Indices Still at Support
- Stocks finish a down week with a modest recovery, bounced by prospects G20 might intervene on Europe’s behalf.
- Gold and commodities continue their dive
- Is the market different now than in times past? Yes and no.
- A cathartic selloff and reversal is a possibility, but why would one occur now?
- Indices still at support, so regardless of our biases, be ready to take what the market gives.
Modest bounce holds indices at support.
Friday was rather anticlimactic. There was a modest bounce on the indices after some very sharp selling on Wednesday and Thursday brought SP500 down to its August lows. As the often the case ahead of a weekend after some sharp selling or a sharp rally, stocks will modestly revert to the other direction to end the week. In this case, there was a bit of short covering, and that was fueled by rumors or theories that the G20 or some other entity perhaps the IMF would come to Europe’s rescue over the weekend. There is talk of a new bailout package or some other plan to help prevent the EU from falling apart as its individual members slide into default and bankruptcy.
As late as Thursday, there was new economic data out of Europe that was not positive. Germany and France both put forth PMI manufacturing reports that showed contraction. That is hardly the stuff that recoveries from financial crises are made of. It rattled the markets, and thus we had the kind of selloff we had on Wednesday and Thursday. Friday we got that bounce, and it is one I talked about as a possibility. Of course we were able to take some downside gain off of the table early as stocks did start a bit lower. They started to reverse, and we locked in more downside gain as we did on Thursday.
We were also able to pick up some upside positions on a few really solid stocks that are in the right sectors and showing very good action. I am not saying that the market will reverse, and I will expand on that later. But there is the possibility out there, and these stocks are in good shape. You have to be ready to take what the market gives, particularly given that SP500 and the other indices have basically held the August lows. NASDAQ did even better; it held its trendline up off the August low as well.
This was not a major move. It was more short covering, or just a relief bounce after all that sharp selling. How do we know that? There was no news that would have driven the market higher or lower, although most of the news was less-than-positive. One news story was that credit default swaps for French and German banks are surging to the upside. Credit default swaps are basically an insurance policy. It is not the kind that we are familiar with as individuals, but it protects against third party defaults. That was one of the problems with the financial crisis in 2008; these credit default swaps exploded in price. They were going thousands of percent, and at the time I think I reported that as one of the warning indicators of the meltdown that was to come.
It is a game of “who do you trust.” You buy these credit default swaps, but who will cover them? It is a kind of shell game, passing the buck down the line and hoping that when you lift up your shell that the pea is underneath. That did not work too well, and as a result we saw massive bailouts. Nonetheless, it is a signal of problems. Credit default swaps are surging on the continent, both in numbers and in price.
The ECB said it would be ready to act “next month” if the outlook in Europe worsens. They do not want to rush it or anything. That is great. This rather lackadaisical attitude toward the problem is something the ECB and Europe in general has been renowned for during this crisis. Many in the U.S. entourage that went over with Treasury Secretary Giethner came back scratching their heads and saying that Europe does not seem to think this is a serious crisis. We know it is a serious crisis, of course; been there done that. Many people say it will not be as bad as Lehman. It may not be as bad for us, but this is definitely Europe’s Lehman moment. The problems there could be even worse than they were in the United States.
As noted, futures were down early but were not tanking. They were trying to start rallying into the open, as you can see from the SPY five minute chart. Futures were moving up into the open still negative, but hanging in there. Stocks worked their way higher in a continued jagged uptrend through mid-morning. They peaked and then moved basically laterally the rest of the session with very modest gains.
SP500, +0.6%; NASDAQ, +1.1%; Dow, +0.35%; SP600, +1.4%; SOX, +2%.
There were gains to the upside, but they were nothing impressive by any stretch. Just more of a relief bounce after two days of gutting by the sellers.
MONDAY
There is no doubt we will have news. It was the Fed and the “twist” this past week, but we still have a lot to come. New Home Sales, Case/Shiller. Consumer Confidence is expected to rise to 46.7. My friends, that is recession. Confidence has remained in recession levels since this selloff occurred. The textbooks may say that we have recovered and are no longer in recession. As far as the consumer is concerned, however, we have been in recession the entire time since the Lehman meltdown.
We have Durable Goods Orders. We have Initial Jobless Claims again. Every week you have to love that. We have the GDP for Q2. I believe that is the third and final estimate, and we will see what GDP comes in. It is expected to improve a bit. Yeehaw. We also have Personal Income and Spending to round out the week, and the Chicago PMI and Michigan Sentiment. We have news aplenty. That news will be important because the market is looking for something to grab ahold of.
What about action outside of just the news? There are trends that occur this time of year. We often have selloffs in August, though not as many as in September. There are still some in October, but October is kind of a follow-through month to September when the market actually bottoms. We are not there yet, but we are getting close. It does not have to be October it can be in September. What we have now is a sharp selloff back down to a prior low. We have had sharp selling, a bounce, and then a sharp selloff back to that low.
Sentiment is terrible. Bears fell a little and bulls rose a little, but they are still at a crossover point. That is a very powerful, bullish indication. But we have this pullback to support. We have all of the bullish indications from the crossover of the bulls and bears. We have a very high put/call ratio that has been high for quite some time. We have the high volatility index. We have a very high new lows reading over 1100 on the NYSE on Thursday. We have tremendously negative sentiment indicators, and we have the market technically holding support.
What often happens in this situation is a further selloff. A break of those old lows. You will have different technicians tell you different things. They will say that when you break a low and make a new low, that you have to come back and test that. We have done that on the Dow and the SP500. According to their theory, we have had that cathartic selloff and they should break to the upside. It is kind of like that false bottom I was talking about. There are two versions of that. One is not really what I consider a false bottom. It is more of this scenario where you have the retest. That would be another selloff early in the week.
Say that no one comes to the rescue of Europe over the weekend that those rumors were wrong. The market shoots lower, sells off sharply, well down into this August 2010 base. But then it reverses and slingshots back to the upside. That would be your cathartic selloff. It usually happens on a Monday or a Tuesday after this kind of Thursday selloff. This is really going toward the pattern. You have the big selloff on Thursday, you have a choppy, back-and-forth day on Friday. It traded in a range and then closed near the middle of the range. Then you have the big meltdown on Monday and/or Tuesday followed by a reversal. That is typically a bell-ringing time that you can buy for a new move higher.
Or you have the false bottom where it breaks down and looks terrible. It closes below that level, but then it comes back and makes the move back to the upside. We had that last summer with July and August. It broke below key levels, looked very bad, but only stayed down there a few days and then reversed. It tested once more, and then it was off to the races. That is the false breakdown, and we could see that as well a breakdown below this important support level.
The question is why that would happen. The market does indeed forecast in advance. In order for that to happen, the market would have to be forecasting better economic times ahead. Can we really expect better economic times ahead and near enough to make the market care? Let’s face it. We have an election that is over a year away. If we get a new President, it would not be in until January. That is a long time. The market looks ahead a long time, but it will not look ahead that far because. There are too many variables out there with what we have being put forth from the administration. What the administration would be willing to sign from the Republicans and what the Republicans would be willing to pass from the President are two different things. There is not much chance of either one passing. We are not looking at anything that would change the situation.
Maybe that would be it. Maybe if we just left things alone and did not try to prop them up, they would finally fall off and then find their true bottom. That is one of the problems with this stimulus we have had. It has not allowed things to hit their bottom, and we have been slowly bleeding to death by a thousand cuts. That has not helped anybody as we have seen. Everyone is just miserable. Sentiment has been low record lows for years now, and it is getting worse.
You have to figure out how the market would see that there is some kind of turn coming. In the past, the market has typically bottomed and rallied when some kind of meaningful stimulus has passed. Almost to the day of the Iraq War and the announcement of some stimulus, the stock market bottomed under George W. Bush. It rallied and we had some great gains in the economy. 7%+ GDP growth. Very strong. It is just knowing that the stimulus is in place. It does not want to wait for the good news to actually appear in terms of better economic data.
The market knows when the right tools are put in place. One of the problems we are having now is that the market saw what the twist would be. The market saw what the President was going to propose, and the market realized that it was not going to pass. If it did, it would not do anything because it is more of the same old crapola that got us where we are right now. Just more in debt, wondering where all the jobs are as a bunch of multinationals are sitting on billions of dollars. More government intervention will not make that change. We would need the market to see something that no one else sees. That is often the case, but there has to be some reason out there for the market to move higher. Frankly, I do not see that as being the case.
I posit that there is no reason for the market to rally. There is no reason for the economy to improve other than just people saying “to hell with it,” and spending some money at Christmas because it has been such a crappy year. Maybe people will try to make it a better year at the end of the year. We will see. That could happen it happened in 2009. People were tired of not spending any money after the Lehman meltdown and decided to have a better Christmas than any of the retailers expected. Then there was a shortage of goods, and they had to make last-minute orders to fill the needs. We will see.
Regardless of what I think could happen, we have to look at what the market is going to do and be ready for it. It is at support and it could bounce. We have good stocks that look ready to bounce. We need to be ready to play those if they are ready to move. I will continue to look at those. We have some good upside plays. We picked up some on Friday. We still have some such as AAPL and others that are ready to move. We have a few more over the weekend that look as if they could make some money and to the upside, for that matter if the market wants to bottom here.
We will have to see how Monday plays out and if it wants to ride lower or not. We will also have some downside plays. We already have some in position. If the market does make that cathartic run to the downside if it wants to dive toward those August 2010 lows or thereabouts we will make a ton of money on those. We will also have a few other downside plays in case that happens. We can make that money in a day or two if we make that kind of steep dive. That is fast money, and it is nice money. You get in, you get out, and then you play the upside.
Regardless of what our guts tell us, and regardless of what our brain tell us, the market will do what it will do. It is at a crossroads right now, and we need to be ready to play it. And we are. We are represented and have plays on both sides of the ledger. It makes it difficult when the market has been extraordinarily choppy. But it is at a resistance point. It is at a support point right now. It will go one way or the other, and we can make money even if it decides to go both ways, i.e., that cathartic selloff followed by a reversal.
