Big Funds Win Tiny Moral Victory in Disastrous Quarter-End
Today’s drama was whether or not the Dow would close in “official” bear-market territory of 20% below the high set on October 9, 2007 of 14,164. The magic number was 11,331, and though the Dow dipped under that number, it was able to close above at 11,346.
This is important because the big mutual funds were desperate to prevent the giant “BEAR MARKET” headlines in the media over the weekend. There will still be headlines, but they won’t be as big and as highly-placed. So, the funds won a tiny moral victory after taking a brutal beating during a period when they are usually able to paint happy faces on the charts.
So far, it doesn’t look like the public has begun to pull its money out of mutual funds in a panic yet. They poured money into the market during the March-May bear-market rally, and will surely pull it out soon.
Over the weekend, we will probably hear stories about how a bear market was narrowly averted, and that the S&P 500 successfully tested its March low. That, of course, is BS, but it may be enough to hold back the tsunami for a few more days.
While it is illegal for funds to run their stocks up at the end of a quarter, they are allowed to bid underneath, at that is what they did today. When the market did not crack, some late-to-the-party shorts got nervous and bailed out. So, if you look at the charts, especially the QQQQ chart, you will see what looks like a nascent reversal pattern.
A good deal of traders will look at the charts over the weekend and conclude that a short-term bottom is forming. And with the big funds bidding underneath again on Monday, the last day of the month, we could get a short-squeeze rally.
The market burned off a good deal of its over-sold condition by going more-or-less sideways today, but it is still over-sold. In this state, the market looks for an excuse to rally. Late-to-the-party shorts with some gains are easily spooked, and when they buy-to-cover they push prices up frightening more shorts, and that’s how a short squeeze is ignited.
The big funds cannot push stocks up on Monday, but their support could spark a rally. Or we could have another sideways day like today. Of course, if the public decides to panic, then the market could dive on Monday as redemptions flood the mutual funds and force them to dump stock.
The SPY calls that I bought this morning (see previous post) are under water, but don’t worry about me. My large SDS and SKF postions kept me flat on the day. If the market is able to rally early next week, I will sell my SPY calls and use the cash, plus all my remaining cash to go fully short. The economy, outside of the tax-rebate checks, continues to decelerate and I don’t think it is possible for the S&P 500 to hold the March lows.
June 27th, 2008 at 6:59 pm
Matt
Care to take a WAG as to how low we go before a tradable bottom is in place.
June 28th, 2008 at 1:19 am
A crash always happen in over-sold markets. Not in over-bought markets. It’s a final capitulation with no buyers available.
We’re probably not there yet? The data is not bad enough. And the oil-related stocks holds the market up. However, those thousands of factories in China will soon be empty and commodity markets will tumble.
That should help spur several bear-market rallies in USA and W Europe, somewhat muted by Exxon, Shell, Oil services, etc. The big money to be made next 6 months will be in resource-related exchanges such Toronto, Oslo and Sydney.
When commodities have crashed, house prices continue to fall and consumer still not buying, I believe you will see the final capitulation and a crash.
Above based on Austrian view, who predicted Great Depression and the current environment. I recommend cash, shorts and focus on your day-time job. (I know you asked Matt, but I couldn’t resist:)
June 28th, 2008 at 12:30 pm
Crimson Ghost,
I will have more to say about that after the S&P 500 takes out the March low. In the mean time, I think 2001 is a good precedent to study. Take a look at this page where, a few weeks ago, I compared our recent bear-market rally to a couple of such rallies in 2001. A trade-able intermediate-bottom shouldn’t come until after a sickening decline that causes everybody to stop looking for a bottom.
Matt
June 28th, 2008 at 12:40 pm
Hi Larry,
Yes, the blip-up in some of the data caused by the tax-rebate checks is causing a good deal of false hope at the moment. But the jobs report on Thursday might be enough to send the market through the March low. Oil has been battering stocks, but the biggest plunge in the S&P 500 came after the last jobs report on June 6th.
With all the layoffs in the auto industry, banks, airlines, etc., I can’t see anything but a nasty number coming.
Matt