Wednesday’s Trading

TNX Time
After the bond pits close in the afternoon, stocks are free to act crazy. I believe that is at 3pm because that’s when I stop getting TNX quotes. The TNX was taking a beating Tuesday, and so were stocks, until 3pm. Take a look at the intra-day chart. Was it a coincidence that the last-hour rally started right after the bond-buying was done? Probably not. I have noticed this pattern a few times. If somebody wants to move the market, be it the big funds, the PPT, or the put-writers, it makes sense to wait until the bond traders are done.

We already know that we need to be alert around 3pm, and this may be a big part of the reason why.

Sagging XLF
Even after a last hour surge (which George played like a maestro via UYG), XLF chalked up a new bear-market low close, and a new intra-day low. Perhaps the financials are sinking because Hank Paulson said that he was done spending TARP money today. Paulson said that he will spend only for emergencies and try to save the rest of the money for Obama.

If traders were thinking that financials were going to get the whole $700 billion, then it makes sense that the stocks would fall. Especially when you just know that Obama is not going to give the rest of it to banks. The Democrats are already agitating for the money to go to other things, and that’s exactly what’s going to happen. Each UAW member is going to get a solid gold mansion just like the one that Chester J. Lampwick had in that old episode of The Simpsons.

Deflationistas 1, Inflationistas 0
Today’s record plunge in the PPI scores a point for deflation over inflation, or stagflation. See the chart at Bespoke. Go Team Deflation!

TNX Transgression

The TNX dropped 4% today and fell through the lower trend line that has been in place since October 6th (click chart to enlarge):

It didn’t matter for stocks today, but it likely will soon. Maybe after the put-writers are done fleecing the suckers.

In case you don’t know, the TNX is the 10-year bond yield and usually goes in the same direction as stocks. Why is that? Because portfolio managers have two big buttons on their desks. One is labeled “sell stocks, buy bonds” and the other is “buy stocks, sell bonds.” Trained monkeys press the buttons all day long. So, if the yield is falling, that means the monkeys are selling stocks.

Notice that the TNX turned up on October 6th before stocks did so on October 10th. The TNX gave us the heads-up.

Testing, or Eroding?

Over the past few days, I have seen several chart analysts extolling the virtues of the market as it “keeps bouncing off of its lows.”

They should know better.

In reality, the market is eroding the support around the October lows. Too much “testing” turns into erosion, and that’s bad, mmm’k?

That’s how its done. After a big plunge like we had, you get a period of consolidation, then erosion, and then another leg down.

There isn’t even the smallest hint of a reversal pattern on the charts. The nascent reverse head-and-shoulders has been blown out. And when the SPX drops to 819 and 826 like it did on Thursday and today, those are not successful “tests” of the low. Those are price probes. The market is dipping its toe in before it makes the dive.

This recession is a MONSTER compared to the 2001-2002 recession. I think that the odds are very small that the market can hold above the October 2002 lows.

Tuesday’s Trading

Still Too Many Bulls?
Yesterday morning, I suspected that the crowd was leaning bullish, and that we might get some more downside. Sure enough, the Ticker Sense blogger poll Monday morning proved out my suspicion.

Did enough bulls capitulate on Monday? I don’t know, but looking around the blog-o-sphere I still see quite a lot of hope, and some griping about the “rigged” market. Those writers sound like trapped bulls to me. Also, this market doesn’t seem to be able to rally until a sufficient number of late-to-the-party shorts build up to provide fuel for the short squeeze. So maybe the market has to drop for another day or two before it can rally.

On the other hand, the ‘Daq might be able to put in a “Get Lost Jerry Yang” rally since a deal may finally become feasible with him no longer steering Yahoo into icebergs. ‘Daq futures are down a bit less than S&P 500 futures as I write this, so it does look like there is a bit of relative strength there.

SPY’s daily MACD has turned negative for the first time in three weeks. The XLF’s has been negative for four trading days now.

Broadening Patterns

For you fans of broadening patterns, here are two that I have found. This is a weekly chart of the S&P 500 (click to enlarge):

This is an hourly chart of the S&P 500 showing a broadening pattern on Friday:

Prices look like they want to tag the lower (red) lines.

Wonders Are Ceasing

Will wonders never cease? Maybe they will. Take a look at this SPY chart (click to enlarge):

The blue arrows mark the three giant, one-day-wonder rallies since October 10th. As impressive as these rallies were, each one has topped out at a lower level.

The volume has increased on the second and third rally days, but I think this indicates that more-and-more short interest is building up and then being burned off. So this trend may indicate that there is more enthusiasm for shorting the market than for buying it, and the animal-spirits advantage may belong to the bears.

Car Crash Coming?

Cramer says that if GM goes down, the Dow goes down to 6,000. Can GM survive until Obama takes over? Because it looks like they will have to judging by what appear to be some very hostile Republicans:

“Companies fail every day and others take their place. I think this is a road we should not go down,” said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.

Phil LeBeau, CNBC’s automotive reporter, is apoplectic over how much of a disaster it would be to not bail out GM. My question for LeBeau is, what exactly does he plan on doing with all the cars that Detroit will build after the bailout? The American people either don’t want them, or can’t afford them. Subsidizing Detroit to build more cars doesn’t make any more sense than subsidizing the home builders to build more houses. There is no escaping the fact that the American people are not as rich as they thought they were. It turns out that we cannot afford three houses and six cars each after all. Who knew?

Maybe we could stack up all these new cars in warehouses until the depression ends in 2018. Cramer wants to bulldoze empty houses, so maybe taxpayer-subsidized cars can be crashed into empty houses so they can both go up in flames. Seems like a good use of taxpayer money…

Couture vs. Lesnar

Brock Lesnar is fast as lightening. Randy Couture is 45 years old.

Randy is smart. Brock is dumb.

Those are the factors that will decide this fight at UFC 91.

Let’s assume that Lesnar has trained-up enough to avoid getting caught in a ridiculous foot-lock like the one that Frank Mir defeated him with. (When was the last time a UFC fighter was defeated by a foot lock anyway? Ever?) And since Couture is no submission specialist, he will have to find another way to defeat Lesnar. But Randy is very smart, and if it is possible, he is the fighter most capable of designing an anti-Lesnar game plan.

Part of the solution might come from Couture’s Greco-Roman wrestling experience. Lesnar has defeated many freestyle wrestlers, and fake wrestlers, so maybe Randy can surprise him with some slick Greco-Roman moves.

Couture’s biggest problem may be that he does not have enough film of Lesnar to find flaws in Lesnar’s game. Lesnar only has a few rounds of MMA experience.

Both Lesnar and Couture are decorated wrestlers. We know that Randy’s boxing is pretty good, but we haven’t seen enough of Lesnar’s stand-up to make a judgment of his skills. However, that’s exactly what I want to see from Lesnar. The last thing we need is to have Tito Ortiz’s boring ground-and-pound replaced by Lesnar’s boring ground-and-pound.

Frank Mir said that he saw stars after Lesnar knocked him down with a right hand. Heath Herring literally flew across the ring after another Lesnar right hand. We need to see more of that. Lots more. Watching the strike in slow motion, you see that Herring was like a deer frozen in the headlights. Lesnar was that much faster. And don’t forget that Lesnar landed two very nice leg kicks on Herring too.

It would be sad if Lesnar would continue to think of himself as primarily a wrestler because he has the speed and agility to do some awesome stand-up. And he should take note of the fact that even fighters who are competent on the ground, like Chuck Liddell and Rich Franklin, try to keep fights standing up to please the fans. Ideally, Lesnar would throw some strikes, do a lightening fast take-down, get into an exciting scramble on the ground, let the guy up, knock him head-over-heals, lather, rinse, repeat.

Heath Herring has never been a UFC champion, but he did defeat an equally gigantic wrestler, Mark Kerr, back in 2001. So, I think the fact that Lesnar was able to totally rag-doll Herring is a significant achievement.

I say that Lesnar is dumb because he can’t figure out how to play nice with others. He got cut from the NFL’s Minnesota Vikings because he was basically too much of a jerk. Lesnar is no team player, and make no mistake, MMA is a team sport. You may fight in the ring by yourself, but if you don’t train with a solid team, your success will be greatly diminished.

Lesnar is a lot like another very talented wrestling jerk, Matt Hamill. When Hamil was on The Ultimate Fighter TV show, the other fighters ganged up on him and gave him a beating – that’s how much of a jerk he is. Like Hamill, Lesnar trains by setting up a gym and then hiring people to come in and work with him. That’s not the best way to train. You want to join a camp with wise, graybeard coaches and other champion fighters. That’s how fighters like Anderson Silva and Thiago Alves do it.

Lesnar: “I like to do things on my own” – in his private gym. Lesnar: as a kid, “I didn’t make any friends. Life is not about making friends.” This is a very wrong attitude.

Randy is the exact opposite of Lesnar in this regard. He owns a chain of MMA gyms and has always trained with other top fighters. Lesnar may be talented enough to get away with being a lone-eagle jerk, but he will never reach his full potential with that type of training.

I also think that Lesnar might be dumb because he hit both Mir and Herring with rabbit punches. Is he too dumb to learn simple rules, or is he just too negligent to learn the rules? In either case, it’s a bad sign because there are quite a lot of details to master in MMA. It is my impression that fighters who make mistakes like this don’t go on to become champions.

As an MMA fan, I was overjoyed when a real fighter, Frank Mir, defeated the phony-baloney “professional” wrestler, Lesnar. That fool Hulk Hogan is always going on about how UFC fights are fake and that the fighters “work light.” What an imbecile. Of course, Hogan wisely watches UFC fights from the audience with his daughter Brooke, instead of getting into the ring.

Unlike Hogan, Lesnar is a real accomplished athlete. The problem though, is that he has spent too many years pretending to fight when he could have been developing real MMA skills. If Lesnar were facing a young Randy Couture, he wouldn’t have much of a chance.

But I will not root for Couture. If Couture wins, he might run off and pout about his pay and hire layers to sue the UFC again. He always does that, and always robs the fans of exciting rematches.

So, I will be rooting for Lesnar unless he bores me with incessant ground-and-pound. And I think he can win.

Friday’s Trading

Patterns A-Plenty

Alan Farley gives a good run-down of the various patterns being considered for the market in a piece here. I favor a downtrend channel for the Q’s, but Farley thinks the SPX triangle takes precedence.

I like the QQQQ downtrend channel better because I think that the ‘Daq gives a better read on economic growth. And the NASDAQ-100 companies don’t include banks or oils. OPEC attempts to manipulate oil, and the federal government manipulates banks with no end of crazy schemes.

So, I would rather take my direction from the pristine Q’s than the tainted SPY’s. If that’s a correct position, then SPY’s triangle should be resolved to the downside.

One-Day Wonder Aftermath
After the giant rally on October 13th, the market gapped higher, flopped over, and then plunged for two days. After the giant rally on October 28th, the market closed down the next day, but then rallied for four days. However, that four-day rally was almost certainly attributable to the big funds doing their year-end markups, plus two days of the PPT trying to get McCain elected.

This time around, there is nobody to levitate the market until the end of next week when options expire. So, I am expecting a down day today. The futures are down under 897 as I write this, possibly because of the looming retail sales number that might roll the economic clock back 34 years. And Nordstrom and Kohl’s dropped a couple of retail bombs after the bell on Thursday.

Thursday’s Trading

Trade the Range?
Many traders seem to have gotten comfortable “trading the range.” But all good ranges come to an end at some point. I’m thinking that Best Buy put the first nail in the range’s coffin Wednesday morning, and Intel put the second one in Wednesday evening. Both companies reported that the world was ending. So, it might be time to give up trading the range, and to start trading my downtrend channel.

Beware Purveyors of Puts
Options expiration is next Friday, so when the put-sellers engineer a big, scary plunge, don’t fall for their sales tactic. Once they sell you those puts, they will turn around and, using the money you paid to them, start buying futures to ignite a short squeeze and run your puts out worthless by next Friday. They might even turbo-charge the squeeze by getting Warren Buffet to write another “Buy, Buy, Buy!” piece for the New York Times like he did on the morning of the last expiration day. So, if in the next few days, there comes a moment where you feel that you absolutely, positively must have some puts, you might be better off with some calls.

This Time, It’s Different

This 60-minute SPY chart shows that SPY is approaching its low with more momentum this time around (click to enlarge):

During the first descent on October 22, 23 & 24, marked in blue as “A” and “1, 2, 3”, SPY leveled off as it fell. During the current descent, marked in red as “B”, SPY is not being shy about its intentions. It looks like it wants to proceed lower with all due haste.

Note: the lines I have drawn on the chart are artistic, rather than technical, and are designed to highlight character rather than precise trends.

King Dollar: “Off With America’s Head!”

Here is a 60-minute chart of the “Dixy”, the US dollar index. Note the classic bull pennant pattern (click to enlarge):

Unless the Dixy is about to make a double-top, the pennant should be able to power it up to 91 or 92, which are resistance levels from late 2005 and early 2006.

Why is the strong dollar crushing the stock market? Because for at least 10 years now, the market and economy have been dependent upon monetary inflation. A strong dollar, and weak gold, indicate that the Fed is failing to blow up another bubble. And no more bubbles is bad news for stocks, in the short run.

Eventually, a strong dollar would be bullish. But to get to that point, you have to go through a Paul Volcker-style mini depression as we did in the early 1980’s.

Wednesday’s Trading

Business as Usual
My conclusion after surveying the economic landscape: it’s business as usual – everything exploding. But that won’t stop the market from making a technical bounce if it is so inclined…

Joe Sixpack on Fire!
Short-squeeze rallies can happen at any time, especially now that brokers are reporting a surge in new accounts, and trading, by retail investors. What happens when Joe Sixpack sees the Dow skyrocketing 1,000 points in one day, and hears Warren Buffet saying what a great time it is to buy? He races to his computer to get in on the fabulous ‘bull-market’ action. Is he equipped to handle the insane volatility? No. Very few of us are.

So, when you see these short, sharp, and breathtaking short-squeeze rallies, the fuel is being provided by Joe Sixpack’s burning carcass.

Candlestick Pattern
SPY, QQQQ, XLF, and IWM have a daily pattern that isn’t quite a bullish doji star, but isn’t too far from it.

QQQQ Downtrend Channel

Here is another way of looking at the market: the Q’s may be in a downtrend channel (click chart to enlarge):

The chart uses daily closing prices. The upper black line has been resistance for several weeks. If the market can bounce off of its current short-term oversold condition, the Q’s may top out in the $32 area.

Tuesday’s Trading

Whitney: “Nothing can save the system.”
Meri-death Whitney told the FT that nothing, short of “massive reflation” can save the banking system. That quote comes in part 2 of this four-part interview. You may have been surprised to learn this morning that AIG still posed a “systemic risk” but you are probably going to have to get used to it. Whitney says that the system is no better off now than it was a year ago.

Bearish Candlestick Pattern?
For the past two days, the closest candlestick pattern I can see is a bearish engulfing pattern. QQQQ, IWM, and XLF all have it. SPY does not, but probably only because of oil’s bounce and consequently, the XLE’s bounce. Volume was light Monday, but Tuesday is an official holiday, so perhaps some traders are taking a long weekend.

The Last Hour Bounce
A few bloggers today (including Cramer) expressed confusion as to why the market has bounced in the last hour of the last three trading days. I’m thinking that traders are getting short in the morning playing for a hedge-fund barf. When it doesn’t happen, they buy-to-cover in a hurry before the day ends.

Barack O’Blunder?
Did Obama sink Detroit? On Monday, the President-Elect went to the white house to lobby President Bush to save the jobs of his auto-worker supporters. But over the weekend, Obama said that he would probably revoke most of Bush’s executive orders. This does not strike me as a brilliant political tactic. Shouldn’t Obama have buttered-up Bush instead of dissing him? Shouldn’t he have praised the executive orders before he went to beg a Republican president to save a Democratic interest-group – the UAW? GM was down almost 25% on Monday.

BS, Chinese Style

Tonight, the futures are rallying on the announcement of a Chinese economic stimulus package. And that is tantamount to an announcement that the Chinese economy is in trouble.

Question: If your GDP is growing at 9%, why do you need a stimulus program?

Answer: Because you are full of it.

As you may recall, the S&P 500 rallied 45 points on October 20th after China announced that its GDP grew at 9%.

The positive response of the US markets to this Chinese stimulus program is obviously knee-jerk short covering. The Chinese have announced that their fabulous 9% economy has just gone “poof.”

Not bullish.

So, the market rallied when China said its economy was on fire, and now it is rallying again after China has said that its economy is in trouble. What do we learn from this? Weak-handed shorts don’t actually know anything and cover in a panic at any sort of important-sounding news.

The “China rally” on October 20th marked a short-term peak for the S&P 500. This new China rally probably will also.

Will the Chinese stimulus program divert money that has been buying US bonds? If so, we can expect our interest rates here to rise, and effectively veto some of the Fed’s stimulus.

As a manufacturing economy, the Chinese may well suffer more in this global recession than any other country. Manufacturing is capital-intensive, and over-building factories is a very costly mistake. If the Chinese turn inward, and the torrent of US bond purchases turns into a trickle, the Fed will have a new “conundrum” to worry about: stubbornly high interest rates, the opposite of the stubbornly low rates from the conundrum days of a few years ago.

SPX Death Cross

When the week of October 10th ended, the S&P 500 made a “death cross” on its weekly chart. That’s when the 50-week moving average crosses under the 200-week moving average. See the blue arrows on the chart. The black line is the SPX, the purple line is the 50-week, and the red line is the 200-week (click to enlarge):

This is only the second death cross on the weekly chart since the great bull market began in the early 1980’s. The first death cross was made in November 2001, and since there was another year of bear market after that, we might have another year to go before we put in a bottom this time too.