CNBC Declares New Bull Market

On CNBC at about 2:52pm, Matt Nesto declared that the bear market was over and a new bull market has begun. His evidence: “October is the bear killer.” Several bear markets in history have ended in October, and its October now, so the bear market must be over. Right?

Seems a bit flimsy to me.

Nesto also mentioned the VIX, but is the VIX’s bull run really at an end? Here is how I draw my VIX trend line (click to enlarge):

The chart uses daily closing levels, and I think that the purple line best represents the major trend. The green line is a minor trend line that has indeed been breached. Before we can presume a new bull market, or even a new bear-market rally, I think the purple line needs to be breached.

If you look at an intra-day chart of today’s trading, you will see that Nesto’s report almost perfectly top-ticked the action. So far, so bad.

If CNBC had informed us that the bull market had ended last year, I would take today’s declaration more seriously. But what are the chances of CNBC getting this right? In fact, I’m sure they’ve got it exactly wrong.

Let the record show that CNBC declared the 2008 bear market to be over on the very day that the great bull market that began in the early 1980’s came to an end.

SPY Rectangle

SPY may be forming a neutral rectangle pattern. Here is a 60-minute chart showing the potential rectangle bounded by purple lines (click to enlarge):

The lower purple line is well established, having been touched a few times. The upper purple line has seen a lot of trading action. It is possible that this rally wave will top out there Friday. If so, I may do some shorting at that level in anticipation of a pullback, especially since month-end markup buying will disappear on Monday.

Year-End Markup

The big funds are fighting surprisingly hard to support the market for their month-end markups. I have heard that this is fiscal year-end for most mutual funds, so perhaps they set aside an extra-large pile of cash to paint some greatly-improved numbers onto their annual reports.

Also, perhaps they don’t fear prosecution by the SEC here in Black October for blatantly running the market up. Since the government is desperate to levitate the market, perhaps the SEC even gave them the wink.

Or maybe Obama’s Plunge Production Team, which struck yesterday afternoon, is being routed by the Republican Plunge Protection Team which is trying to fool voters into thinking that the recession is over.

In any case, holding long positions at the end of the month has been a bad idea lately since the market usually falls when the big funds pull their bids in the new month.

Here is an updated version of the chart that I posted last month in The New Month Massacre, a post that saved you a lot of money (click to enlarge):

The purple arrows point to the beginning of each month since June. Note that the S&P 500 was levitated at the end of each month, and immediately fell in the new month – especially September and October.

Will November play out the same way? It looks to me like there is a rather large mark-up going on now, so maybe it will. If it does not, and the market continues to rally, then that’s a pretty good sign that it is the real deal.

Thursday’s Trading

Global Trade Grinds to a Halt
We’re hearing a lot about a credit thaw, but according to Bloomberg global trade is still slowing down because of credit problems. Here is a quote from a shipping broker:

“We only see this kind of shock when we have outbreaks of war, or maybe the oil shocks of the 1970s…”

Cargo is still piling up on docks, and jobs are being lost above and beyond would we get if this were a plain-vanilla recession.

Pension Funding to Cut Dividends and Jobs
Pension plans own stocks, and since stock prices are down, companies are legally required to put more money into their pension plans. They are getting the money by cutting dividends and laying off workers. See the Bloomberg story here.

Put/Call Ratio Signals Danger
The last time that the put/call ratio was this low was right before the October plunge. Not bullish…

The Immelt Meltdown
GE CEO Jeff Immelt, got the blame for pulling the rug out from under the market before the close on Wednesday, but was it all really just a mistake? Maybe, but last I heard, GE was “participating” in the Fed’s commercial paper program (translation: begging for money.) If GE is so shaky that it is having trouble selling its CP on the open market, then why would the stock market even bother paying attention to anything Immelt is saying?

The truth is that what we saw in the last 8 minutes of trading was just more of the same: redemptions. There simply isn’t anything else short of a major disaster that could cause such selling.

The “Finite De-Leveraging” Meme
This meme says that hedge-fund de-leveraging is a “finite event.” At some point it will be over and the market will go back to the land of rainbows, lollipops, and puppy dogs. While it is true that it certainly will end at some point, where will the market be at that time? I’m guessing that we will be under the 2002 lows. And how will we be able to get back above without any leveraged-up hedge funds to gun stocks higher again?

A few days ago I posted a link to a story stating that hedge funds had $1.6 trillion dollars under “management”. It is estimated that they have barfed up about 10% of that, and may go as high as 30%. And I don’t know if that includes European hedge funds. Of course, the mutual fund industry is much larger, and they appear to still be getting redemptions too. And gargantuan pension funds like Calpers also have to sell.

The dramatic whoosh down that we had Wednesday afternoon almost certainly was not the last.

Bearish Doji Star
SPY, QQQ, and IWM all have patterns very close to the bearish doji star. XLF couldn’t quite muster enough of a rally for the doji, and it’s 4.9% drop on Wednesday is a bit of a red flag.

How I Saved the Market

On Friday, I explained why the market didn’t like hearing Bernanke, Paulson, or President Bush speaking on CNBC. So far this week, I haven’t seen one second of Bernanke, Paulson, or Bush on CNBC – and the market has rallied.

Do you see how I control the world now?

(Note to new readers: while this blog has about a thousand readers per day, I can see from doing reverse-DNS look-ups on my server logs that I have many readers in high places. My ideas have shown up on CNBC many times.)

Why would I save the market if I’m bearish? Easy. I don’t like shorting “into the hole.” When the market is oversold, shorting is very dangerous as many bears found out on Tuesday. But if I have a nice, big, fat and stupid bear-market rally to short, then I can print money with little risk, just like I did in June. I dream of another bear-market rally like that…

Wednesday’s Trading

Rally Strength
The first monster rally that we had was on Monday, October 13. That was a gap-and-go day. Traders liked the bottoming action on the 10th, and were not ambivalent about getting long the next day. Tuesday’s rally looked more like a two-hour short-squeeze triggered by some weird euro/yen thing that will have absolutely no effect on the US economy. Zero new jobs will be created in the USA because Japan cuts interest rates by a quarter point.

SPY’s volume was indeed good, but QQQQ’s, XLF’s, and IWM’s were so-so. XLF and IWM actually had lower volume than they did on the 13th.

Tuesday’s rally was almost certainly a short squeeze, and not the result of bulls with conviction.

Selling the opening gap on the 14th was an incredibly fantastic trade. Let’s see if history repeats. I will be watching the IWM closely for follow-through because it is the weakest of the big-four ETF’s and the market cannot get far without it.

Watch the comments for updates throughout the day.

Japan! To the Rescue!

As today’s rally was fizzling out around 2:10pm (or so), CNBC reported that Japan was going to cut it’s interest rate in half – from 0.50% to 0.25%. While a quarter-point rate cut doesn’t mean anything to me, it obviously means quite a lot to a good number of traders because the NYSE TICK jumped immediately and the market was off to the races.

Here are some possible reasons why Japan saved our market today:

  1. It may have been a signal that another round of coordinated rate cuts was coming from the world’s central banks.
  2. A quarter point may mean a lot to carry traders, and European hedge funds might not blow up so much in the near future.
  3. It may have been a sign that Japan is commited to driving down the value of the yen, which will also help carry traders.

Will this have any effect on next Friday’s jobs report? Of course not. If you want to buy into this rally, you will need to gird your loins for what may be the first of a long series of -200k, or worse, jobs reports coming over the next several months. The market is not thinking about that today, but it will be soon.

Tuesday’s Trading

SPY Hangs by a Thread
The market had a bit of a rally going today until what looked like a wave of mutual-fund redemption selling hit in the afternoon. Bottom-fishers are no doubt clinging to hope since SPY was able to close above its October 10th intra-day low, but that’s a thin reed. The NASDAQ composite, NYSE composite, and Russell 2000 have all smashed their October 10th lows, so there isn’t much hope that SPY can hold on much longer.

Is Art Cashin Senile?
On CNBC this morning, Art Cashin was complaining that the banks were lagging. At the time, the XLF was the leading sector with a 2% rally going. What was he thinking? OK, maybe a couple of banks were down, but the financials were definitely strong this morning.

Cashin also keeps saying that we need a washout to put in a lasting low. But it looks to me like we have had a least a dozen washouts already. I think that Cashin is missing the point. Hedge funds are not going to emotionally capitulate. They are going to be steadily butchered by margin clerks until the massacre is complete.

Cashin has been right to be bearish, but he needs to start thinking in terms of liquidation rather than normal sentiment-based stock trading.

Feisty Futures
The futures have been mostly green 7 hours after Monday’s close, so maybe we will get a Turn-Around Tuesday. But the 2002 lows beckon and rallies are still for selling until they’re not.

Watch the comments for updates throughout the day.