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.

Triangles In Trouble – Day 3

Since I began this series on Wednesday night, the S&P 500 futures have dropped 36 points. So far, I have the correct analysis, and things still look bearish to me though there are some potentially bullish signs. Here is what SPY looks like now (click to enlarge):

SPY has fallen decisively out of its symmetrical triangle (bounded by the purple lines). SPY also has a new, steeper downtrend line (black) that has been in force for four days now. SPY needs to break above that black line quickly, and fight it’s way at least back up to the upper purple line. Otherwise, the bottom-fishing bulls may sell in a panic.

On the bright side, the SPY candlestick pattern is close to a bullish inverted hammer or possibly a bullish belt hold. It doesn’t quite fit either, so if you have an opinion, please post in the comments.

Previously, I had used the QQQQ’s more bearish descending triangle pattern to predict that SPY would fall out of its triangle, so let’s see what the Q’s are doing:

The Q’s broke way below the lower purple line in the morning, but then fought back above it and held there at the close. Not bad, however the support around 29.40 has been badly eroded, and the Q’s now have the same black downtrend line that SPY does.

Here is the IWM chart:

Like SPY, IWM has decisively fallen out of its symmetrical triangle. More ominous though is that it was not able to even tag its new black downtrend line. The small-cap stocks of the IWM are where traders go when they feel extra bullish, so this is not a good sign.

Here is the XLF chart:

The XLF fell out of its triangle a few days ago, and made a new closing low on Friday. However, it was able to peak above its black downtrend line, and does indeed have a bullish inverted hammer candlestick pattern. So, it does look like it could bounce on Monday.

Friday’s reversal was very impressive. However, SPY has made three impressive intra-day reversals in a row on Wednesday, Thursday, and Friday, and still the feisty bulls have lost ground. Will they keep fighting?

Friday’s reversal reminded me of the action when the initial low was made on Friday, October 10th. There was some selling before the close on the 10th, just like we had on the 24th. However, the selling before the close this Friday was more intense and began earlier. So, that looks more bearish to me, but I will be watching the action of the futures tonight for an indication.

On the Sunday following October 10th, the futures gapped up a little bit and trended higher all night before the giant rally on the 13th. If I see that again tonight, then I will conclude that we have a bullish hammer reversal going and will take profits on my short futures position. I will then look to remount at the peak of that potential rally which may come after the Fed announcement on Wednesday.

Other bullish factors are:

  1. The big funds will do their best to prop things up as we approach the end of the month.
  2. The market is not overbought even after all the buying on Friday.
  3. The Fed will probably cut rates again.

If I had to trade right now, and couldn’t trade again for several days, I would stay short for a test of the 2002 lows.

LATE ADDITION: SPY’s rally on Friday afternoon can be seen as a failed thow-back attempt. Such back-testing of a breakout is common, whether prices break to the upside or the downside of the pattern. Because of this, Monday is a crucial day for SPY. Also, to confirm a breakout, many traders look for a 3% move. To regain its triangle, SPY would have had to close above 91 on Friday, but could only manage 87. So, the breakdown is confirmed by the 3% rule. Traders also like to see prices trade below the pattern for three days for confirmation, and while SPY has not done that yet, XLF has. And since the financial system is at the heart of our problems, XLF’s descent as a very bad sign for the market.

Half Way to the Bottom?

Felix Salmon has a good piece on the stock market’s dividend yield. To Salmon’s points I would add that, according to Yahoo Finance, SPY now has a dividend yield of 2.38%, so SPY would have to fall quite a bit more before it became cheap by historical standards.

If SPY were yielding 5-6%, many investors would load the boat to live off of the dividends and not care what the share price was. And with the historic collapse of the hedge fund industry, that might just be what the future holds. After all, if there are no hedge funds borrowing cheap money to gun stocks to ridiculous P/E’s, then what kind of world are you left with? We may be transitioning into a world where stocks have to “sing for their supper” by delivering attractive dividends.

Saturday Discussion

Giant Rally Any Minute Now…

The “meme of the day” being broadcast from Wall Street now is that a giant rally is right around the corner. Color me skeptical. While it is true that a big panicky plunge such as we have had is usually followed by a substantial snap-back rally, I can’t see any evidence for such a rally on the charts.

Not only that, but the futures were locked down Friday morning for one of the few times in history. And they were locked down because of the panic sweeping the globe – not anything that happened in the USA.

In the past, US stock market crashes have been triggered by financial crises in other countries such as Russia and Mexico. The way the world is going today, I wouldn’t be surprised to see half-a-dozen of such crises occurring simultaneously. And that wouldn’t be good for stocks.

If I were inclined to “buy stocks for the long term” as Larry Kudlow shrieked on CNBC like a blithering idiot through the first several months of this bear market, I would wait at least until the world stopped exploding.

Also, one of the ways to play the unpredictable, giant panic-plunges such as we had Friday morning is to always have something short in inventory. When traders start screaming for SDS and SKF, you have to have a few shares to sell to them, right? So, Friday afternoon, I stocked the shelves of my “panic store” with some fresh SDS. If traders stampede into my store in a frenzy on Monday morning demanding: “Inverse! I need inverse!” I will have some to sell to them – at an egregious mark-up, of course.

Friday’s Trading

Bear Market Just Getting Warmed Up?
Stocks are way over-priced. Sound crazy? Read this.

Greenspan’s Bug
Alan Greenspan told Congress today that he had found a bug in his world view. Ostensibly, this bug caused him to do crazy things back in 2003. He didn’t mention exactly what the glitch was. I wonder what it could be?

Market Prefers Its Head in the Sand
Every time CNBC put the congressional hearings on today, the market fell. When they cut away, it bounced back. I don’t believe that the market hates Bernanke, Paulson, or President Bush, but rather, it hates being reminded of reality.

For example, whenever Bernanke speaks, he feels compelled to give an objective assessment of the situation. The assessment is, of course, dire.

The market is trying not to hear that.

The market wants to hear how fabulously cheap stocks are and what a fantastic historical opportunity this is to make the buys of a lifetime. Whether or not that is true, it is all that the market wants to hear. Any content on CNBC that contradicts that is likely to trigger selling.

The market closed Thursday with a dramatic surge of buying, and is still a bit oversold short term. Normally, it would follow through with more buying Friday morning, but these are not normal times. Various things are blowing up around the world again, such as Samsung, so who knows what the market will do Friday?

Note: semiconductor chips, such as Samsung makes, are a good tell on the global economy because they go into just about every consumer product these days.

Watch the comments for updates throughout the day.

Triangles in Trouble – Day 2

Today, the market tested the October 10th low for the second time. I’m not impressed with the performance. Take a look at this SPY chart (click to enlarge):

Notice how SPY bounced to a lower level and with less volume than it did the first time on October 16th (blue arrows). That means that the ranks of bottom-callers have thinned, and there will probably be fewer buyers if SPY goes down to test the low again.

After the bounce on the 16th, SPY had two days of follow-through, but since this bounce was weaker, I’m thinking it may only have one more rally day. The upper purple line looms close over SPY’s head now, so that may be the last good entry point for shorting before the low is taken out.

SPY was the strongest of the big-four ETF’s today thanks to energy stocks, so if you are rooting for SPY, you have to root for oil and the XLE also. So, let’s take a look at the XLE chart:

The XLE also has a symmetrical triangle pattern. Notice how it bounced more strongly today (purple arrow) than it did on the 16th (blue arrow) and with increasing volume (black line). OPEC is threatening to cut supply to raise prices, but they won’t have any more luck than Bernanke has had with Libor. So, I think the XLE’s days are numbered along with SPY’s.

That’s the good news. Now for the bad news: QQQQ, IWM, and XLF all finished in the red during today’s “rally.” Here is the QQQQ chart:

QQQQ’s bounce off if the low today (purple arrow) was much weaker than the bounce on the 16th (blue arrow). Volume was lighter, and there was a price loss instead of a gain. I will be surprised if the Q’s can follow through and hit the upper purple line – especially now that Microsoft has guided down.

Here is the IWM chart:

IWM bounced off of its low, but fell out of its triangle, and sustained a nasty loss. Tarzan no like.

The XLF was the first big-four ETF to fall out of its triangle:

XLF held above its low, made a nice reversal, but still finished with a loss. Any rally up to the purple line will probably be money in the bank for shorts once again. The XLF is our financial system, and if it can’t gain ground, the prospects for the rest of the market are not good.

Thursday’s Trading

“Contrary” Carter Worth
On “Fast Money” Monday night, Carter Worth, who is chief market technician at Oppenheimer, said that they were “all in” because the market had priced in all potential bad news.

Two days later? The S&P is down almost 100 points.

Watch the comments for updates throughout the day, and watch out for falling hedge funds, and maybe Oppenheimer too!

Triangles in Trouble

Today, we had a false breakout of SPY’s symmetrical triangle. On this chart, you can see how prices fell below the lower purple line, but then popped back above before the close (click to enlarge):

If SPY is able to rally up to the upper purple line again, that would probably be a good place to sell. Many traders will be looking to sell at that point, so you will have company.

QQQQ was the only big-four ETF to fully retest its low, so its pattern is a more bearish descending triangle:

Apple may have saved the Q’s from breaking down today, and since there is only one Apple to save the world, I am eager for a bounce up to the upper purple line to short here also.

The IWM is in the same position as SPY. It had a false break down:

I think IWM will go the same way as XLF. Here we see the XLF has drifted out the apex of its triangle:

What is the pattern now, you ask plaintively? Well, it looks like the upper purple line has become a simple downtrend line and may develop into a downtrend channel.

It is possible that the other three ETF’s will follow in the footsteps of XLF by drifting out of their triangles and entering downtrend channels.

My strategy will be to watch as each ETF approaches its top line, and if the rally volume is light, to short in the vicinity of the top line.

Bulls Eye!

Here is the chart that I posted on October 16th in “Spy Rally Target” (click to enlarge):

The blue arrow marks the spot where I thought that SPY would top out. Here is what the chart looks like now:

Note how the blue arrow hit the bulls eye. Pretty snazzy, huh? If only I could do that every day, right?

I only learned how to analyze charts a few months ago, so maybe I will be doing it every day during the next bear market in 2015.

Wednesday’s Trading

Apple’s earnings triggered a large rally after hours Tuesday, but a few hours later, Hank Paulson spoke and knocked the futures back down. A few hours later, the failure of the Samsung/Sandisk deal seems to have put another dent in the futures.

The VIX was only up 0.26% on Tuesday which shows that the S&P’s 30-point drop didn’t inspire much fear. So, let’s keep in mind that there is a potential double-top on the VIX daily chart. Using closing prices, there are two peaks near 70 and a valley in between at 55. So, if the pattern plays out, we might see a move down to 40 which would get the VIX down through its primary uptrend line dating back to the beginning of September.

Watch the comments for updates throughout the day.

Tuesday’s Trading

The big drop-off in volume that we had on Monday is a feature of symmetrical triangle patterns. So, it is normal.

Symmetrical triangles are the least predictable pattern. There is no way to tell which way they will break. According to Edwards & Magee, they are usually continuation patterns, meaning that they are areas of consolidation before the prior trend continues on its way. However, after an extended trend, such as we have now, it is possible for this pattern to produce a reversal.

It is possible that SPY’s triangle will turn out to be the pennant part of a giant bear flag. It is also possible that it will fizzle-out. While we can’t really predict how the pattern will break, we can look around the rest of the market for clues.

For example, QQQQ’s pattern looks more like a bearish descending triangle since it has two roughly-equal lower points at about $29.30. And since the Q’s have been leading the market, that might be a bearish signal.

XLF has moved deep into the apex of its triangle, so it will be breaking out of the pattern soon, if only by default. The deeper prices move into the apex, the less power the breakout should have. So, maybe there will be a fizzle-out instead of a dramatic breakout, though that doesn’t seem likely in this volatile market.

The Q’s also finished Monday with a bearish hanging man candlestick pattern on the daily chart. And a disappointing earnings report from Texas Instruments had the NASDAQ-100 leading the futures down past midnight (when I wrote this). So maybe we will not get the dramatic breakout Tuesday that so many traders seemed to be excited about.

Of course, the Lehman CDS settlement is the big event for this Turnaround Tuesday, and it is possible that the market, by rallying on Monday, has set up for a sell-the-news reaction if there is no ensuing disaster.