Light Summer Volume? Ha!

Last week on CNBC, Bob Pisani was warning viewers not to fall for the “light summer volume” meme. That was an example of CNBC giving us excellent advice. The rally that we saw in August is suspect because it came on light volume, and it wasn’t just because the big fund managers were on vacation.

In fact, in August 2007 there was a huge surge in volume over July of 2007. In the table below I list the big-four ETF’s, and two smaller ones that have been leading the market recently. All of them had huge surges in volume from July-August 2007, and huge drops from July-August 2008 (volume numbers are millions):

ETF July 2007 Volume Aug 2007 Volume % Gain July 2008 Volume Aug 2008 Volume % Gain
SPY 3987 6242 +57 7471 4344 -42
QQQQ 2780 3836 +38 4122 2894 -30
IWM 2158 3295 +53 2730 2087 -24
XLF 961 1899 +98 5761 3236 -44
XHB 89 142 +60 167 113 -33
XRT 31 43 +41 191 147 -23

The almighty XLF had the biggest drop – down 44%! Retailers (XRT) and homebuilders (XHB) were down big too.

I spot-checked several more ETF’s, and it was the same story for all of them. Even hot areas like health care (XLV) and biotech (XBI) saw declining volume in August.

Before you argue that we had a high-volume capitulation in July and that we can’t expect August’s volume to match that, go back and look at July 2007. There was a high-volume capitulation there too!

The big money is simply not buying into this rally. Neither is the public.

Will the public eventually get sucked in as they did during the March-to-May rally? If they do, its going to take an even bigger snow job to lure them in. Just imagine what the average person thinks when they turn on CNBC and see a story about brokers who won’t let investors withdraw money until an attorney general sues the broker and forces them cough up.

Wall Street has really shot itself in the foot with the auction-rate securities debacle.

I saw one story on CNBC about Fidelity refusing money to some of its investors, complete with footage of a Fidelity retail store. It wasn’t quite like the IndyMac footage, but some viewers might have taken it that way. If you can’t trust Fidelity, who can you trust?

And it’s not just retail investors. Rich investors have probably heard the stories about hedge funds refusing withdrawals (“gating”), especially since Alan Abelson wrote about it in last week’s Barron’s. A gating clause at a hedge fund works like this: if you stop by the hedge fund office to try and get your money out, the receptionist pushes a button under her desk, and a big iron gate comes down out of the ceiling to capture you. Then she presses another button that releases the hounds to come and dispose of you.

So, now investors are beginning to be concerned about the return of their capital rather than the return on their capital. If you add that to the fact that the American and global economies are decelerating, you don’t really have a good recipe for a lasting rally.

Two More Years Until Housing Bottom

Barry Ritholtz has published a piece by David Merkel on his Big Picture blog where Merkel analyzes the current real-estate disaster. After looking at all the aspects of what typical housing bottoms look like, Merkel concludes that we have about two more years to go.

I can’t see a way to link to specific posts on Barry’s blog, but if you go here, you should be able to find it. You may have to scroll down the page, but the title of the piece is “Fundamentals of Residential Real Estate Market Bottoms.”

Last week, Jim Cramer raved over homebuilder stocks on his Mad Money TV show. Then, the next day, he told his viewers not to buy the stocks. Then on Friday, he told his readers to buy HGX calls. Cramer likes the homebuilders, at the moment, because they are going up – just like he did in 2006.

While the sector may be good for daytrading from the long side at the moment, how far can the stocks really get with gigantic levels of inventory still on the market? And that inventory is only one factor that Merkel cites in the article linked to above.

Friday’s Trading

On Fast Money last night, they were discussing the dramatic surge in XLF call buying, which was considered to be wildly bullish. I consider it to be wildly foolish if the buying was based upon Thursday morning’s GDP number. Can the economy really be expanding while shedding jobs?

Fast Money also thought that Dell’s IT-spending bomb was just wonderful news because it will be creating such good bargains on tech stocks today. Of course, if you are long tech, that’s the kind of thing you would say to keep other traders in long enough for your to get out.

Watch the comments section for updates throughout the day.

Public Runs Screaming from Stocks

I just updated my Mutual Fund Flows chart. Take a look at it.

$18.69 billion was pulled out of US mutual funds in July, a pretty gigantic number. What about August? The official data won’t be out for another month, however the public does not appear to be in any rush to come back in. One research firm is predicting a very modest inflow.

You can also get an idea of how enthusiastic the public is about US stocks by looking at the monthly volume on the major ETF’s. For example, SPY volume plunged dramatically from July to August, whereas in 2007 it surged from July to August.

Thursday’s Trading

After shrieking that the homebuilders had bottomed on the Tuesday edition of his Mad Money TV show, Jim Cramer told his audience not to buy them on Wednesday. Crazy.

Cramer also said that the Fed was out to destroy the economy 1930’s-style with high interest rates. Two percent is high?

Picking on Cramer is too easy, but the man is so bizarre at times, that I just can’t help it.

But the most bizarre thing that I heard on Wednesday was on Fast Money. Quint Tatro admonished traders to conserve their “mental capital” so that they will be rested-up when the market starts “running.”

That’s a curious position to have after a sharp bear-market rally. And when you look out at the sea of weakening economic, financial, and geopolitical factors, you really have to wonder what kind of thought process goes into generating a worry that the market is on the verge of running away to the upside.

Watch the comments section for updates throughout the day.

Kiss SPY Goodbye

As Tony G mentioned in the comments Wednesday night, SPY has a bearish descending-triangle pattern on its chart. The pattern has been established over three weeks, so it looks pretty solid. Here is a 60-minute chart (click to enlarge):

(I find that hourly charts are the best for spotting emerging patterns.)

If you look at a TRIN chart over the same period, you will see that the last two Monday Massacre sell-offs were dramatically more intense than the first sell-off that began on August 11th. The TRIN takes into account not only the number of stocks advancing/declining, but also the volume.

I think that this increasing intensity is due to bulls having their mouses hovering over the sell buttons on their screens. Bulls with profits in this bear-market rally look like they are being very quick to lock them in by selling in when the market starts falling.

A couple of weeks ago, I got burned by trying to play a descending-triangle pattern on the USO. An oil inventory report was released and USO blew out of the pattern to the upside. I miss-played that set-up because USO was oversold, and the pattern was only about three days old.

SPY’s descending-triangle is very well-defined over a nice period of time. SPY is also overbought on a short-term basis, and a longer term basis. Good news in the form of the durable-goods number on Wednesday morning, failed to break SPY out of the pattern to the upside, so it looks like the large players have little interest in accumulating stocks, even on good news.

I like the set-up technically. I also like it fundamentally. The economy is clearly slowing. So is the global economy. And the credit crisis is actually getting worse judging by credit spreads, and more banks being added to the FDIC’s trouble list.

I think the big funds will likely be able to keep the market from breaking down as they bid underneath to keep their monthly numbers looking good. While they are not always successful at the end of a month, with light holiday volume, they should be able to do it this time.

So, I’m thinking that SPY doesn’t break $126 this week, but will probably do so early next week. And then SPY should quickly proceed to testing $125.

SPY has tested, and bounced off of, the support around $126 twice so far. The textbook says that the third time is usually the charm. So, I have taken a short position in the futures, and am hoping that the big funds can hold things up long enough Thursday for me to complete an all-in short deployment.

SPY’s old breakout area at $129 served as resistance Wednesday. So, our trading range is $126-$129. If any of this week’s remaining economic reports pushes SPY above $129, I will be shorting as I think it will likely prove to be a false breakout.

Keep in mind that the tape has not rolled over yet, as of Wednesday’s close, though the futures are down a couple of points as I write this late Wednesday night.

Thursday and Friday will be very interesting. On one hand, you will have the big funds bidding underneath in a low-volume environment. They usually win. But on the other hand, you have increasingly jittery bulls itching to get out alive. With at least a neutral news flow, I expect the big funds to win with SPY perhaps being range-bound between $127-$129 for the rest of the week.

90 Billion Barrels of Oil at the North Pole

There may be 90 billion barrels of oil at the North Pole and both the Canadians and Russians are training-up for Arctic combat. Russian bombers already patrol the area while Canadian fighters chase them off. The “cold” in this new Cold War now has a double meaning.

Oil is finally responding to Hurricane Gustav, but stocks are looking to open up on a “good” durable-goods number. My dream is for a move back up to 1285 where I will be shorting.

Watch the comments section for updates throughout the day.

No Bottom for Homebuilders

On his Mad Money TV show on CNBC today, Jim Cramer declared that the homebuilder stocks had bottomed. He showed the charts of the major homebuilders, pointed to the July low, and declared it to be THE bottom. A guy on Fast Money was also all a-twitter over the homebuilders, and said that the XHB had a double-bottom on its chart.

Well, here’s the weekly chart. I don’t see any double-bottom on it, or reason to believe that THE bottom is in (click to enlarge):

The XHB was invented at the top of the housing mania in early 2006. Since then, it has been in a steady downtrend (blue lines). A bottom was made in early 2008, but the declining volume showed that it would not last (black lines).

In July, another bottom was made. But the sharp rally was made on an equally sharp reduction in volume (purple lines).

Is the big money buying homebuilder stocks? It sure doesn’t look like it. Will the talking heads on CNBC be able to keep the XHB running? Well, it looks like the XHB is already rolling over. This rally looks like a classic, sharp-and-low-volume bear-market retracement.

Cramer also denied that he had ever called a housing bottom before. But he definitely did so back in 2006 during the first bear-market rally in the sector (which you can see on the chart). In fact, he had a pile of sand on the floor of his show, “drew a line in the sand” on the homebuilders, and declared that the bottom was in. That was a memorable show. Cramer has literally been calling the bottom over-and-over for years now. And he shows no signs of stopping any time soon.

TRIN Oversold

According to my trading program, the TRIN closed Monday at 2.03. While that is a very oversold level, it is no guarantee that the market will bounce. Looking at recent history, a high TRIN only presaged a bounce while the market was up-trending. So, if the market is beginning another leg down, then it will do so regardless of how oversold it is.

However, since this is Month-End Markup Week, I would be surprised to see a plunge. The big funds will do their best to keep their holdings up so that their marketing departments will be able to paint rosy pictures for the month. And with volume being so light, the big funds can easily levitate the market.

Of course, if there is a disastrous event, not even the big funds will be able to keep things from falling apart. Such an event would be along the lines of a super-spike in oil, a massive loss of jobs, or a spectacular bank failure.

If we don’t get anything like that, then this week could look much the same as last week: maybe a little more downside, then the big funds come in and buy, the market stabilizes, and then rallies to end the week.

But I wouldn’t hold any long positions over the weekend, because such a scenario would be a recipe for another Monday Massacre.

Hurricane Gustav is headed straight for the Gulf of Mexico, but if it does go there it wouldn’t arrive until next week. So far, oil is not reacting to the storm.

Watch the comments section for updates throughout the day.

Monday’s Trading

The market seems to have run up on Friday in anticipation that the Freddie, Fannie, and Lehman disasters would somehow be transformed into miracles over the weekend. In the absence of said miracles, the market looks like it will open down on a gap.

Watch the comments section for updates throughout the day.