After a great road trip, I got back to LA last week and found myself working on four projects simultaneously. It's a great problem to have, but one that will impact my posting schedule for many weeks to come.
Thanks to everyone for the thoughtful e-mails, messages and comments. I'll do my best to keep in touch as I work through one of my busiest schedules in years. ---- dk
The raging debate in the financial press, blogosphere and on message boards is whether or not we've tagged an IT bottom. With such a divergence of opinion, it's critical to try and grasp what the market itself is saying. Read everything you can, but always trust the market.
From the market's perspective, the outlook is still murky, but with a bullish bias. How long this bias lasts is unclear, but last week the sellers lost momentum.
An important consideration going forward is that V-bottoms are extremely rare. As the story goes, if money managers feel that a bottom is in play, they simply stop buying to get better prices. Without huge money, stock prices eventually slide, weak hands sell and the pros scoop up the slop at prices that interest them. In the world of TA, a double-bottom is born, and they're painful, uncomfortable experiences for the unprepared.
The rub is that the few times that V-bottoms actually work is during market events like this one. Two weeks ago, perfectly good positions were sold -- and perfectly bad ones were covered -- all to raise cash for reasons unrelated to those positions. The market hiccuped on non-fundamental selling, and this raises the odds for a spastic V-bottom to hold.
Of course, this is no prediction. Charts map market fundamentals and not the other way around. The fundamental question is whether the credit market has another shoe to drop, and what the market will do if this proves true.
To help understand these two questions, below are eight observations of the market itself:
1. Sizing Up the Correction
In just 20 sessions, the NASDAQ corrected 12.4%. While this felt dramatic at the time, the chart below shows that this was the skimpiest "correction" of the five since the Oct 2002 bottom.
Even more interesting, last week's skinny red spike shows that the market was very reluctant to give up even that much. The Composite spent just 40 minutes below 2400, and only 20 hours below 2500. Then, in just 7 sessions it regained more than half of the pullback.
This is quirky behavior. It's also consistent with derivative-based unraveling -- a grand "margin call" -- and not necessarily some sea change foreshadowing an economic slowdown.
Last week's light volume caught everyone's attention. NASDAQ trade came in 14% below normal, and it was the 4th lowest weekly total of 2007. Making matters worse, the other three weeks were all holiday-shortened.
Meanwhile, the Composite gained 2.9%. It broke out of a descending price channel, closed above the 50-day, confirmed above the 13-day and cleared the 61.8% Fib re-trace. Those are important moves, made even more so by their pack-like proximity.
It's worth remembering that two weeks ago trading volume saw it's highest total in US stock market history. After big selloffs, markets are famous for leaving the station with the fewest number of investors on board. Sellers are exhausted and buyers are skeptical. So, markets rise on low trade, and this is exactly what happened in August 2006.
A low-volume rise is technically a red flag. However, the market has just had a big convulsion. In this context, it's a murky signal at worst, and only more trade can clear it up.
3. McClellan Oscillator
One of the most compelling charts continues to be the McClellan Oscillator. The McClellan Oscillator measures breadth, and is a momentum indicator of advance/decline statistics. It charts the difference between moving averages of gainers and losers, a process which smoothes out the noise. It's also very fussy and difficult to impress.
Therefore, it's remarkable that, after four weeks of positive divergence, the McClellan Oscillator is now printing a new 2007 high! This is a one-two positive punch for the stock market, and it's a sign that the selling has been focused on a narrow set of targets. Crossing zero marks the "buy" signal.
Would you buy this stock? While it looks ripe for a bounce, the VIX is also making an impressive case that an IT top is in. Someone thinks the worst is over, and this is bullish for equities.
5. Bond Contagion
The chart below shows that bonds swooned heavily before the equity market did, then began recovering. As equities fell apart, all three classes of bonds held on to their recovery. In a world of credit hurt, this is important.
The mortgage market is a complete mess, liquidity is an ongoing problem and consumer credit is next. However, the bond market continues to avoid the signal of a more widespread catastrophe.
6. 5-10-20 Timer
If the market holds up this week, the 5-10-20 Timing Indicator will trigger a buy in the next few sessions. That's a big "if", and timers can give false signals in either direction. However, if the signal is decisive, the 5-10-20 is one of the most reliable timers of all.
7. TOF Ratio
For all the VIX shenanigans, the option market itself stayed surprisingly cool-headed. As a result, the TOF Ratio didn't even stretch down to its lower boundary, and is setting up for a buy signal.
8. Investor Sentiment
Finally, like the Hulbert Index, Investors Intelligence tracks the sentiment opinions of professional advisors. It's hard to see in the chart below, but the Investors Intelligence Bear Percentage is now 37.4%, a 4 1/2-year high. While individual investors are still very sanguine, the pros are noticeably bearish, and this indicator is reaching extremes typical of bottoms.
The market gets a slew of economic data this week and ends with a three-day weekend. This week is going to count, and all signs point to higher trading volume. It will be interesting to see if the bulls can capitalize on their thin-volume bias.
Have a great week, and I'll check in when I can.
Sunday, August 26, 2007
After a great road trip, I got back to LA last week and found myself working on four projects simultaneously. It's a great problem to have, but one that will impact my posting schedule for many weeks to come.
Wednesday, August 15, 2007
There shall in that time be rumors of things going astray, erm, and there shall be a great confusion as to where things really are, and nobody will really know where lieth...those little things with the sort of raffia-work base...that...has an attachment.
---- Boring Prophet, Life of Brian
I'm not much for financial prophecies -- especially ominous ones -- but the market continues to weaken in ways that suggest more weakness. The NASDAQ ended a 2-hour afternoon selloff with a close below its 200-day. Even worse, volume surged 15%. The internals are a rogue's gallery, and the IBD100 tumbled 3.6%. Just 8 of 100 IBD100 stocks closed higher.
On the other hand, a good friend of mine is in sales, and I asked him once how he kept going during long stretches of rejection. He replied, "I remind myself that each 'no' is just one step closer to a 'yes'."
A wide array of indicators are growing more and more oversold, as the market steps closer to a bounce/bottom/zero. Unfortunately, price can easily keep falling long into oversold conditions, but we'll see.
I'm on the road so this is short. I'll try and touch base again tomorrow.
It's unfortunate to see that the Cyclicals closed below their 200-day on Wednesday.
Posted by dk at 8:44 PM
Tuesday, August 14, 2007
It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another. ---- Gordon Gekko
Thankfully, investors didn't lose any money on Tuesday. They just saw their stocks transferred from the perception of being higher to that of being lower.
This perception shift appears likely to repeat itself. Every index except the RUT printed fresh, 4-month closing lows on Tuesday. Also, none of the rally attempts have survived, which means that the market is now searching for Day 1 of a new, potential bottom.
Of course, every session has some type of divergence, and Tuesday was no exception. In this case, Tuesday's price slide was accompanied by low volume. Stocks fell a long way under little selling pressure, and during option expiration, this is always curious.
There's no way to prove it, but Tuesday's step-down action looked like a calculated bid pull, designed to help options traders heal wounds. Days like this can then be answered by brief rallies, also contrived to de-fang option trades. This is a weak market, but with a 27-handle VIX, anything's possible. If the market does manage to rally, it will be sold into, so be careful.
Market internals and leading stocks are not offering promising signs for the bulls. Breadth, Buy Volume and New Highs show a market in distress (see charts). The bigger problem is that none of the indicators are at extreme levels of weakness typical of contrarian buy signals. Adding to the problem is that the IBD100 plunged 2.8% as just 13 of 100 stocks moved higher. It's never good when a proxy for stocks with the very best fundamentals does worse than the broader market.
Once the NASDAQ slips below Fib 38 -- around 2480 -- it's in no man's land. A variety of targets become feasible, and institutional investors will have buy programs keyed to all of them. 2450 is a 10% pullback; 15% would be a retracement all the way back to the March low. The mathematical favorite is probably Fib 19 (not pictured) around 2400-ish. However, we're in credit market hell, so who knows?
The chart below shows the synchronized support violation mentioned above. From a TA perspective, this coordinated weakness is bad news.
Below is another look at some IT bottom finders. These all include the 2002 bottom as a reference, and each says the same thing: we're not at a bottom yet.
The High-Low Indexes for both the NASDAQ and NYSE are getting close, but would benefit from more selling.
NASDAQ stocks above their 50- and 200-day are getting close too, but these charts also need a fresh leg down to push the indicators to extremes.
The NASI breadth indicator broke a 5-year trendline off the 2002 low. This suggests that this correction is the real deal, and will be successful in wringing out excess. It also implies that stocks could go lower than many investors suspect.
So far, this correction has a bizarre, unpredictable quality to it that's about de-leveraging, illiquidity and other serious matters. However, there's no evidence that the weakness is about an economy tipping into recession. As a result, it's worth repeating that remarkable opportunities are being created through the mis-pricing of equities. High quality watchlists will come in handy soon enough.
I leave early tomorrow morning for four days on the road. I'll try and post if I can. However, it's another grueling itinerary that gets me back to the hotel late each night.
It should be a wild rest of the week for stocks, and I'll try and catch up on the weekend.
Monday, August 13, 2007
After a promising start, stocks faded to unchanged on Monday as the market nursed a wicked hangover.
Volume started out heavy, but faded dramatically as the day wore on. By the close, NASDAQ trade was off 31%, and leading stocks put in a similar, bleary-eyed performance. The IBD100 edged up 0.2%, but 94 of 100 stocks traded on lower volume. Strong open or not, institutional investors remain cautious.
Volatility has been so wild recently that it may come as a surprise to learn that stocks have actually traded in narrow range for the past 13 sessions. Also, price losses for the broader market are still relatively minor, with the Dow off just 5.6% from its high. The indexes are all consolidating at their 200-day or 50-day, and after experiencing the heaviest trading week in history, stocks still aren't in an official correction yet.
In the face of all of the uncertainties surrounding the credit markets, this sideways action has produced a growing sense of bullishness among some experts. Below is a random sampling of this and other bullish indicators, and there's much more of it out there:
--- Bill Cara is one of many who believe that the liquidity injection will lift stock prices.
--- KingCAMBO makes an interesting Camtasia presentation on the XLF that suggests The Fix is In, and big money is flowing back into financials.
--- Bill Rempel uses a variety of Predictive Models, and his 20-day versions remain positive for stocks. He notes that regression models are offering good odds, and that his fav EMA-based trend is still up.
--- Carl Futia offers a contrarian observation: while stocks have gone nowhere, the media has grown more bearish. Barron's, the New York Times, Chicago Tribune and Business Week Online have all published bearish front page stories.
--- In another contrarian bullish take, Mark Hulbert notes($) that the HSNSI has fallen off a cliff and is now down at a stunning 5.4%. Just four weeks ago, it was at 50.9%! While the Dow fell 5.5%, HSNSI slid 45 percentage points, a move contrarians would suggest is a tad overdone.
--- Goldman is making a bullish move from the belly of the beast, pouring $3 billion back into the deeply wounded Global Equity Opportunities quant fund.
--- There's definitely no signs that the US or global economies are rolling over, and Q2 earnings season both beat expectations and offered decent guidance.
--- Finally, there's a hodgepodge of various technical bottom finders and volatility metrics nearing extremes common at important IT bottoms.
So, are we near a bottom?
It would certainly make things simpler, but very weird clouds remain on the horizon.
--- On Thursday, both the Dow and NDX undercut their previous low, killing the new IBD rally on Day 8. The "Current Outlook" of Investor's Business Daily has returned to "Market in correction".
--- VIX and More notes that the commercials are heavily long VIX calls. This is the "smart money", and it points to continued equity downside ahead.
--- In an interesting twist, one of Bill Luby's readers noticed the purchase of 30,000 Aug 25 VIX calls on Monday. This is a $7.5 million bet that the VIX will close above 27.5 by Friday -- a big negative for the stock market. Such a large, professional move led Bill and others to wonder if another fund is about to liquidate on a massive scale.
--- Speaking of options, Jim Kingsland notes in his CNBC Options Report that despite Goldman's $3 billion GEO ante, options players aren't bullish on XLF, with puts swamping calls 2.5 to 1 on Monday. Is this another not-so-subtle hint that more fund liquidation is ahead?
--- The current index consolidation at 200-day support looks like a bottom. However, it could easily be a setup for a fresh leg down. Numerous technical indicators give this possibility above-average odds.
--- In a troubling sentiment note, the AAII Sentiment Survey shows that individual investors are surprisingly sanguine about the current pullback. At 46% bullish, this group has a long way down before it reaches historic bottom territory.
Strong arguments for both the bullish and bearish case are being made by experienced professionals. However, this fact alone suggests that the pullback may not be over. Historically, a sentiment extreme needs to be reached before corrective behavior is complete, and this is clearly not the case. Also, despite last week's heavy volume, an exhaustive price extreme was never reached either. Lastly, it seems very unlikely that the financial sector has given up all of the skeletons in its closet.
In the end, a strategy is perhaps most influenced by one's time horizon. With your time frame in mind, adjust risk to taste.
And get ready for another ride 'round the track.
See you tomorrow.
Saturday, August 11, 2007
Liquidity injections can smooth out the wrinkles in financial markets, but the effects are both mildly disfiguring and very temporary.
In less than 48 hours this week, the central banks of the US, Europe, Canada, Japan, Switzerland, Australia, Singapore, Malaysia, the Philippines and Indonesia injected over $326.3 billion of liquidity into the global financial markets. A whopping 65% of this infusion -- $213 billion -- occurred not in the US system, but in Europe.
This was the largest global liquidity injection in history, and it's ironic that the US pump was a paltry $62 billion, one-fourth the size of Europe's.
There was also a jargon injection, with "statistical arbitration" and "quantitative funds" added to a growing list of arcane credit terminology popping up in the mainstream press.
The market also saw a volume injection, as this marked the heaviest week of trading in US stock market history. The kicker is that even though volatility reached record highs, the stock market paradoxically edged higher as well.
What's going on here?
Hard to say for sure, but below are eight observations:
1. The Stock Market
The financial markets have become more irrational than they've been in years. The source of the problem is that mortgage-backed securities -- a huge asset class -- have become difficult to value. Wall Street hates uncertainty anyway, and when it extends to the value of an entire asset class, it's a big problem. Massive positions are being liquidated for reasons other than fundamentals or technicals, making this an unusually risky time to own stocks. Because so little has been resolved, it's going to get worse before it gets better, probably much worse.
2. Statistical Arbitration and Quantitative Funds
Stat-arb is the latest variation of black box strategies in use for decades (LTCM was brought down by a variation of these). Really smart guys with computers exploit tiny, statistical abnormalities in the relationships between various securities. The spreads are so small that enormous leverage -- up to 10 times -- is used to make them profitable. The problem is that in an emergency, it can take 10 times as long to exit a position. When the emergency is in an illiquid asset class -- like mortgage securities -- it can really get out of hand. Perfectly good stocks get sold en masse to raise cash, which in turn triggers stops at other firms, and so on. The irrationality can accelerate rapidly.
3. Liquidity Injections vs. Rate Cuts
Because the FOMC didn't cut rates on Tuesday, Fed critics feel vindicated by this week's liquidity pump. However, liquidity injections and rate cuts are very different tools. Liquidity can be highly targeted (the Fed bought high-quality mortgage paper this week) and is very short-lived. Rate cuts are a blunt instrument capable of producing unintended consequences. The effects are also much more long-lasting.
There's widespread disgust at the thought that the peddlers of shameless credit products are getting "bailed out" in some way. The truth is that the peddlers are paying dearly for the Fed's help. The Fed is holding the market's best mortgage paper for just 3 days. After 3 days, the peddlers have to buy the paper back plus a Soprano-style vig that's roughly 5-19% higher than on the open market. The bad news? This caper doesn't solve the original problem of the subprime toilet paper they still can't sell.
5. Greenspan vs. Bernanke
Thanks to the bias of Greenspan's 20-year reign, an entire generation of Wall Street pros believes that the main function of the Federal Reserve is to be "accommodative". This isn't true of course, and Bernanke's data-driven approach has proved a genuine shock to the system. Despite consistent policy language and behavior, Wall Street refuses to take Bernanke at his word. You can see this refusal in the Fed fund futures and the bond market. After 1 1/2-years, they still resemble more of a Greenspan handicap than an acknowledgment of Bernanke's approach. Bernanke will continue to provide liquidity, but will be slow to cut rates. If things really fall apart, he will of course. But short of that, he'll continue adjusting policy to the incoming data.
6. Frozen Markets
The biggest reason Bernanke will be slow to cut rates is because in the end, lower rates won't solve the problem. Illiquidity has hit the mortgage market because the value of the assets is unclear. In absolute terms, rates are low, and making them lower (a) isn't going to create valuation epiphanies, and (b) will open a can of worms in other asset classes and global economies. Transparency, not cheap rates, is the only true solution.
7. "Malt Liquor Mortgages"
The unspoken secret about the subprime mess is that these products were designed for and marketed to low-income minorities, mostly African-Americans and Hispanics. Comedian Jon Stewart had a great subprime bit on The Daily Show this week. Fellow comedian Larry Wilmore called subprime the "menthol cigarettes of loans", adding "we knew these loans were unfair, that's why we stopped paying them back!" In a cheeky twist on Black Power, Wilmore contends that Blacks are getting back at The Man by using $100 billion in leverage to strip him of power, status and wealth. Protests, voting and riots are dead ends -- using Wall Street against itself is the ultimate diss.
8. The Silver Lining
When the stat-arb boys are forced to raise cash, they sell the market's best companies, and cover shorts on the worst. This crushes hedging strategies in both directions. It's also why the best stocks fell and the worst stocks climbed this week, and a troubled, heavily-shorted market closed higher. The silver lining is that this irrational behavior is creating a large value inefficiency in the market. The economy is in decent shape, yet some of the most best stocks in America are being dramatically mis-priced. There's a bundle to be made when this is over.
Keep some powder dry.
Posted by dk at 9:42 PM
Friday, August 10, 2007
That rumble you hear is trading volume, which is currently tracking at record levels exceeding Wednesday and Thursday's epic totals.
It's very difficult to estimate so early in the day, but for the NASDAQ, EOD suggests the high 3.x billion shares. NYSE is above yesterday's all-time record of 2.8 billion.
Should volume back off from these quick-takes by the close, that would be interesting behavior as well. VIX almost tagged 30 before easing a bit.
A summer to remember for sure.
Posted by dk at 8:46 AM
Thursday, August 09, 2007
Watch your back.
One day after the NASDAQ saw its heaviest volume in 2007, the NYSE saw its heaviest trading volume ever. While historical extremes can suggest an exhaustive climax is in progress, this is hardly a foregone conclusion.
Distribution has a long history of killing young rallies, and Investor's Business Daily points out a sobering statistic. The market has seen heavy selling within 3 days of a follow-through session 14 times since 1982. 13 of those 14 times, the rally ultimately failed.
Unfortunately, leading stocks aren't suggesting that this losing streak will be broken. While the NASDAQ shed 2.2%, the IBD100 tumbled 4.7%. Also, after improving some on Wednesday, IBD100 internals weakened on Thursday. 91 of 100 stocks closed lower, while 35 stocks saw distribution. In truth, it's a little surprising that the distribution wasn't heavier on so large a price move with such terrible breadth.
The market is so unstable that short-term predictability is difficult. While further downside seems obvious, the chart below shows that the NASDAQ is also printing a variation on a bullish inverted hammer. It's been approached unconventionally -- and the reliability is low/moderate anyway -- but in this crazy, volatile market, it's best to keep all the cards in front of you.
The odds continue to point to an eventual test of Monday's low. However, the second-highest NASDAQ volume in 2007 produced just a 2.2% slide, which neatly closed the gap in the process. Also, after 7 billion shares changed hands in just 13 hours, the NASDAQ is off a scant 5 points (0.2%). The evidence suggests there's a stealthy bid under this market, but Friday is a whole new day.
There's also more to the credit situation than meets the eye. For now anyway, the broader credit markets don't show the histrionics seen in the mortgage-based areas. In an article on Thursday, Tim Rogers at Briefing.com clarifies the distinction between liquidity demands and a credit crunch, and notes that, while gnarly and unpleasant, both systems continue to function normally.
There is an undeniable need for global liquidity, which the various central banks are responding to. However, Rogers notes that for now, only a small number of commercial banks (4%) are tightening commercial and industrial lending standards. This contrasts with the 60% that did so during the 2001 peak. Rogers writes:
There is no evidence yet of a credit crunch, only the need for cash to stand in for the subprime assets less able to be valued and used as collateral.
The performance of the bond market continues to corroborate Rogers' findings. Below are comparative charts of the 10-year Treasury, high-grade corporate paper and junk bonds that I posted a few days ago. These continue to hold up, as the broader, non-consumer credit market shows some welcome stability -- for now anyway.
Also, both yield curves are now positive, as the bond market still has doubts about the "certainty" of a US recession.
As counterintuitive as it may sound with so many stocks hitting New Lows, growth continues to outperform value. Not only does ELG continue to outpace ELV (see chart), semiconductors were the best performing group on Thursday.
The VIX vaulted 23% to another 4 1/2-year high as the price for an equity prophylactic continues to be no object...for now.
The effects of the credit nightmare are accelerating at the same time that bottom indicators are strengthening. If history is any guide, the growing tension between these two is likely to release itself when everyone least expects it.
Friday should be another doosey. See you then.
Wednesday, August 08, 2007
The rumor mill may have disrupted trading on Wednesday, but stocks managed to put in a solid day nonetheless.
By some counts, it was the best session of the current, six-day rally. The NASDAQ traded 3.55 billion shares, logging its highest volume total of 2007. Also, the Composite gapped at the open -- and then kept going. Just three days after testing 200-day support, the NASDAQ is back above its 50-day.
However, building bottoms is messy business. Markets misbehave and often fail in this zone, and this one is no exception. Stocks may be in a "confirmed rally", but the action is fickle and rumor-prone.
In the end, stocks recovered from Wednesday's gossipy selloff, but this is clearly a "shoot first, questions later" market. While this may sound wise, the final 100 minutes of trading on both Tuesday and Wednesday didn't exactly bear the stamp of wisdom. The action seemed frantic and confused.
Adding to the overall messiness was that a lot of Wednesday's action was bargain hunting. The best-of-breed had another so-so day, marking the third time in four sessions that the IBD100 has trailed the broader market. The IBD100 added just 1.4%, while the NASDAQ tacked on 2%.
That said, leading stocks brightened in an important way on Wednesday. The gains may have been sub-par, but the internals on the IBD100 showed a big improvement. An impressive 35 stocks saw accumulation vs. just 18 seeing selling. Also, 23 stocks jumped to record highs, up from only 11 the day before, and 5 the day before that. This is a tone shift for the market elite, and it's a welcome sign in an emerging rally.
The NASDAQ held at both its 13- and 50-day today, a good sign. Also, various technical indicators are improving, and stochastics still has room to run. However, it doesn't take a master technician to see the near-term prospects for MACD divergence, as well as for H&S.
Mark Hulbert published an article on Wednesday that discusses how the NYSE High-Low Index is on the cusp of signaling a bottom. This is a favorite bottom finder of mine, and the article mentions how the indicator's creator, Gerald Appel, noticed a very oversold 9% reading on Tuesday. Appel was talking about the blue 10-day on the chart below, and crossing back above 20 is the Buy signal.
The relationship of price to the 50-day offers important insight into the relative strength of four of the main indexes. The NDX, Dow, NASDAQ and SPX are included below, arranged by price strength. It's something to think about when building watchlists.
One chart looking suspicious of the equity rally is the VIX. For such a powerful up day, the VIX slipped just 0.5%. Option-based protection continues to be a prized possession.
The market hasn't been very generous or stable, and great setups in leading stocks are still few and far between. This suggests that equities have more work to do, and it's a worthy time to be patient.
I'm out all day tomorrow, so I'll see you after the close.
Tuesday, August 07, 2007
In the face of its self-inflicted credit problems, Bernanke gave Wall Street some much-needed tough love on Tuesday.
The FOMC offered a token nod to "tighter credit conditions", before reminding professionals for the bazillionth time that the greater policy issue is still inflation. As difficult as the credit crunch may be for some, it stems from poor choices made by professionals who should have known better. Unlike his predecessor, Bernanke remains intent on letting the marketplace heal such overindulgences on its own, and isn't predisposed to tempting further moral hazard.
The stock market seems to like this new therapy, as the indexes all closed with decent gains on solid volume. The two current leaders -- the Dow and the NDX -- both reclaimed their 50-day. Internals were also much improved, although New Lows continued to smother New Highs, 963-171.
Daddy taking the T-bird away certainly inspired leading stocks. The IBD100 shot up 2%, although internals still came in just good, not great. While 25 stocks saw accumulation vs. just 11 under distribution, two-thirds of stocks on the IBD100 had lower volume than on Monday. Institutions remain cautious about charging back into the good stuff.
The NASDAQ is trying to be on its best behavior, but it's still no candidate for sainthood. The high-volume action off the 200-day is positive, but the Composite is still a damaged chart mired in a thick band of resistance. Overhead supply doesn't thin out for another 70 points, so if stocks move up, expect a bumpy ride.
However, the bigger issue is that in TA, few things are more rare than an untested bottom. Statistically, this pullback won't be over until 2490 gets sat on again, and the best double-bottoms overshoot lower on their retest. History is filled with examples of retests taking weeks -- even months -- to finally develop.
With the FOMC meeting now in the books, two important and related questions are still searching for answers:
1) Is the credit problem going to poison the broader economy?
2) Has the stock market now seen the worst of it?
Debate has a habit of raging on endlessly, but parsing the market for objective, evidence-based data is a better basis for making investment decisions. The two sections below use a few charts to help work through the questions above.
Regarding credit issues contaminating the economy, it's worth noting that the short end of the yield curve (3-month/10-year) flipped negative over the past week. While this is an unwelcome development, the 2-year/10-year remains unperturbed. This gives the yield curve "recession" indicator a lukewarm reading at worst. Below are charts of both curves.
While specific mortgage and derivative metrics have imploded over the past two weeks, the Treasury and corporate bond markets have remained more rational.
Below is a chart of the 10-year Treasury bond, along with LQD (an investment grade corporate bond ETF), and HYG (a junk bond ETF). Over the past two weeks, as the Bear Stearns fiasco hit the tape and financials plunged, Treasuries, high-grade paper and junk bonds all moved higher. Things can change, but so far this is not the sign of "credit contagion."
Junk bonds (HYG) are particularly noteworthy. During a week that we learned we're in "the worst fixed income market in 22 years" HYG actually moved higher. There's no doubt that Bear Stearns and other non-banks have issues. However, If the crisis was truly widespread, high-grade paper would be falling and junk would be tumbling out-of-control. Things could get worse, but for now this is no Armageddon, and the broader credit market is still functioning.
Regarding the stock market: if all that remains for this pullback is for it to retest the lows, this is one heck of a bull market. The jury is still out, but a couple of interesting developments are worth noting.
The McClellan Oscillator is a breadth metric that smoothes and distills advance-decline data into a single line on a chart (for more info, click here or here). NAMO is a stubborn indicator that is not easily impressed, but in an unusual TA event, it's developed a positive divergence with the NASDAQ over the past two weeks.
Interestingly, Up Volume vs. Down Volume (NAUD) is printing a similar divergence. Both NAMO and NAUD printing positive D raises the odds for higher prices soon, possibly in the form of sharp, strong rally.
With not even the most basic timing indicator printing a Buy yet, it's premature to get ahead of oneself. However, this market is displaying remarkable tenacity against a steady drumbeat of problems.
If this bottom does hold, it's worth acknowledging Bill Luby's thus-far prescient bottom call he made at 11am on Monday. For the record, this is currently the precise market low. Bill also gave fair warning a bottom was near on Sunday in a post on VWSI, his proprietary volatility metric. Nice going, Bill.
This has been an interesting summer, which will no doubt be continued on Wednesday.
See you then.
Monday, August 06, 2007
Now that Spector has resigned as head of Bear Stearns -- and a scapegoat is safely in place -- we can all get back to buying stocks.
At least that's what the market appeared to be saying on Monday.
In an interesting development, Day 4 of last week's rally attempt saw the Dow print an IBD follow-through day. Despite Friday's selloff, the Dow never undercut last week's low, and that kept the rally attempt alive. On Monday, the Dow surged 2.2% on a 1% uptick in volume and the bull "officially" lives on. Of course, Barry Bonds is about to "officially" break Hank Aaron's record also.
According to the steroid-free research of Bill O'Neil, market rallies are confirmed by a follow-through day on one or more indexes. While it doesn't guarantee success, it shifts pressure back to the bears to maintain control of the pullback. In short, the bulls now have a slight, statistical advantage, but how long it lasts is anyone's guess.
The NDX hasn't cut through last Wednesday's low either, but its 1.9% bounceback came on slightly lower trade (0.6% lower to be exact). Since the market peaked in July, Industrials and Technology are two sectors that have held up well, and their strength was visible again on Monday. Below are both the Dow and the NDX.
One of the problems in identifying the bottom as it occurs is that powerful divergences usually arrive to blur the signal. For example, stocks enjoyed a powerful reversal on Monday, but NASDAQ breadth was still negative. Even worse, New Lows totally spanked New Highs, 1171-102. This is a ratio of 11-to-1, which may be signaling a climax bottom -- or not. This statistic is also consistent with dead cat bounces, and in the context of a bounce day is worthy of caution.
Leading stocks certainly didn't clear anything up. The IBD100 trailed the broader market with a 0.5% gain, and 28 stocks saw distribution, vs. just 21 that saw accumulation. Definitely a mixed picture from the market leadership, although this too is very characteristic of market bottoms. Regardless, you want to see a proxy for stocks with the very best fundamentals to show accumulation if a real bottom is in place.
The chart below shows that the NASDAQ put in a beauty at it's 200-day on a 9% surge in volume. This is an ideal reaction at support, but it's also nothing more than Day 1 of a new rally attempt. It's still a nasty-looking chart with a lot of work to do.
On Monday, new NASDAQ lows spiked higher than even at the 2002 bottom -- and this is definitely odd for an 8.5% pullback. Still, Monday's New Low total just barely squeaked into the top 7 in the past 7 years, so it has room to get much worse.
The Financials saw genuine buying for the first time in two months, and the surge erased 3 1/2 days of weirdness in one, fell swoop. This is a difficult group to have confidence in, as the odds of roaches in the walls are still very high. The Death Cross doesn't help either.
Another group flashing weirdness is energy. Energy stocks and the underlying commodity have been out of sync for three weeks. As XLE pulled back 12%, crude kept climbing another 14%. Today crude fell to its 50-day, while the XLE reversed at its 200-day. This asynchronous volatility is not for the feint of heart.
If the market climbs higher, retests, and this proves to be "the" bottom, the bulls have serious mojo. Based on investor sentiment numbers, they also deserve a great deal more respect than most investors are giving them.
Thus far, the ratio of hissy-fits to price declines is one for the record book. For the "worst fixed income market in 22 years" to produce a sub-10% stock market decline would suggest we're in an unusually powerful bull market with room to run.
Of course, step one is that the bottom has to hold, and with the VIX printing a 22-handle, there are definitely more challenges ahead.
Until then, see you tomorrow.
Posted by dk at 8:58 PM
Sunday, August 05, 2007
The news about Daniel Lyon is a tragedy that I can understand.
But Bob Nardelli?
If the Blackstone IPO wasn't enough to convince the market that private equity had reached a top, Cerberus deciding that Bob Nardelli is the best executive in America to revitalize Chrysler should remove all doubt.
At least Cereberus kicks things off with an eye towards efficiency:
the announcement serves double duty as both press release and punchline.
Cramer's rant struck a chord across the blogging community this weekend.
--- Barry expects it to become "required viewing for market historians and technicians alike", and Barry's cultural sensibilities are matched only by his flare for philanthropy. He honored this pop-finance watermark with a commission for a new musical work.
--- Howard Lindzon thinks Cramer should do a movie ("I hear dead home owners"), and makes the interesting observation that perhaps his craziness is genetic.
--- Adam observes that market conditions are at least ugly enough "for a grown pundit to kick and scream and beg in front of a hot woman on TV, and all he wants is a rate cut."
--- Roger brings up the interesting point that if Bernanke lowers rates, he faces the taunt gauntlet of "Cramer-made-me-do-it". I'm sure Bernanke remembers when he let the martini's do the talking with Maria.
--- For author Michael Panzner, Cramer blathering, "we have Armageddon" is like manna from heaven -- and a natch quote for the next edition's book jacket.
--- The gonzo, potty-mouthed (and often hilarious) Broker A is on Lindzon's wavelength and thinks we should "give this man an Oscar".
So, is Cramer on to something?
Fellow CNBC bretheren Larry Kudlow and Ron Insana think so, as do UBS economist Maury Harris and Lou Crandall, economist with ICAP, the world's largest inter-dealer broker. Also, in a sure sign that hell is freezing over, respected blogger Babak agrees with Cramer that the bond market is facing a liquidity crunch that requires action from the FOMC.
The problem with Cramer's plea is its profound myopia: the broader conditions required for FOMC action simply aren't in place. Said another way, from a data-dependent, Fed policy perspective, the damage remains contained -- for now anyway.
Cynics have another way of putting it: it isn't in the scope of Fed policy to keep the stock market heading higher.
The very thoughtful David Merkel at The Aleph Blog points out that the epic crisis Cramer alludes to doesn't ring true. The problem is "in the exotic stuff" -- subprime ABS and ABS derivatives, CDO's, LBO debt, loans-in-progress, and LCDX/CMBX derivatives. Merkel adds that for "the vanilla structured securities, the market is functioning." Bear Stearns is freaking out because they're heavily-exposed in these areas. Wall Street as a whole isn't -- at least for now.
Also, the ever-rational Dr. Brett points out that this continues to look like a bull market correction and not the beginning of a new bear market (my thoughts exactly). While some sectors are clearly being shredded, others are holding their value. "This is not a monolithic bear market".
If you want to handicap a rate cut, track the clue that the Fed has so carefully included in every FOMC statement in recent memory: resource utilization. If unemployment starts climbing, the FOMC will alter its stance. Short of that -- with the stock market not even in a correction yet and the global economy expanding -- the Fed will stay put and its stance will remain fundamentally unchanged.
The irony is that Cramer's Howard Beale imitation may actually backfire on him. This is now the most widely-anticipated FOMC statement in at least a year, partially due to Cramer's diatribe.
If the FOMC statement isn't sympathetic enough, the market could see a fresh round of selling.
Posted by dk at 12:56 PM
Friday, August 03, 2007
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, Law.com broke a story that Nancy Hughes -- wife of Rambus CEO Harold Hughes -- has been flame posting on the RMBS board at InvestorVillage.com.
Friday morning, I spoke with Ralph "Blue" Kidd, founder of InvestorVillage.com, 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 InvestorVillage.com 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.
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.
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.
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.
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.
The percentage of NASDAQ stocks above their 50- and 200-day still have a ways to go as well.
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.
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.
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.