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.”

(The book where I found that quote is no longer online.)

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.

Yet Another CNBC Bottom Call

Matt Nesto thinks the bottom may be in once again. His reasoning? The consumer staples were a lagging sector today. (He made comments to that effect on CNBC around 4:10pm) Seems like flimsy reasoning to me. The last time he called the bottom it was because the month began with an “O”. That call was on October 31st when the S&P 500 closed at 969. The S&P then rolled over and plunged more than 200 points over the next three weeks.

Note to Nesto: don’t make bottom calls at the end of the month. There is this thing called “month end window dressing.” Look into it.

Wednesday’s Trading

Hanging Men
Many daily charts now have bearish hanging-man candlestick patterns. Take a look at the XLF and IWM for especially good examples, and QQQQ and SPY fit the pattern pretty closely too.

Grantham Says the Bear Ain’t Done
In this interview, famed value investor Jeremy Grantham who manages $100 billion gives 2-1 odds that the market will go down a lot in 2009, and wouldn’t be surprised to see the S&P 500 at 600. He says that earnings will be mercilessly crushed for the next year or two. In the account that he manages for his sister, he has her in 80% cash. He also said that making Greenspan Fed chairman was a dumb idea because he was a follower of Ayn Rand.

Russia Preparing to Take Alaska Back?
After the USA collapses and splits into six new countries in the spring, Alaska will be left high and dry and ripe for the plucking. So says a Russian scholar.

BKX Death Spiral in Store for SPX?

Take a look at this monthly BKX banking-index chart (click to enlarge):

Notice that after plunging through the 2002 lows, the BKX staged a “throw back” rally back up (blue arrow) to those levels in September. The BKX failed to recapture the 2002 lows, rolled over and plunged hard. This may be a good template for what the S&P 500 may do in the next few months. I will be betting that way.

Screaming TRIN Sell Signal

The TRIN sell signal that I wrote about on Monday has intensified. Since it is a three-day average, Thursday’s selling has dropped off and Tuesday’s buying has been added on. So the average now stands at 0.68 and is the most overbought reading since February 26, 2008 when it hit 0.62 during another month-end mark-up period. Funny how that works, right? By March 10, 2008, the S&P 500 had dropped over 100 points (click chart to enlarge):

Probably the only way that this signal could be wrong would be if the masses were stampeding back into stocks. And since SPY’s daily volume has dropped for three straight days, I’m guessing that is not the case. So, I added to my short positions on Tuesday and will keep selling into strength until I have a huge mound of triple-short ETF’s on hand for when this month-end markup is done.

October’s month-end markup gave us a fantastic shorting opportunity, and this month’s chart pattern isn’t looking too different. As I mentioned back then, the SEC is probably giving the wink to the big funds to run up stocks, which is normally against the law on the last day or two of the month. It’s a huge gift for a short trade.

Thanksgiving Day Massacre

For those of you playing for a seasonal rally, take a look at this 15-minute SPY chart for the three days around Thanksgiving 2006 (click to enlarge):

SPY plunged from 141 down to 138 – and that was during an egregious bull market with an historic lack of volatility!

Note: I chose 2006 because it stuck in my memory.