’t expect this consolidation to last more than a few days since there are tons of bulls looking for an exit. When you consider how much oil dropped on Thursday, and how little the market rallied, you have to think that a giant herd of bulls used the good news on oil to bail out of stocks.

Another spike in oil could cause stocks to just flop right over here in this vulnerable spot.

I don’t think it is too late to sell here. I think the odds of the bear-market rally resuming are just about zero.

I used the market’s feeble strength on Thursday to pick up some QID. Many analysts think that the small, domestic companies in the Russell 2000 will suffer more here in our domestic recession. But those stocks have been under-performing, and don’t have any where near the amount of froth in them as the tech stocks do. When the big profit taking comes, in can only come from where the profits were to start with, and one of those places is tech.

The techs also sell a huge amount of gear into the financials, and that looks like it will come to a dead stop. Banks are laying off thousands of workers, and will have big piles of un-used computers stuffed into their closets. They also won’t need any new computers to run mortgage-security valuation models any more. You can pretty much do those calculations on napkin now, right? I mean, how hard is it to draw a big zero onto a napkin with a carrot during lunch time?

Cisco also mentioned in its last earnings report that it’s overseas business was decelerating. As our recession spreads to the rest of the world, techs should take another big hit there too.

I Called the Top

For the past couple of weeks, I have had my blog motto (at the top of the page) set to: “The S&P 500 Bear-Market Rally is Almost Over.” I hope that you were paying attention and didn’t get stung in today’s (and yesterday’s) sell-off.

Today I have changed the motto to: “The S&P 500 Bear-Market Rally is Over. Look out below!”

If the economy really were strengthening, we could expect the market to move sideways for awhile here before resuming its climb. But the economy is weakening, and the market is more likely to get very ugly, very quickly here.

The S&P 500 broke its intermediate trend-line on heavy volume today, and that will cause every technical trader on the planet to short any kind of strength going forward, me included.

Banks Lose Trillion Dollar Market

While it has been fashionable to say that the worst of the financial crisis is behind us, bearish economist Nouriel Roubini says that the banks have lost a trillion dollar market:

“…securitization of mortgages, that was running at the annual rate of $1,000 billion in January of 2007, was down 95% to an annual rate of $50 billion by January of 2008.”

Even if the worst is behind us, how do these companies make money in the future?

And the worst may well be ahead of us. Four days ago, I posted:

“Credit is tightening. The economy is contracting. It ain’t over.”

…and today, ace banking analyst Meredith Whitney picked up my theme:

“The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,” analysts led by Meredith Whitney wrote in a research note today.”

I have a fat profit on my SKF position, but I’m not selling it here. The XLF today plunged through the bear-flag pattern it had made on it’s chart over the past several days, and it looks like some more downside is in order.

Cramer Predicts Wages to Rise

Today, Jim Cramer said (subscription required) that the end of the American Axle strike will allow a lot of GM workers to go back to work:

“Don’t overlook this strike’s impact. It hurt everything from wages to raw materials. Those will snap back quickly now and make the recession scenario that much tougher to propound.”

I will keep this in mind while watching the withholding data, but I am skeptical of Cramer’s theory. Just today, Bloomberg published a story that mentioned falling auto sales:

“Auto sales in April slid to a 14.4 million annual rate, the lowest since 1998…”

Maybe Americans have been breathlessly waiting for GM to start building cars again, and this whole recession thingy was just the result of some stubborn auto workers. But I’m thinking this is just another example of a perma-bull grasping at straws and wishing that the recession wasn’t real.

The Great Fed-Funds Fake-Out of 2008

Many traders believe that the bottom is in on the stock market because the Federal Reserve Bank kinda, sorta, might-be, hinting at a pause. Everybody knows that when the all-seeing Fed stops cutting rates, that the recession is over, right?

Well, maybe not this time. The chart below shows that the Fed has gotten way out in front of the market this time around. Chairman “Chainsaw” Bernanke has cut rates almost twice as fast as Alan Greenspan did during the last recession.

That could be a good thing, but it might be a bad thing too. How? Well obviously it indicates sheer terror on the part of the Fed due to the financial panic we all know about. And that terror is not over yet.

If the banking panic were over,

  1. Bernanke wouldn’t still be trying to beat down the Libor rate which has vetoed his attempt to reduce rates on mortgages.
  2. You wouldn’t see a long line of banks, hat-in-hand, bumming cash off of Bernanke at the discount window.
  3. You wouldn’t see Bernanke swapping out perfectly good treasuries for crappy mortgage paper just so banks could pretend that they were still solvent.

Perhaps the bottom would be in if the Fed’s rate cuts really were helping the economy. But they are not. By the Fed’s own survey of bank managers, credit is still tightening. So far as anybody can tell, the rate cuts have done almost nothing.

Credit spreads have tightened from panic levels showing that the financial system is not breaking down. However, that is not really big news. One thing that we have learned over the years is that the global financial system bends, but it doesn’t break.

Yes, the Fed’s rate-cuts are well known to work with a lag. But the lag varies, and this time it will be a long lag. Why? Because the banks are simply destroying assets faster than the Fed can pump them up.

Credit is tightening. The economy is contracting. It ain’t over.

Note: The red dots on the chart show the fed-funds interest rate. The first “line in the sand” that Greenspan drew at 1.75% failed. The market just plunged right through it, and the next one at 1.25%. Even if Bernanke draws a line-in-the-sand here at 2% doesn’t mean that it will stick. Greenspan didn’t take his foot off the gas until he was certain that the economy was adding jobs. Bernanke won’t either. Rate hikes in 2008? Dream on…

Dumb-Money Rally Rolls On

In the fourth quarter of 2007, the paychecks of American workers were growing at a rate of almost 9%. Here in the second quarter of 2008, they are not growing at all. That is a breathtaking deceleration of the economy.

Perhaps the global economy will save the US economy. But if that were the case, why are American paychecks being vaporized at such a rapid rate?

I, for one, will not get caught up in this bear-market rally. If you have long-side profits, you should think hard about taking them here.

Withholding Tax Haul Hits 23-Month Low

Today, the Treasury Department reported that withholding income tax revenue for yesterday was a paltry $1.46 billion. This was the lowest amount since June 13, 2006 when the number was $1.34 billion according to my database.

I wouldn’t read too much into such a data point since it is possible that it was the result of a data-processing delay, or some other glitch. However, I think the trend in withholdings shows that we should expect more such ultra-low numbers to be popping up in the future.

The jobs reports have been defying the downtrend in withholdings (and the plunge in corporate income tax revenue) but I doubt that can last much longer.

The market feels a bit “crashy” here, and a bad unemployment claims number tomorrow could trigger a bull stampede downward.

Euphoric Failure on the S&P 500

Today’s gap-up open on the S&P 500 is what I am calling a “euphoric failure” because the morning’s euphoria was much weaker than the last two such events. I have marked the last three gap-up openings “A”, “B”, and “C” on the SPY chart below:

Click for larger chart

After Gap A, the market was able to hold onto most of the gains with little trouble.

After Gap B, the market held onto less of its gains after a struggle.

After Gap C today, the market lost ground. Also notice that today’s gap was much smaller despite coming off of a very strong reversal.

I interpret this trend as a thinning-out of the enthusiastic crowd of buyers who think that the recession is already over. Or you might say that the market is running out of baby seals to club.

Also notice how strongly the market sprang off of the lower trend line (purple) the first time it hit it back in April. This time, the snap-back is much weaker so far, and returning to the top of the trend line looks impossible.

The rally is weakening as it runs out of believers.