Friday, August 03, 2007

We have Armageddon!

As I watched Cramer's meltdown on Friday afternoon, it wasn't just how poised Erin Burnett remained. Rather, I wondered what Cramer is going to do when the market actually gets bad.

Even after Friday's tumble, the NASDAQ has fallen less than it did in February, and that was just a 7.9% love tap. Stocks aren't even in a correction yet, and television personalities are already channeling Howard Beale. Booyah!

There's never just one roach either.

Just like Bear Stearns won't be the only casualty of the structured credit fiasco, John Mackey isn't the only corporate insider anonymously posting on stock message boards.

On Thursday, broke a story that Nancy Hughes -- wife of Rambus CEO Harold Hughes -- has been flame posting on the RMBS board at

Friday morning, I spoke with Ralph "Blue" Kidd, founder of, and he said that Nancy had been posting there since July 2006 under the alias clarissamehitable. "clarissa, me hit-able". Hmmm, sounds fetishy, but alas I digress.*

Last year, the FTC ruled RMBS had acted improperly with regard to its patents. Also, the company had stock option backdating "irregularities". For 10 months, mistress "clarissa" bullwhipped her husband's critics on the RMBS board and accused them of slander. She also implied that former RMBS general counsel John Danforth was responsible for some of the RMBS litigation problems.

I read through Nancy Hughes' posts, and she was SUCH an insider tell it was pathetic. Here's the complete list of all 170 posts (FYI -- Mackey's are much more interesting). Better yet, Treowth posted some interesting highlights.

The RMBS board is an unusually informed and knowledgeable forum, and by Jan 2007, numerous regulars (dotbot, EMPIRICUM, and many others) had become suspicious that "clarissa" was a company insider. Rambus also had begun their own investigation. The Rambus board of directors ultimately cleared Harold Hughes of any wrongdoing and determined he had no knowledge of his wife's postings. Apparently, Hughes had put his wife on Ignore (just kidding).

Food for thought: never post anything on a blog or message board that you don't want to see reprinted in The Wall Street Journal.


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It was clear from the beginning that Wednesday was not the perfect bottom. Not only was the dip shallow, numerous bottom indicators were far from triggering Buys.

Friday confirmed this assessment, and the NASDAQ closed at a new, 5-month low. While the Composite saw an ugly outside day, the SPX, NYSE and WLSH each sliced through their 200-day. This was not a good development, and the NASDAQ is likely to follow its peers lower.

Unfortunately, leading stocks are giving no clues that a bottom is near either. On Friday, the IBD100 tumbled 3% as just 13 of 100 stocks closed higher. The selling was heavy also, as 42 stocks saw distribution.

The Composite is in bad shape, and it's going to get worse before it gets better.

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The weekly SPX shows an index headed into no-man's land. After 5 years, a proper correction of 10% or more appears to be underway.

After all of the drama this week -- Bear Stearns, AHM, the Beazer "bankruptcy", weak factory and jobs data, etc. -- the SPX slid just 1.8%. It's also only 7.8% below an all-time high. A lot of pain lays ahead for investors on the wrong side of this move, and the chart below includes a couple of famous landmarks. 1400 and 1320 are key levels, and both should produce buying interest. Whether either becomes the low of this correction is impossible to tell at this point.

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Financials and Energy had terrible weeks, and they were the worst performing sectors. The market is also showing signs it's hunkering down for bad weather. Healthcare, Consumer Non-cyclical and Utilities were the only three sectors in the black for the week.

It's still early to be searching for value in Financials and Energy. These charts have more work to do.

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One problem for stocks is that the traditional bottom finders are nowhere close to historical Buy signals. Below are fresh looks at four that were mentioned last week.

Despite the recent surge of New Lows, the High-Low Indexes for both exchanges remain above cycle lows. Historically, meaningful bottoms occur only after the blue 10-day falls below 40 -- and lower is even better.

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The percentage of NASDAQ stocks above their 50- and 200-day still have a ways to go as well.

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NASI breadth is near a 5-year trendline, and given the NASI lag, this upsloping trendline has little hope of stopping the descent. Breaking the trendline is an early sign that this pullback may prove more serious than any during the past 5 years. This is consistent with other indications that the current slide will be the first 10%+ correction since 2002.

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The TOF Ratio is another indicator suggesting more downside will be necessary before a bottom is in. A move down to 1400 would be an early sign that an end to the pullback is near. However, it can bounce around for weeks at those levels before stock prices are ready to rally again.

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Stocks have begun a fresh leg down. Following the ball works in both directions -- as does momentum trading -- and patience is required with both to maximize returns. No need to get in a hurry working against the trend.

I hope everyone has a great weekend and enjoys a little R&R. Next week will be another wild one.



* Hughes spells the name incorrectly, but Archy and Mehitabel were cartoon creations of New York newspaper columnist, Don Marquis. Introduced in 1916 in The Evening Sun, Archy is a cockroach with the soul of a poet, and Mehitabel is an alley cat with a celebrated past. In reading some of "Archy's" poetry, I discovered that Mehitabel had been Cleopatra in another life, "the favorite wife of the emperor valerian." Perhaps a poor speller, Hughes deserves high marks for metaphor.

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