Friday’s month-end mark-up rally was rather weak, don’t you think? The elves had to struggle hard to get the S&P 500 above 1400, and couldn’t keep the Dow from turning red.
And since every trader knows about this year’s “First Day of the Month Pop” pattern, you would think at least some of them would want to get long ahead of it. Especially that we now have evidence that new retail money has been coming in. See the Mutual Fund Flows chart here.
I think a lot of traders came to the same conclusion that I have and decided to exit before the bell. If you look at a minute chart of SPY for Friday afternoon, you will see the sell-off, and then the elves coming in to save the day in a surge of volume that dwarfed the rest of the day’s action.
Jim Cramer was mystified by the action in tech stocks Friday afternoon: “Tech Should Be Dead, but It Won’t Lie Down“. I think tech is staying strong while the S&P 500 is rolling over because the retail baby seals are piling into tech. Who else would be buying tech here? What pro would buy tech ahead of the standard summer plunge in tech stocks?
Both retail investors and foreigners have a reputation for coming into our market at the top and exiting at the bottom. We know that people who fled the market at the bottom in March came back in April, and we know about the Sovereign Wealth Funds eagerly lapping up freshly-printed shares of soon-to-be-gone banks. So, that’s pretty good evidence of a top.
But I also think that the retail investors, the baby seals, are falling in number. Why? Because of the last jobs report. While it was ostensibly a “good” report, only the paid shills tout it. Not even Larry Kudlow with his idiotic economic analysis of late mentions it. That jobs report was widely ridiculed, and retail investors do indeed read Barron’s and they read Alan Abelson’s account of the BS coming out of the BLS. And I think the jig is up.
The propaganda blitz to suck in the naive investors has worked only too well producing an astounding bear-market rally that has even caused the most hard-core bears to doubt their convictions. But even retail investors will only swallow so much. I think that we are seeing the last wave of baby seals flopping around on the ice. If the clubbing looks good Monday morning, I will probably fulfill my quota, completing my 200% short position with my remaining cash.
The economy is clearly slowing and everybody knows it. No matter what the official reports say, when Americans are forced to eat Spam (sales are up 10%), and ride trains instead of airplanes like it was 1908 instead of 2008, and save their $600 tax-rebate checks so that they can heat their homes this winter, it’s not going to be easy to convince them to buy more stock.
The 20% price increases that we saw from Dow Chemical and others last week show that inflation is officially out of control, etc., etc., etc.
The wheels are coming off, and I am betting the farm that this is an astounding, and just maybe, historic shorting opportunity.
I’m betting the farm too. And I will join you when it turns up again, but I fear it might take longer than we currently guesstimate. 2010 at the earliest.
In the meantime, do not let short-term noise distract you.
As for oil, look out below, China, India and Vietnam are tightening the money supply to combat inflation. Russia, Ukraine, S Africa, Argentina will be forced to follow very soon before Zimbabawe-like inflation starts to creep in. Credit continues to tighten in USA and EU.
Matt:
You may be correct in your assessment of current market conditions. I can cite several technical reasons why we’re still in bear market mode (and, of course, many many fundamental reasons). For the most part I share in your bearish enthusiasm. However, whenever I start to feel “certain” about the market’s direction I like to think about what could change the scenario. Here’s the potential problems I see with the bear case (I am sure you can think of more than these): (1) the Bernake put; Bernake’s actions (which were recklass in my opinion) have emboldened traders to believe that any negative action can be swept away by the federal reserve; (2) possible commodity collapse (or just plain vanilla weakness); if it occurs, players could interpret it to be beneficial to the markets in general thereby causing a lift in the averages; and (3) unreasonably low short term rates; where are retail investors looking for a decent return on investment? Housing prices? Not likely. Commodities? See #2. Bonds? Perhaps, but even though the long yields have been ticking up, there doesn’t seem much value there. So the market could be the vehicle of choice by default.
Sorry for such a long post.
Regards,
Jim
Hi Larry,
I think we need a crack in the global economy before we see a meaningful crack in the price of oil. I think that is coming, but last week’s pull-back in oil might just have been some traders taking off positions that didn’t exactly conform to the spirit of the law now that the futures markets face tougher regulation.
In addition to the credit-tightening you cited, many countries like Indonesia are dropping their fuel subsidies because they can’t afford them any more. Prices will rise sharply and demand will be reduced in those countries.
Matt
Hi Jim,
I worry about all the same things:
1) The Bernanke Put – I think the last release of the FOMC minutes was the Fed saying to the markets: “You’re on your own.” It may have even been a green light to the bears to take down a few banks. I understand that both Lehman’s and Merrill’s CDS insurance is spiking…
2) Commodities Collapse – I think that is coming, but see my note to Larry above. With Dow Chemical kicking off the recent wave of giant price-hikes, commodities could even spike much higher as an inflation hedge.
3) Low Rates – Yes, low rates are certainly a catalyst for stocks, but maybe not just yet. On November 6th 2001, Alan Greenspan lowered interest rates to 2%. It took the stock market over a year to bottom after that. We have only just gotten down to 2%.
In addition, if the market were to move to new highs here, then this would be one of the longest bear-market rallies in history and a strong hint that the economy is expanding and a new bull market has begun. Maybe that’s possible, but I don’t see any fundamental indicators that would even remotely suggest it.
Jim Cramer is the only person actually worrying about the economy expanding too fast. He is worried that Friday’s jobs report will show too many jobs created which would cause the Fed to tighten in a panic! Maybe he’s right, but I think that he’s lost his mind.
I think that the smart money is selling hard to the dumb money here. While it is true that a tsunami of retail investors could overwhelm the smart money (quantity has a quality all its own), I’m siding with the smart money. If the economy were actually expanding, I would join the baby seals!
Matt
[...] days ago, I posted about how I thought that the waves of retail buyers coming into tech were receding in number. [...]