Monday’s Trading

-300k Cometh

Bloomberg’s survey of economists shows that expectations for Friday’s jobs report is for 320,000 jobs lost in November.

If you look at the historical data, you will see that the worst report of the last recession was -330k in October of 2001. The stock market bottomed one full year later!

So, even if this is as bad as it gets, there is a good chance that we will see another year of bear-market action. And of course it can get worse. We topped -400k in May 1980.

Weekend Stock Market Discussion

New Fed Programs
I don’t think the Fed’s new mortgage and consumer-credit lending programs will cure the recession. During the last recession in 2001-2002, we had a normal credit environment with a healthy banking system. And yet, we still had a nasty recession and one of the most fierce bear markets in history. The primary reason was that corporations had overbuilt their technology infrastructure and ceased further investments.

While we have an historic credit crisis on our hands, that isn’t the real cause of the recession. Just like last time, we are overbuilt. We have too many houses, cars, malls, hotels, etc. Thanks to Alan Greenspan’s easy money policy, we went berserk and built way too much of everything.

Even if a normal credit environment could be magically restored on Monday, it would not halt, and reverse, the direction of the business cycle.

Obama’s Economic Team
Cramer says that we shouldn’t be so negative on the economy any more because of the wonderful team Obama has put together. Whether or not this team is as fantastic as it is being billed, there is no man who can reverse the business cycle.

The cycle will cycle. Get used to it.

Depression Era Bear-Market Rallies
Yerk brought up the topic of the gigantic bear-market rallies of the 1930s, but I am thinking that we won’t see such rallies this time. Back then, they didn’t have good unemployment statistics. In 1928:

“Baltimore, which had started the practice of sending police knocking on a door-to-door journey, reported 42.5% unemployed, the highest in the nation.”

(That quote can be found on page 159 of the 1928 chapter of this book. The links to all of the book can be found on CyclePro. Thanks to Sherry for the CyclePro link.)

So, as much as we like to criticize our government statistics, we don’t need to send police officers door-to-door to count heads. And we are not likely to be caught by surprise by anything as were the traders of the 1930s. I’m thinking that we might see very large trading ranges like we have experienced since October 10th, but not the unrealistically hopeful rallies of the 1930s.

CNBC Copycats
Today, Fast Money showed a chart of how the market has plunged at the beginning of each month recently. But you heard it here first months ago. I posted my New Month Massacre chart here and here.

Black Friday Trading

Say Goodbye to GM
Llewellyn H. Rockwell, Jr. thinks that Detroit’s struggle to land a bailout may be the beginning of a new political trend:

“The government looks poised for a fantastic gridlock that will let the liquidation take place so that we can move toward a good recovery.”

I’ve been hearing people say that if GM goes, the entire auto industry goes with it. Could that possibly be true? Will every single auto plant and parts plant in the country shut down? Will Toyota close up shop and go back to Japan? Will Tesla stop making their electric super car? Is it really impossible to reduce excess capacity without the world ending? Is our choice really between too many auto makers or none at all? This strikes me as a bit of an exaggeration.

Rising Wedge #3

A third bearish rising wedge pattern has formed on SPY’s 60-minute chart since the October 10th low. See my last post on the subject for further details. Click chart to enlarge:

I made a lot of money shorting wedge “B”, so I am shorting wedge “C” as we speak.

This next chart is from “the” bottom in October 2002:

It has the shape of a rising wedge, but the two break-away gaps on the 11th and the 15th gave the heads-up that something very bullish was happening.

Our current wedge has no such impressive gaps, and in fact, the futures have been very saggy in the morning. This gives me the feeling that the market doesn’t really want to rally and is being frog-marched by the big mutual funds who are running a month-end window-dressing short squeeze just like they did with wedge “B” at the end of October.

But, even if this is “the” bottom, I am comfortable shorting this wedge because prices will almost certainly correct back to this level in the near future. At that point, I could admit defeat and get out even. Of course, I think the chances of this being “the” bottom are about 0.00% because the economy is contracting hard and there is no sign that the Fed’s stimulus is able to escape the gravitational pull of the black hole that we call the banking system. In October 2002, the economy was actually getting better, so the fundamental background is dramatically different here in 2008.

So, I will be watching for gaps, and evaluating the nature of the selling on the first down day. If volume is light when the market corrects, then I may admit defeat at start looking for an exit.

Turkey Day Discussion

On Sunday night, Bloomberg will release its analyst estimates for next week’s economic reports. The estimate for next Friday’s jobs report could be -300k. During this recession, we will probably chalk-up a couple of -400k reports at some point.

If I had any long positions, I would close them out on Friday before reality intrudes upon the rally next week. Don’t forget, the market plunges ahead of the jobs report, not after it.