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.

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.

Hot Poker MIA

The red-hot poker that stabbed the bears Friday and Monday afternoons was missing-in-action today. But it’s not like they didn’t try! Take a look at this minute chart of the S&P 500 futures showing the action around 3pm (click to enlarge):

At 2:55pm, a surge of buying began that was 3 or 4 times the previous volume average. The previous chart pattern did not look like a breakout was coming and there was no news at the time. So, this was very likely somebody trying to run another last-hour squeeze play.

They got the futes up to 860, but could not spark another giant rally. Why not? Because the crowd is leaning long and they are fresh out of shorts to squeeze. I’ll bet that they don’t try again tomorrow.


I am not long or short Citigroup, or any financial ETF’s, but I find the chart amusing:

Citi is up huge this week, yet all of the candles on its chart are red indicating constant selling pressure. How does it do that? All of its gains have been made on opening gaps. Once the stock is open, the selling resumes. I’m thinking that somebody big does not want to be in the stock. Mutual funds are probably exiting it.

Citi’s crazy chart seems appropriate for the premier zombie corporation leading America into its very own, Japanese-style Lost Decade.

Tuesday’s Trading

Put/Call Ratio
Monday registered the second lowest put/call ratio so far this year. Definitely not bullish.

Weak Volume
Volume slacked off from Friday in the big-four ETF’s during Monday’s rally. SPY, QQQQ, and XLF all exhibited waning buying interest, and the IWM’s volume plunged from 161 million on Friday to 97 million on Monday.

Lots More Hedge Funds Will Die
So says this hedge fund manager. The only reason why they are not blowing up now is because they are “gating” – refusing redemptions – and imagine how angry that is making their clients. Rallies will be sold, because they must be.

TRIN Sell Signal

The three-day TRIN average is flashing a major overbought condition for the first time since the big crash began in late September (click chart to enlarge):

The bottom panel of the chart is the S&P 500. The blue line in the top panel is the three-day average of the TRIN. The red line is where the TRIN is very overbought. The green line is where it is oversold.

In a normal market, this indicator flashes good buy signals at the green line. However, in this historic bear market, prices plunge even while deeply oversold, so I have not been relying upon the TRIN for buy signals lately.

Notice that the current reading of 0.71 (in blue at the right) is the most overbought condition we have seen since September 18th, which was not exactly a great time to be getting all giddy about the market.

I have used this indicator to print money here and here, for example. I put on some short positions this afternoon, and am looking to add more into any further strength.

Also, notice that the three-day candlestick pattern from September 17, 18, and 19 (blue arrows) is exactly the same as the pattern of the last three trading days.

Monday’s Trading

Level Drama
I enjoy “level drama” like we had on Friday with the S&P 500 trying to break back above the October 2002 intra-day low of 768.67, which it did in the afternoon after some trouble in the morning. However, this sort of level drama should not be a main focus on days where the market is likely to be rigged such as Friday’s options-expiration, month-end window dressing, or things like the presidential election earlier this month. 768.67 will matter again – maybe early this week, or early next week after the month-end window dressing is done.

820 or Bust

Here is an hourly chart of the S&P 500 futures (click to enlarge):

The blue lines bound the November downtrend channel. Note that prices were able to hang near the upper blue line (above the red line) for a few days last week before plunging below. Friday’s last-hour geyser shot prices back above the red line, and that may presage another test of the upper blue line.

The purple line is a resistance line and starts with point “A” which was a price probe down below the October support line. Note that point A served as resistance for point B a few days later. I have the feeling that there are a lot of trapped bulls at point B around 820 who thought that they were catching a ride on a geyser.

And so, if the market rallies Monday, it should hit strong resistance around 820 from both the blue line and the purple line. The market is still on the oversold side technically, but I’m not sure that there are many more weak-handed shorts to squeeze after Friday’s traditional “burning of the puts.”

The big funds will do their best to support the market this week for month-end mark-up. But the tidal wave of bad news just keeps coming, so they have their work cut out for them once again.

Above 820, 840 should be the next resistance level.

Randy Couture is a Sore Loser

After being defeated by Brock “Lightening” Lesnar at UFC 91, Randy Couture said that there is nothing that he would have done differently and his game plan worked very well, but he “got caught.” That’s what a fighter says when he takes one on the chin and gets knocked out.

Any fighter can get knocked out because a shot to the chin sends a shock wave into your brain that pushes your “off” button. You can juice your muscles up as big as you want, but you can’t juice up your chin. And sometimes a lesser fighter can knock out a better opponent by throwing lots of punches with one getting lucky and landing just right.

But Couture didn’t get hit on the chin. Lesnar hit him on the side of the head, a strike that requires more power for a KO than a shot to the chin. Also, Lesnar’s previous two UFC opponents, Frank Mir and Heath Hearing both saw stars after Lesnar right hands.

Lesnar did not get lucky.

Lesnar’s right hand is powerful, but it is also fast as lightening. It’s like having bricks shot out of a cannon coming at you. It’s going to be a problem for a lot of fighters.

I would also say that Lesnar out-wrestled Couture, if not by much. And Lesnar had better stamina. It was a clean and decisive victory any way you slice it.

Friday’s Trading

Today’s Drama…
…will be a potential attempt by the S&P 500 to regain the October 2002 intra-day low of 768.67. (I predicted that we would fall through that level on October 15th in 768.67 – Coming Soon to a Screen Near You – yet another one of my fulfilled prophecies.)

Failure to recapture 768.67 would likely lead to despair amongst investors, and more aggressive shorting by technical traders.

A lot of bulls got trapped up around 820 on Thursday and I’m sure that they are just itching to get out even, so that will be a strong resistance area if the market can get that high.

Don’t Forget Iran
We are now in the “window of opportunity” period where many analysts have speculated that Israel would strike Iran: After the election and before the Democrats take over in January. And now Iran has enough uranium for a bomb. Shorting oil seems easy now, but it isn’t without risks.

Thursday’s Trading

Wagoner to Pull a “Fuld”?
Will Rick Wagoner blow up GM just like Dick Fuld blew up Lehman in an attempt to extort money from the government? As you may recall, Fuld had the chance to sell his company to some suckers in Korea. He turned down the offer and went the extortion route, suicide-bombing the financial world in the process.

Wagoner says that he has “no plans” for a bankruptcy filing, which is equivalent to vowing to burn through his remaining cash as fast as possible. That’s very Fuldian.

Cramer says that GM has issued a multitude of bonds. I didn’t think there were that many clown college endowment funds in the world, but I never actually counted them up. Who else would have bought a GM bond? In any case, GM is a tentacled company like Lehman, so this could be much uglier than simple plant-and-dealer closings and layoffs.

S&P Scenario
One possibility is that the SPX will drop to the 775 area, the 2002 low, and then bounce back up and back-test 840.

Don’t Bet on Seasonality
The days leading up to Thanksgiving are usually a cheerful time for the market. But seasonality is only one factor – and small one at that. After all, we’re not growing crops here, right? To stay long through Thanksgiving, you need a much stronger catalyst. A small statistical edge is nothing in the face of GM and Citigroup exploding, right? Not to mention the commercial real estate bust taking the XLF down to zero as the USA goes belly up… (I might be exaggerating a little, but you get the idea, right?)

Go India!
Talking heads on CNBC were surprised to discover that India had a navy after news hit that an Indian vessel had sunk the pirate “mother ship.” India has a long naval tradition and a well-regarded, highly-competent navy. CNBC should do a story on the Indian Navy as penance.

These pirates should realize that the more the world goes broke, the angrier it gets. People are just itching for things to blow up and sink. Might not be the best time to be a pirate…