- Reversal reverses as stocks resume the selloff on European crisis: if Europe cannot buy our exports, our export economy is not that helpful.
- Jobless claims at 400K or better for seventeenth week.
- Japan intervenes to undercut yen in a race to the currency bottom.
- Panic selling in the last hour as indicators start hitting some extremes.
- Some say more QE won’t help because QE2 didn’t help. They miss the point: it is liquidity, not economic improvement, that is QE’s weapon.
- Reaction to jobs report to tell a big part of the next move: sold out for now or just getting started.

MARKET SUMMARY

Selling resumes but it wasn’t a gutting until the last hour when everything was thrown out.

The Wednesday reversal on solid volume brought stocks back to positive after an undercut of support, but it lost its mojo on Thursday. Stocks started lower on old, familiar news that became a bit more worrisome. The ECB kept its benchmark interest rate at 1.5%. More importantly, it renewed its version of QE2. It reversed course from when it said it would not do that again. Why? Sources from around the world saw that liquidity has dried up in Europe. Banks are not lending to one another because they are in the same situation that the United States was in the fall of 2008. They are concerned that if they lend today, the bank may not be there tomorrow to pay them back. We have a lending lockup between the banks. LIBOR has ticked up. It was up to 0.27% after rising from 0.26% and 0.25%. That is not a big move, but it shows something is transpiring when you get these kinds of moves after it has been comatose for so long.

That news in itself does not seem so bad. Europe has had problems, it has been in trouble and we knew there would have to be some sort of resolution. The issue is the new export economy that our leaders in DC want us to have one leader in particular, and I think you know who I am talking about. He has strived to drive out the small businesses and create a few large multinationals that sell overseas and bring their money home. Then we can tax it and live off of that. Or so they think. That is not actually the case. It does not work out so well when other parts of the world start suffering and do not want to buy our exports. Indeed, even though our dollar is significantly lower, there still comes a point where they do not want our goods.

Frankly, it is a race to the bottom across the globe. Japan intervened overnight in the currency markets to lower the price of the yen. It does not want to support the price. It is afraid if the yen continues to rise as it has been, then no one will want its exports. Everyone is racing to gut their currencies so other countries will want to buy their goods. But it does not matter. If your economy is weak and poor, people will not buy imports or not at the levels that they have been. All you end up doing is gutting your currency, creating inflation, and ruining the savings of your citizens. You would think they would figure it out. It has happened many times in history, and it has never had a good result. I say it often: No country has ever devalued its way to prosperity. It is not going to happen this time, and we are seeing exactly that. The history is true; we are all lowering our standard of living as this madness circles the globe.

With that bit of joy, let’s talk about what happened on the day. It was a dramatic plunge on the SP500; indeed, it was a dramatic plunge on all of the indices.

NASDAQ, -5%; SP500, -4.8%; Dow, -4.3%; SP600, -5%; SOX, -6%.

It was about as ugly as you would think, but it did not totally crap out until late in the day. There was selling, but the market tried to put in a double bottom at a logical support point. This was that initial down thrust, and then it spent much of the day trying to put in a bottom. That made sense given the jobs report was coming up and people might want to stop their shorts and buy them back going into the jobs report since it is an unknown. Then panic selling took over in the last hour. There was a tremendous drop in the last hour, and that was the stinger.

The market was trying to recover and lick its wounds a bit, and then the selling came on. That really killed it. A lot of stocks were holding up nicely. They were not positive or ready to race to the upside, but they were holding support until that last hour when everything was thrown out. It was panic selling ahead of what, I assume, they felt would be a weak jobs report. They sold everything going into the close the good, and bad, and the ugly. That drove a lot of our good positions down into the dumpster by the close. That was somewhat disheartening, but you should never sell into panic selling. Just as history shows that devaluing your currency is sure to bring your economy to ruin, selling into a panic close is never a good way to manage your portfolio.

We decided not to sell early in the day when the market gapped lower. Maybe we should have, but this was after eight or nine days to the downside, and then they tried to set up and bottom mid-morning. That is a typical fulcrum for the day, and it looked as if, ahead of the jobs report, we would get that recovery. It was trying to put in that double bottom I talked about, and stocks were holding up above some support levels. It looked good, but that last hour was the gut punch.

Even so, there were some major selloffs, but stocks found themselves at the next support level. Maybe we get the bounce. It has the smell of panic selling. This did not seem like a meltdown in progress, although it may look and feel that way. In the bigger picture, the market looks to be pricing in another recession by giving up the trading range and being unable to hold that reversal, and it is stretched at this point. It had the look of panic selling, and that often results in a rebound. It may not result in any kind of significant recovery that takes stocks back in the range, making everyone happy. No, it is just a rebound. There are sharp selloffs and sharp recoveries in this kind of market:

The ECB was really the negative on the day. There was also Japan. What other news out there? We did actually have some scheduled data with the weekly jobless claims. We had that wonderful 398K reading last week that broke the string at 16 weeks, but that did not hold because it was revised up to 401K. With the 400K reported for the past week, that keeps the string alive at 17. I guess you could argue that it was not 420K or 430K, so maybe there is improvement. At this level, as well as the GDP levels posted thus far this year, there it is not enough action in the job market to create any significant new jobs.

This was another downer for the markets, although there are a lot of people trying to put a positive spin on it. They say that jobless claims fell 1K down to 400K, but they failed to mention the fact that jobs were reported at 398K the prior week and had to be revised to the upside. Just a little omission. But, you know, that is not going to hurt anyone. They are just trying to bolster the confidence of the American public who are weary from a protracted recession, right? It is the kind of media propaganda they like to put on things to make it all look a bit better. That is hard to do. Everyone knows they stink, and it only further undermines our faith in the news media. Of course I digress.

FRIDAY

Friday brings the jobs report. It has been revised higher to 84K expected. I am sure that was before the weekly claims hit today. The unemployment rate was bumped up to 9.2% from 9.1%. There are slight adjustments in what is expected.

The question is how the market will react to the jobs report. The market has sold off quite sharply, no question about that. There has been a big move to the downside. It could continue to sell down. The indices are approaching some next support, but without reason, why would they want to bounce? They have gone down far enough, so maybe they want to move back to the upside. Maybe they get a good jobs report and feel they need to bounce. More than likely they will get a terrible jobs report. They either sell off further or they will just not do anything.

Sometimes after a big selloff, you get bad news and the market says “Oh well.” That is good news because it shows the market is somewhat sold out and will try to bounce. Also, if we get a sharp selloff on the news we will likely get a reversal and a move back to the upside. The rubber band has been stretched pretty far. SP500, Dow, NASDAQ, and many leaders are right at the next support levels or close. If they fall down further and tap them, they would then be primed to move back up for a relief bounce.

I am not saying they will rally back up and everything will be nirvana. That would take something from the Fed saying we will do QE3. I heard a lot of pundits after hours saying that, even if QE3 works, it will not do any good because QE2 did not matter for the economy. The economy is still sliding into a double-dip. They are absolutely right. It did not do anything, but that is not the point of Quantitative Easing. Quantitative Easing is liquidity. I said all along that the move from the low in March of 2009 was liquidly-based. It was not on a growth economy. The economy did improve from a standstill when it tumbled down in all of 2008 thanks to the crisis in the financial sector. But the recovery, while there was economic growth, was illusory. It was all liquidity. If you just say Quantitative Easing will not work because it did not improve the economy last time, then you miss the point. It is liquidity. Liquidity will be put into financial instruments. We will see stocks and commodities inflate again, and that is what the Fed wants. The purpose of Quantitative Easing is to get them inflated, to keep from deflation, and to make people feel wealthier so they will hopefully spend money.

The Fed will try it again. Bernanke is from Princeton. Krugman at the New York Times is from Princeton. They all have the same theory that if you spend money you buy jobs. They think if you spend money you create jobs. With all the money we have spent thus far, we would have created millions of jobs if that theory worked. But they are good Ph.D. holders; they will not abandon what they have been taught and what they are teaching. They will keep spouting the dogma and doing the same thing, even though, as Einstein put it, it is the definition of insanity to expect a different result. We will get more Quantitative Easing. We will get asset prices inflating. It will cost everyone more money. Our hope is just to make more money in the stock market to (more than) offset the increase in prices. We will use that, but we have to get the Fed in to make a significant change from the downtrend. They need to turn this selloff and what could be a rebound in relief to a new sustained rally.

Remember, this has a different look from the 2010 summer where it bottomed in a reverse head and shoulders. Here it is a trading-range top. It will take the Fed to come in and bolster the market and get it going up once again. I am waiting for that and wondering when the Fed will come in. I wonder if they will preempt Jackson Hole and just step in to say we have to do something. Especially since the ECB is doing Quantitative Easing and, lo and behold, it is driving our dollar back up. Lord knows we cannot have that if we want to be an export, second-rate economy.

We will watch for two results. Either it sells off or it does not sell off, and then you probably get a rebound. That does not mean it will last. It will turn over and sell again, but we can use that rebound for many things. One is to play some great stocks that did not sell off; we can trade them to the upside. Number two, we can take up some more of our big gains on the downside off the table if it looks like it will bounce. If we get an additional selloff in the morning, we can take some more gain and then let them bounce. Then we can just play the upside with those new plays. A three-step process. Use any selloff to take more gains on our downside positions. We can use any bounce after it starts to stall. It may be anywhere from a day to a week, and we will want to take those positions off the table.

At the same time, when it starts to bounce we want to play some of those good stocks to the upside. You cannot just think it is too wild and give up. Roll up your sleeves, get back in it, and make the money. Take what the market gives. If it will bounce and bounce for a week or so (that often happens after such a selloff), that is great. It will not bounce as fast as it sold, but it will give us a bounce. You can make money off of that. Then when it stalls out, which it likely will unless the Fed steps in, then you roll over and play the downside again. Just do what it takes. Take what the market gives and move on from there.

Tomorrow we will see what the jobs report says. We have our possibilities out there. We have had a lot of selling. If we get another selloff, look for a reversal. If it does nothing, look for a slow, steady recovery. After this kind of selloff for the last two weeks and going into weekend, we probably will get short covering of some sort. The question is whether you want to bail out on any bounce. Usually when you get a relief bounce after something like this, it will give you more than a day or two. Maybe it will not, but we will try to see how far it to go. Then we will use that to unload some upside positions we have left and some new ones we took on that reversal that came back to bite us. That happens. Just use it to make money.