Today's market action Nov. 20, 2008

The market action today was almost predictable from the crap going on in Washington DC. Is it any clearer that investors are seeing that anyone with a hand out is getting a handout?

 

And when that doesn't work due to the Bush-43 administration still in the White House, like the Big-3 auto makers and its dump cousin, the UAW, say, "OK, we will wait for the BHO administration since we know we will get something then."

 

It is the dawn of a new age in the USA as we pass from the anneals of history as the last remaining superpower into a socialistic, big government, 80% tax rate 3rd world European-style has-been!

 

How was that for a long list of adjectives and adverbs. ;-)

 

Anyway, "let not your heart be troubled..." I believe that things will work out the way they are suppose to work out, just not the way we would like them to do so. Remember, the Creator put laws in place when the Universe was designed, and when we violate those laws, we have to pay the consequences.

 

A great philosopher said once,

 

       "Greed is the mother of want, the father of despair."  (IBNanouk, that's me)

 

We can't do what we did for the last 30 years beginning with the CRA in 1977, the forcing of rules to change proper underwriting, the manipulation of the free-market by the government, the printing of money to monetize the debt, and bail-out everyone who supported our power run to Washington without having to pay the check when it comes due.

 

Today, the waiter brought the check, and boy, did people check out!

 

Called the market action on the nose BHO effect

The markets sold off to the 804 on the SP 500 and closed < 8000 (into the 7000) for the first time since 2003. Please see my Nov 15th blog post ("Outlook for the markets this week") for the call last week.

Come back for more sound calls and indications where the market goes next. Remember, when everyone is calling the bottom, it ain't it.

Why are the markets in a rout? I call it the BHO/SMDC effect. As it becomes clear that BHO and his SMDC are going to be able to do anything they want without fear of Republican intervention, the smart capital is pulling their investments from the US equities and moving it into cash and overseas.

This is what happens when you say the magic words: "Share the wealth." Well if it keeps going, there will not be much wealth to share.

Outlook for the markets this next week

The markets did a huge pull-back (PB) right at the close on Friday, and that usually does not bode well for the opening of the futures on Sunday evening 1800 (6:00PM) EST. If the market continues down as the NZ,AU markets come on line at 1800 and then the Asian markets at 2130 EST followed by the European markets at 0330 EST.

 

If these openings bring the SP 500 down form its levels on Friday afternoon, then the markets are going to sell-off again and this time it could take out the 800 level on the SP 500 and move into the 7000 on the DOW. This will most likely produce the capitulation and the bottoms in the market needed to form the next pattern to the upside.

 

The patterns forming in the market are very atypical for a post-election period. History has shown that most post-election time periods are rallies in the market not dumps to new lows of the year. However, we could still get a rally if the market sells off far enough to bring back the buyers, but only if investors once again gain confidence that the US Government isn't going to continue to play around with the rules.

 

If BHO and his SMDC start re-regulating the markets, increasing taxes on capital, and making changes to how markets operate, it could sell-off even further while those with capital begin removing investments from the US market and moving to where capital is treated with less hostility.

 

This will cause the US Dollar to drop as assets denominated in US Dollars are sold to begin the moving or redenomination of the assets into the new investment locale's monetary standard. This could force another round of US capital market sell-offs.

 

Sorry the news isn't better, but when capital is treated with disrespect, it leaves your country. It's that simple to understand.

 

What happened today in the markets?

Well the short covering started today right before Bush-43's speech to the Manhattan Institute. The reason for the big rally was purely technical not fundamental.

 

What does that mean? Well, there are 2 major types of investment analysis in the financial world today. There is the accounting-based analysis called fundamental analysis that tries to tie the price of a financial instrument to the fundamental accounting and business operations of the entity upon which the instrument is based.

 

In other words, fundamental analysis reads and tries to understand financial statements of a company or corporation. The problem with this is that if fundamental analysis was so great then why did we miss the Worldcom, Enron, Tyco, Fannie Mae, Freddie Mac, Bear-Sterns, Lehman Brothers, Merrill Lynch, etc failures?

 

That's the problem: the financial papers are so complex and so ripe for cooking by accountants and lawyers that its almost impossible to be able to look at financial statements and get a clear understanding of just what is going on inside the entity under inspection. Why do analysts disagree on the financial health of a company when they are all reading the same financial statements?

 

I will tell you: its not that clear and that is why fundamental analysis is flawed.

 

The second type of analysis is called technical. It is basically constructed on the simple premise that the only thing that matters for a financial instrument (stock, bond, option, future, etc) is the stream of prices and volume of those transactions. When someone is willing buy and someone is willing to sell at an agreed upon price/volume point, then all the other analysis is done and the resulting tick (transaction of time, price, and volume data) is entered into the exchange data streams.

 

Technical analysis is the purest form of analysis because it doesn't use the financial statements for the reasons mentioned above or the words that are coming out their mouths for the basis of the entities financial instruments. It uses on the three items of the tick: time, price and volume.

 

Analogy: using fundamental analysis is like your doctor diagnosing you medical status and health from only your medical history, test results, and physical inspection. Technical analysis is your doctor using instruments like an EKG, EEC, Pet scan, MRI, CT, and ultrasound to determine what is the real goings on regardless of what you say or what a test says.

 

Hope that helps. Today, the rally was a technical rally since nothing fundamental in the market place has changed. It will be interesting to see if the rally runs out of steam and stays in the 825-1000 range I predicted on this blog back on October 30 when I said... (well you can read it yourself.)

 

Outlook for the market for Nov-Dec 2008

The outlook for the markets appears to be that it will stay within a trading range of SP 500 825-1000 for the foreseeable future since it would appear that the economy is not going to improve in the near term.

 

Nothing that BHO is talking about will help and in a lot of cases, it will hurt and keep the market from recovering before all the stimulation has an impact and that begins the inflationary results of the over $2.5 Trillion USD liquidity that the US Government has flooded the market.

 

Once the banks begin loaning again, they are going to flood the market with loans and funds and the next bubble is going to take off on the heels of the last one since that amount of money does not good being hoarded for too long.

 

The hedge funds, banks, and investors will sit pat for awhile to see how the new rules and regulations that the Bush-43 administration has started, and the BHO's administration will undoubtedly continue and probably make permanent impact the so-called US free-markets.

 

BHO is walking a tight-rope and he is beginning to understand it. With control of the White House and Capital Hill in his hands, we, the members of the disloyal opposition, will point out every mistake and stumble he makes.

 

It goes with the territory: welcome to the world of power, BHO.

 

What's next for the markets & economy?

Now what for the markets...

With the culmination of the election cycle, the markets now have certainty and not uncertainty which they dislike. Therefore, the markets are going to begin the big task of trying to figure out what the new US government is going to do that will impact their ability to make money.

This means that anything dealing with taxes, fiscal policy, government hand-outs, market regulation, bail-outs, etc. Speaking of unemployment, expect it to rise to over 7.5% in the coming months as the recession deepens.

Trying to guess the manner in which the markets will move depending on the news item is a losing proposition since many times its counter-intuitive. Just watch the major indices and how they accept the policies being bantered about in the next few weeks and months before the Jan. 20th inaugural.

In the short term, history says that the markets rally after a big event like this and this rally could take the SP 500 up to the 1075-1090 level before topping out and heading back down as the earnings of the SP 500 begin to falter.

We are not out of woods yet since now its back to financial basics of earnings, employment, value of the dollar, trade imbalances, and government action.

2009 could be a very bad year for the market given historical action especially if government action reduces employment, raises taxes, and drives capital overseas.

The first indication of coming problems will be another rate cut by the Fed.

The 2nd indication will more foreclosures and increased bail-out demands.

The 3rd indication will be huge consumer credit default that is coming and banks trying to work out debt forgiveness on this monster.

Market action was relatively non-committal today

Market today did relatively nothing as it awaits the outcome of tomorrow's Presidential and Congressional elections. The market really doesn't care which candidate wins, just the uncertainty that exists without knowing who the next President will be.

The big thing the market is really looking forward to is the amount of additional Democratic margins in the Congress. If the margins give the Democrats a lock on both houses, a SMDC (super-majority democratic congress), I am beating the markets will PB (pull-back) for a day or two and then we will probably get a post-election bounce into the end of the year to put the SP 500 around the 1100 level.

If the Democrats do get a SMDC and begin talking about raising taxes, cutting the military, etc, then you will see the market's tank as the deficit will grow without bounds.

Bear market rally and market operations

Recent market gains are normal during a bear market. Remember a cardinal rule of the markets:

Markets do not go straight up or down instead they cycle up and down.

What is meant by this is that for every transaction there is both a buyer and a seller, no more, no less. This is what government bureaucrats and politicians don't understand, and is why they believe that by banning particular activities such as short selling, they are somehow protecting the markets. Their error is thinking that sellers operate or control markets by themselves. Every seller must find a willing buyer at an agreed upon price.

To find a buyer, a seller must offer a stock, future, or option as a price that will coax a buyer to invest his/her money in the belief that they will make a profit. The seller believes that he/she will make a profit as well, it's just that they are of different beliefs: the buyer believes the instrument will go up while the seller believes the opposite.

So this rally will continue to the point where 1 of 2 things will happen:

Buyers can not coax any more sellers to take the other side of their trades at prices the buyers want to buy at.

All interested buyers are fully invested in a particular instrument.

This minute-by-minute tug of war is of little value to most long term investors; however, it is precisely this action that produces the ups and downs that normal people find bewildering and sometimes silly.

This "bear-market rally" will probably run out of steam when the professional investors have purchased their fill from the general public that is in panic-mode. After this rebalancing of portfolios, the bad economic news or the current recession will begin the slow process of producing a bear market bottom from which the seeds of the next bull rally will spring.

Such operations will continue until the rules are so altered that normal market forces can not longer operate effectively. The current government intervention could cause the markets to change to where they no longer operate effectively. This is the real danger of government tampering with a free-market system.

Market sold off in last 30 minutes of trading

The market sold off its HOS [971 SP 500] down to the [920 SP 500] levels putting the DOW down to a loss of 75pts, but off an intraday high of +300pts.

This means that investors/traders are doing what they do in a bear market recession of "sell the rallies".

The bottom has probably not be seen yet, and it will drift slowly lower as several things start to indicate the future of the market action:

Companies are beginning to end their contribution to employees' 401K plans.

Credit card companies are beginning to lower customer's credit limits and raise rates. This will cause the consumer to pull-back and make Christmas retail period this year very dismal.

The Federal Reserve is lowering interest rates so savers are going to lose money (interest) on their deposits and this tends to reduce the amount of savings both for retirement and emergency times.

Car leasing companies are not offering car loans

Mortgages are getting much tougher to get and so all the other ancillary industries of home buying are going to suffer as well.

Next administration likely to be BHO has said that he favors a withdrawal from IRA and 401Ks without penalty and this would cause another wave of redemptions of stocks.

If BHO is elected, he has said that he would raise taxes on all kinds of entities from dividends, capital gains, and corporations. Again, all these have chilling impacts on the stock markets.

All these plus more and more pressure on the US stock markets keeping their rallies from really taking hold as companies begin to show lower and lower earnings as the consumer which has been 2/3 of this economy begins to really pull-back after the election.

It's just the normal cycle of capitalism, but its going to exacerbated by the BHO's election and with his SMDC's propensity to spend, spend, spend. The deficit is going to be over $1 Trillion USD next year. I wonder how the BHO and SMDC are going to blame it on anyone then?

FOMC action and market reaction

The FOMC cut the Fed Funds by 50bp, and the Discount Rate by 50bp as expected. It was the language of the meeting minutes that caused the lag in the time it took for the move to take place.

The Fed Funds Rate is now 1.0%
The Discount Rate is now 1.25%

The language of the announcement that caused the big move down was the FOMC said it would continue to "act as needed." It also just mentioned that the economy is slowing down, but they did not use the recession label.

That's pretty bland and banal language that really doesn't tip the Fed's hand since they are only 100 bp from going to 0% which would put the Fed in a non-action capable mode.

The 3 stage move played out with an initial move down, a reversal to fail to make new highs of the session, and then the 3rd stage back to the downside.

The rest of the day is now going to be based the "buy the rumor, and sell the news" meaning that the 50bp was already in the market price and now there is very little that future Fed action can do to stem the tide of the financial crisis as more and more houses go into foreclosure and real estate values continue to drop.

The market could slowly drift down over the next few trading days back to the SP 500 850 levels before too long since the Fed language suggested that the US and global economies are in a recession period and it could take up to 12-18 months to recover.

How the market moves after a FOMC announcement

How to play the FOMC STIR announcement action is a topic of much discussion amongst day traders. I have found that the FOMC announcement produces a 3 stage move:

Stage 1: the move is in the direction of ultimate trend, but it only lasts for a few minutes if that. This move is called the "weak hand move" since it is usually taken by weak, quick hands that can't wait for the trend to establish itself and have to get right on the leading/bleeding edge.

Stage 2: this is a reverse of stage 1 against the ultimate direction about 50% of the stage 1 move, and then it reverses sometimes in a very ugly manner - meaning not a clean "V" reversal and it usually reverses off some important support & resistance line. This is called the "fake-out move."

Stage 3: this reverses the stage 2 counter-move and reestablishes the original direction after faking out the weaker hands that give up their original position to stronger hands that have the calm to wait out the first weak move.

This is not guaranteed, but a move that I have seen over and over given the kind of information the FOMC releases at 1415. Remember, the stock market is discounter of future information and it has already priced in a 50bp STIR cut so if the FOMC does something not at the 50bp level or makes some big change in their language about future rate moves.

I would suggest that you don't play this type of move the first couple of times, but just watch to see if you can pick out the 3 stages of the market moves after the FOMC STIR announcement.

Finally, if the cuts are what the market expects, in this case 50bp, but there is some change in the language about future interest rate moves, it may take the market sometimes up to 15 minutes to go through the above 3 stages as the language is analyzed and disseminated.

Outlook for market action today Oct 29, 2008

What can we expect for the markets today?

Since today is the FOMC STIR announcement at 1415 EDT, the market, if it is true to history, will remain relatively quiet (low volume and range) until the 1415 hour release. From there depending on the amount of the cut and then more importantly the wording of the FOMC about future rate cuts or monetary policy concerns.

This means that if the rate cut which everyone is expecting and is already priced into the market with yesterday's big rally is 50 basis points or 1/2% on both the Fed Funds Rate taking it to 1.0% and then Discount Rate taking it to 1.25%.

If the FOMC doesn't cut rates or less than 50bp, the market will give up a lot of the 100 pts it made yesterday (I'm speaking of the SP 500 value) taking it back to the 850-860 level.

If the FOMC cuts the expected 50bp, but says that it will not do more cuts in the future, the market could also tank, but not as much probably to the 875-880 level.

If the FOMC cuts MORE than the 50bp, and says that more rate cuts are not out of the questions, the market could rally to the SP 500 975 level before finding some resistance.

If the FOMC does what is expected, a 50 bp cut in both key interest rates, and does not discuss future rate cuts and does not talk about inflation, etc. the market could just go sideways.

Remember, the Fed doesn't have many options left if it cuts too far since you can't go lower than 0% and they don't want to have to deal with that problem. Bernanke is a student of the depression and he doesn't want to put the US economy into a tailspin like FDR did with STIR so low that capital flees the US.

More after the 1415 rate cut announcement.

Right on the money with market prediction

Again, this blogger was right on the money about the direction and size of market move today. In my market outlook posted at 09:24 EDT (before the markets opened up this AM), I said that if the market held the 880 level of the SP 500, it could take out the next level of SP 500 930.

WELLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL

That's exactly what the markets did today and more. Not only did it hold the 880 level, but it didn't return to the 825 previous LOY (it may very well still do that before too long), but it completed a PB (pull back) to the 1100 time frame and then over the rest of the day with the big push coming at the EOD (end of day), took out the 930 and 940 levels before settling at 939 for the close at 1615.

Right on, eh? Come back tomorrow morning and I will tell where I believe the markets will go tomorrow even with the FOMC announcing its STIR (short term interest rate) actions at 1415.

Stay tuned.

How the FOMC operates on Interest Rates

The market has already priced in a 50 bp (basis point: 100 bp = 1%) rate cut, so anything less or if the FOMC is heavy handed with its language about future STIR cuts the market will tank and tank big time.

If the FOMC goes for a 75 or 100 bp cut, the market could rally to and even beyond the 930 level given the amount of PB (pull back) already in the market from the first of October.

Here is the razor's edge the FOMC is on:

Here isn't much room to cut STIR much lower given the current value of the 2 major STIR that the FOMC uses for economic control (called monetary policy).

The Fed Funds Rate (currently at 1.5%) is the rate at which banks in the US lend to each other usually overnight.

The Discount Rate (currently at 1.75%) is the rate which commercial banks (and now almost anyone else given the TARP legislation) borrow from the FRS (federal reserve system).

A cut of 50bp would bring the FFR to 1.0% (back under Greenspan where all the trouble started), and the DR to 1.25%. Both of these rates will then be historically very low and severely limits the FOMC's future actions since you can't go < 0. Also, once the rates go to or near 0% money starts being denominated in USD driving the USD down against other currencies, but then the money leaves the US for overseas projects due to the very low interests rates on capital that these low rates bring. It's a double edged sword.

Bottom line, the US risks the same problem that Japan did when it had its real estate bubble pop in the late 1980's and early 1990's and the lowering of STIR to 0% in Japan and holding it there for over 12 years. Japan fairly much disappeared off the face of the planet as a financial powerhouse.

The cards are lining up on the US house of cards.

Outlook for markets this week

The SP 500 is still in a pattern for a PB (pull back) and if it can not BO (break out) and hold 880 then it is going to continue on down to probably take out its current LOY (lows of the year) @ 825.

If the market BO the 880 level, then the next level for movement will the 930 area and it could do this after the FOMC STIR (federal open market committee short term interest rates) cut or hold is made public tomorrow at 1415 (2:15 EDT).

Stand by for more volatility this week, but not until the FOMC meeting notes release tomorrow at 1415. Today could be a relatively quiet day with low volume.

Called it right on the nose!

So what I said in "End of day action on the market" before the 15:00 EDT (posted at 14:50 see the Blogger time stamp) did exactly what I proposed.

1. We found support and came back to test the 890 (893.75) right before the end of day, and then it settled down for a close of the SP 500 of 868 and a 312 point loss on the DOW.

2. We didn't BD completely since we didn't get back to the 837 LOY (low of the year), we will probably test it on Monday especially if we get some very bad geopolitical news over the weekend.

3. Today closed the book on McCain's campaign run and it is almost a guarantee that BHO and a SMDC will be elected on Nov. 4th, 2008. McCain blew it with his support of the ESA 2008.

If you would have read the blog today, and you were a trader in the ES, you could packed a ton of profit today.

Take care, folks. I will post more later about poor Senator McCain/Gov. Palin. They will be packed off to their respective corners without media fanfare in just over a week.

End of day action on the market

Well, we got down to 840.25 just 3.25pts off the 837 level I stated we would get to in the post "Likely market action today." I trust you traders out there were listening because if you went LONG there you got quite a nice little pop.

The market found support at that level and bounced all the way back to around 888 on the SP 500 index. So what does this mean, well, the real test is coming around 1500 when the traders decide how they want to spend the weekend: long and worrying about an ASIAN response to the meltdown, or flat which means they have to sell out of all their positions before the end of day (EOD).

If we don't get a big sell-off into the close, we may even get a PTS (profit taking session) which today would be to the upside to test the 890 level before the close at 16:15 EDT.

Watch the markets beginning at 15:00 (that's 3:00 PM for civilians, and big hand is on the 12, and the little hand is on the 3 for public school attendees). If they start to sell-off the panic will spread fast and we could end up around 8000 or lower on the DOW and take out the 837 level on the SP 500.

More after the dust settles.

Likely market action today, October 24, 2008

Here is the likely scenario of what will happen after 09:30 on the NY Stock Exchange and in Chicago at the Globex exchange (where the SP 500 ES mini contract futures are electronically traded):

The ES futures already have a backlog of short positions of over 10,700 contracts that represent about a $500 Million (that's half a billion USD) in short selling pressure that has to be resolved when the markets attempt to reopen. Let me tell what is probably going to happen at 0930:

1. The markets will attempt to open, but there will not be any buyers at the current levels due to the backlog of sell positions, so how do buyers buy? They lower their bidding prices to very low levels to where they think they can find support and make money. Right now that's somewhere near the LOY [837] on the SP 500 futures.

2. If they can't find enough buyers to handle all the sell offers, the price keeps falling (free-fall as we say in the futures markets) until the next circuit breaker comes into play around, well here is a description of what is happening right now:

DJIA futures are down 550 points, S&P Futures are halted at -60 points at 855.20, and NASDAQ at -85 points at 1168.50.  These levels can extend to -10% after the open before circuit breakers come back into play.  The way this works is that the futures can reopen if the bids magically come back and the markets would rise, but otherwise futures are halted until the stock market open.  after -10% is reached in futures there is a 2 minute halt, then the limit is extended to allow for -20% with a halt for 2 minutes, and then the limit is extended to 30% down. (Courtesy of 24/7 Wall Street website)

3. The complete lack of buyers to move the markets back up due to the meltdown in the Asian and European markets overnight, the US markets are going to follow suit. No one wants to commit capital when it might disappear in a few minutes. Remember the Arabs that bought into the financial institutions of the US way back in Feb/Mar of this year? Well, they need better financial advisors since they have all seen their positions cut by as much as 2/3's!! See having money doesn't make you smart. Warren Buffets recent acquisitions and all those that got in with him are now totally in the red and heading down.

4. If the market's find support near their Lows of the Year (837 on the SP 500), then it will bounce and head back up for a sideways move until the 15:00 (3:00 pm hours). Be back then.

As we use to say in the Navy: "Stand by for heavy rolls..."