Matt Trivisonno’s Blog

Was today’s straight-up move a big short squeeze? Maybe. The news was all bad except for a blip down in oil, and volume was very weak, so there was no real catalyst. And we had a massive outbreak in bearishness as shown by the Birinyi and TheStreet.com polls that came out today.

So, everybody turned bearish at the end of last week, and did a good deal of shorting Friday. That left things ripe for a short squeeze today. However, today’s panic buying has left the market in a very over-bought state by some measures. If we get a gap up tomorrow morning, I will be looking to add to my short positions using the April 18th and May 2nd gaps as models. That would indicate that all those bears have turned into bulls again.

Jim Cramer thinks today was a set-up to a positive end to options week, but I don’t get that. If I were a gorilla big enough to move the market, I would have engineered today’s short squeeze so that I could load up on cheap puts, and then do my best to push the market down by Friday.

Update: Now that I think about it some more, perhaps FedEx was the catalyst today. The company disappointed, but the stock closed up. That indicates that shorts were taking profits on the sharp decline over the several days prior to the earnings report. Maybe the market had been plunging in anticipation of a “Recession is Worse” message from FedEx. Shorts who bought the rumor and sold the news could have done so for other sectors also. I smell a dead-cat bounce…

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During the past few days, I have been comparing the S&P 500 to a similar period 7 years ago, in 2001, where a bear-market rally had traders convinced that the worst was over. That meme (idea) appears to have spread rapidly and now appears in this week’s Barron’s.

Alan Abelson writes in his influential column:

“In March 2001, the Nasdaq was off by more than 70% from its peak set only a scant year earlier. Investors became increasingly convinced that lightning had already struck, the landscape was littered with shattered stocks and a turn had to be in the offing. Were they ever wrong! Instead, recession reared its ugly head, profits posted their biggest declines since the 1920s and Nasdaq fell another 50% before hitting bottom deep into 2002.”

As I posted yesterday, next week should begin with large numbers of investors realizing that the bear market is not over. Enthusiasm for the recent rally should evaporate quickly.

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This chart below shows a day-by-day comparison with today’s S&P 500 and the “rising wedge” pattern that ended the bear-market rally in February 2001. To follow along, look at this chart, and then this chart.

The chart above shows the S&P 500’s closing price for 12 days. The blue line is 12 days from 2001, and the red line is 9 days from this year with room for 3 more next week. The 7th day is where the bear-market rallies crack. That was February 2, 2001 and May 7, 2008.

Today’s 9 point drop was a bit worse than the 2 point drop on the 9th day in 2001. So, we are collapsing a bit ahead of schedule. The last few believers in the rally are being wrung out here. If we continue in the same pattern of February 2001, traders will realize that the bear market is not yet over early next week, and a major sell-off will ensue.

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The current “rising wedge” pattern on the S&P 500 chart is paralleling the one from seven years ago very closely. Take a look at how that pattern from the last bear market collapsed:

The big down day came on February 2, 2001 when the S&P dropped 24 points. Yesterday, the S&P dropped 25 points.

On February 3, 2001 the S&P bounced back 5 points. Today, the S&P bounced back 5 points.

What comes next if we continue to parallel this classic bearish reversal pattern? Another 100 points down over the next three weeks.

Will that happen? During the last bear market, we were unwinding a much larger bubble, so maybe not. But this time, we have a genuine financial-crisis/real-estate-disaster which could turn out to be just as bad, so maybe history will repeat.

In any case, this is a very, very scary place to be long. And as you might have guessed, I am way short this thing.

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A few days ago, I posted about how I thought the S&P 500 was in a bear-market rally featuring a “rising wedge” pattern similar to the one that occurred during the last bear market seven years ago.

This morning, I saw my analysis parroted on a major financial website. So, the meme is spreading fast, and traders are beginning to doubt this rally.

The S&P 500 is also struggling to regain and hold the 1400 level. The longer this struggle continues, the bolder the shorts will become.

I was hoping for the market to spike up once more so that I could add to my short positions, but I don’t think it is going to happen.

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This morning, The Wall Street Journal quoted Eduardo Castro-Wright, Wal-Mart Stores U.S. president:

“The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past.”

This conjures up an image of half-starving consumers clutching their paychecks, rolling into the Wal-Mart parking lot on fumes, and then devouring a bag of uncooked rice in order to get up enough energy to walk to the gas station and spend the remainder of their paychecks on a can of gas.

But I may be exaggerating…

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Stocks finished very strong yesterday and looked to continue the momentum today, but plunged instead. Everybody seems to think it was soaring oil that caused the drop, but we have been living with that for a couple of years now.

Perhaps it was Cisco that triggered the sell-off. Apparently, they saw some deceleration in their emerging-markets business. As Sanjiv Wadhwani of Stifel Nicolaus noted today:

“While the company was able to deliver order growth in-line with expectations, some high growth areas such as the service provider segment and emerging markets showed material deceleration”

Bulls like Jim Cramer have been saying that the US economy doesn’t matter any more because the rest of the world (ROW) is so strong. Part of the recent rally was due to so many S&P 500 companies reporting strong earnings from their ROW operations. Now Cisco has cast doubt upon this thesis that the S&P 500 can “decouple” from the US economy and rally right through this recession.

Cisco is hinting that we are now “re-coupling” with ROW by exporting our recession. Economist A. Gary Shilling who accurately predicted this recession, says that this is actually a routine development in US recessions - ROW feels it with a lag.

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I have added a new bear-market rally chart to this page. The new chart from January 2001 looks a lot like the S&P 500 does right now.

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The National Association of Realtors reported today that housing sales are suffering due to tight credit:

“In many cases buyers are waiting for greater access to affordable credit, especially in higher cost areas, but some are disappointed with what appears to be unnecessarily restrictive lending requirements.”

The NAR may think that banks are “unnecessarily restrictive”, but if the cash is no longer in the vault, then no loans can be made. Once a bank has blown all its money on real estate “liar loans” it has no choice but to be restrictive.

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Today’s 2.2% upside surprise in productivity is very interesting. As the Wall Street Journal reports:

“…U.S. firms adjusted quickly to the economic slowdown by shedding workers and cutting back on hours worked.”

…and…

Usually, productivity growth drops at the start of economic slowdowns as companies are reluctant to shed workers.

It looks like that reluctance is gone. If you are dismissing job losses as an unimportant lagging indicator, you may want to reconsider your position.

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