This morning, RealMoney.com ace technical analyist Helene Meisler compared the stock market (subscription required) to the market of early 2001.
But you heard it here first almost three weeks ago! And it didn’t cost you anything either!
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 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.
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.
While it has been fashionable to say that the worst of the financial crisis is behind is, bearish economist Nouriel Roubini posted yesterday 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.
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 this 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.
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,
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…
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.
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.
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.
