Watch Out For One Day Wonders
- Big early downside as stocks play catch-up to Europe, but a reversal almost brings NASDAQ back to positive.
- More great timing as Obama Administration sues banks ostensibly over mortgage crisis, but most believe it is simply an effort to break up the banks.
- ISM Services rises over July, topping expectations.
- The debate continues as to who is forecasting the right economic path, large corporations or the equity and debt markets?
- Intraday reversal suggests another near term upside attempt, but new lows on this selling are more likely before any new highs for the indices.
- Watch out for one day wonders.
Big downside, big recovery. More upside?
As noted over the weekend I always fear the trade after Labor Day, particularly when the economy is not performing well. Monday looked even worse than usual because while the US markets idled to start the week, Europe was open for business and its markets sold hard. Thus on Tuesday the US started the day with futures down in excess of 25 points on SP500 as US stocks sought to make up the gap with Europe left by Monday.
Stocks started lower, but almost as the opening bell echoes died stocks started to recover from the lows. They rallied into the ISM Services number that topped expectations and July (53.3 versus 51.0 expected and 52.7 prior). Investors were not the impressed; stocks sold off the next half hour, taking the indices either back to the morning lows or just below them.
That was enough, however. At that point stocks bounced off a small double bottom, and they trended upside the rest of the session, rising and falling in a solid intraday trend. By the close NASDAQ recouped 60 points, SP500 25 points, and DJ30 over 200 points. They did not get back to positive, but they were well, well off the 2+% losses suffered early in the session, closing with losses much less than 1%.
NASDAQ -6.50, -0.26%. SP500 -8.73, -0.74%. DJ30 -100.96, -0.90%. SP600 -0.22%. SOX -0.69%. NASDAQ 100 -0.01%.
Pretty impressive recovery with the indices looking as if they are putting in a second higher low off of that early August low. Nice doji on the SP500 and that suggests a new rise off of the lows. Will this mean the indices break to new highs on this move? Likely not. This is a serious top and the economy is in serious shape (seriously bad, that is; see the ‘Economy’ section). I feel there is likely a lower low on this leg before the indices make a new high off the March 2009 lows.
NEWS.
Some stories impacting the day’s trade.
Federal lawsuits against 17 banks. Late Friday the Obama administration announced the filing of lawsuits against 17 of the nation’s banks. The gist: these banks deceived (read defrauded) Fannie Mae and Freddie Mac in selling those entities mortgages the banks knew were bad loans. The irony: EVERYONE knew those were bad loans. Ask Senator Schumer, Congressman Frank, President Bush, Mario Cuomo as well. They were forcing loans to bad risks. If the banks didn’t lend they were going to be subject of fines for discrimination.
An accounting, or as Doc Holiday said in ‘Tombstone,’ a ‘reckoning,’ is indeed needed on that matter. That would include, as implied above, not just regarding the banks involved. The issue here is timing. When our economy is in the worst condition since the Great Depression, why does the federal government choose now to initiate these lawsuits? Why isn’t the government working with the banks to get all of the hundreds of billions the Fed has printed into the hands of entrepreneurs and small businesses to gin up the economy? Heal the patient first with all the resources available, then go after those that made him sick.
Of course questionable timing issues are nothing new to this government. S&P downgrades US debt and lo and behold days later a lawsuit against S&P is filed. Not on the downgrade but about the ratings of the financial institutions and mortgages involved in the financial crisis. There is a nexus with the current lawsuits of course, but is it not just handy that the lawsuit was ready to be filed and just so happened to be filed just after S&P made its determination?
Germany economic data still on the decline.
After announcing last week that manufacturing contracted in Germany and the Eurozone in general, this week Germany announced Factory Orders fell almost twice the expected amount (-2.8 versus -1.5% expected, +1.8 prior). More trouble in Europe as it continues to teeter on the edge.
Indeed, Finland now joins the group demanding collateral from Greece and other debtor nations before handing over more funds. Recall Germany wanted this originally but relented. Seems others are not so inclined to put their economies in jeopardy in favor of those who tossed their economic keys into the toilet given that in doing so they place their economies at greater risk.
US ISM Services rises.
In a nice twist August saw the Services sector rise to 53.3, topping the 51.0 expected decline from 52.7 in July. I anticipated a weaker number, and this reading joins some better than anticipated manufacturing data from Chicago and the overall ISM, not to mention capacity utilization.
There is a dichotomy, well-developed, in the US economy. I write about it in more detail below, but in a nutshell, the large corporations that received the subsidies and the benefits from a weak US dollar are driving the manufacturing and other data while the smaller businesses that received no preferential treatment, who cannot export goods overseas, and thus are dramatically harmed by the falling dollar and related rising inflation in energy and commodities thanks to weakened greenback.
Thus while it is good to see Services rising, the data is not a true indication of economic success. Our economy has changed and it is changing to one that puts most people as employees of big companies favored by the government. Sound familiar? That was how the USSR ran things: ‘companies’ that were puppets of the government made up the economic output and we saw how well that worked.
WEDNESDAY
The kind of steady reversal seen Tuesday, starting from the gap lower, suggests there is some additional upside on this move. As you can see over the past 2 months, moves in a bear market selloff can be violent, down and up. Thus with this higher low and intraday reversal you look for more upside, and you look for pretty violent moves. Thus if a bounce can gel off of this reversal it should be pretty strong, taking SP500 back up toward the recent high at 1230 (almost coincident with the 50 day EMA), another 65 points, or even up to the June low at 1258.
That would be a move; a very tradable move, and we have several plays that have set up that inverted head and shoulders, short double bottom, and a few other bullish patterns here and there to take advantage of any such move. In this kind of market you are not looking for breakouts to new highs, just solid moves that you can trade with a good risk/reward, just as we have been doing all along.
So we are looking for a continued upside try again off of this Tuesday intraday reversal. At the same time you cannot forget that this is a weak market and a weak economy. Bonds are running, oil is selling; they are not suggesting a strong economy. When that happens there can be ‘one day wonders,’ moves that look as if there is a change in place only to resume the overall trend, that would be down, the next session. Kind of the old ‘in your ear’ warning from Shoeless Joe Jackson in ‘Field of Dreams.”
Thus while we will look for tradable moves off of these good upside patterns than have developed and held their own through the Tuesday selling, we also will keep those downside plays on the reports, some with adjusted buy points as you will see, at the ready in the event Tuesday was just a head fake.
