Bored and Happy

Barring a last minute sell off, this will be the third day in a row where the market has done little. This is good. Panic selling and buying has subsided (for now?)

Tunnel and Bridge Crowd

On the Times Op-Ed page today, Paul Krugman, on the left side of the page writes about the dearth of consumer spending and he wonders what will fill the gap to get the economy going again. His Op-Ed colleague, David Brooks (who I rarely agree with) answers him on the right: the next administration needs to spend heavily on infra-structure. He writes about transportation infra-structure, but I would add that equality important is energy infra-structure - alternative energy and the electric grid.

Aimless Market

The market continues to be rather aimless. I continue to believe that we do not break out of this trading range until after the election. In the meantime, if you want to understand a short-squeeze, read here.

And for a real sign of the times, J.M Smucker will join the S&P 500 on November 5th. Peanut butter and jelly, the staple of the new economy.

The Ghost in the Machine

It is Halloween and some poltergeist took over my computer this morning. Programs would not load, data was missing, sweat was breaking out on my forehead. The total loss of trading data is my worse nightmare. I do have backups but I first have to diagnose if I'm having a system wide problem or an application specific problem. Two hours later, I seem to be fully restored and functional.

Still in the Range

I'm going out on a three day limb here. Anything or nothing can break the market out of this trading range (see previous post.) It could be bad news, good news (unlikely) or no news. But, I have a guess and it's a pure guess. On November 5th the market is going to react to the election and that is what it's waiting for. If Obama wins we break to the upside and if McCain wins we go down. Why? For eight years we have had a president who is disengaged and knows little about economic policy. All the decisions are left to competing forces within the administration. McCain by his own admission knows little about economic matters. In normal times, a president does not need to be and cannot be an expert on all matters that come across his desk but we are not in normal times. I think the market will react positively to Obama as president because he does care about economic policy and he will be engaged in the issues. More importantly he will bring new people in with new thinking. McCain will be stuck relying on the same people that Bush has relied on. For the first time more money from Wall Street went to a democratic candidate (read here) than to a republican one. That says something.

A Special Voter (off-topic)

Regardless of your political point of view, it would take a hard-hearted soul not to appreciate 109 year old Amanda Jones.

First We Take Manhattan Then We Take Detroit*

First Wall Street and now the automotive industry. Detroit first failed to respond to the 1970's oil crisis, giving the Japanese automakers a chance to establish a strong foothold in the US market. Thirty years later, never having learned its lessons, the US auto industry is teetering on total failure and bankruptcy. I understand that there are a lot of jobs at risk but why should the taxpayers bail out GM, Ford and Chrysler after 30 thirty years of myopic business decision making. Better we should negotiate a deal with Toyota and Honda to take over these companies.

* With apologies to Leonard Cohen.

Dollars to Donuts

At its apex you could buy about 5 dozen donuts for a single share of Krispy Kreme (KKD). Now, a single share gets you 3 donuts, maybe 4 or 5 if you buy day old donuts.

Up or Down?

College tuition, not the market. Here are dueling headlines from today's WSJ and NY Times:

In the Wall Street Journal:

Increases in Tuition at Colleges Slow, for Now by Robert Tomsho

And, from the New York Times:

Downturn Expected to Drive Tuition Up by Tamar Lewin

Funny Picture of the Day (way off-topic)

Here, let me scratch your nose while the milk-maid entertains you.

Picture from Reuters.

What to Look For

After the free fall to the lows of 10/10/08, the market has traded in a range. See the above chart. For the Dow, the intra-day low was 7882 and the intra-day high was 9794 (see the bold white lines.) News has caused the market to react, mostly overreact, both up and down, but it's all been in this range.Until the market decisively breaks one of these levels don't get too excited about anything.

Technical Analysis

Technical analysis is primarily the study of patterns in the stock market. Most so called professionals don't put much credence in the practice preferring fundamental analysis - looking at things like money supply, cash flow, earnings, P/E ratios and the like. I believe that ultimately, the market is all about psychology and herd mentality. Technical analysis is a tool that allows one to measure desperation and conversely manic exhilaration in the market. It allows for the discovery of pending psychological barriers based on past history. For example, since there are so many traders and investors in the market, the law of large numbers, allows us to make some generalized predictions about how much of a loss people are willing to take before panic selling takes place.

Look at the weekly chart for the Dow from 2002 to present. The red horizontal lines indicate the bottom and the top of the market during that period and starting from the top 1/3 loss, 1/2 loss and 2/3 loss. Look at the point I circled, that is where 50% of the gain was lost by an investor who put their money in at the bottom in 2002. Once the market pierced that level, it fell like a rock. This is not a coincidence. It doesn't always happen so dramatically, but it happens enough to bet on.

Fed Action - The Conundrum

Here's the Fed statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Not much positive here. With the Fed rate at 1% and a trillion dollars pumped into the economy, one would think growth should take off. The problem is that not only are banks not lending but who can afford to borrow? Consumers are tapped out, so even if corporations with strong balance sheets could borrow, what would they do with the money if no one is buying their products.

I Am Spartacus

First, Goldman and Morgan decided to be banks - not a big stretch. Today, the WSJ reports that GMAC wants to be a bank so it too can get federal money through TARP. And, this afternoon, CNBC reports that Ambac, a bond insurer, wants to be treated like a bank so it too can get federal money through TARP. (When I say federal money I mean tax payer money.)

Don't Be Fooled

Don't be fooled by how quiet the market is this morning. It has nothing to do with markets calming down and getting back to normal. It has everything to do with waiting for the Fed announcement this afternoon. This is a typical trading pattern on the morning of a Fed announcement.

Cheap Enough?

Is the stock market cheap by historical standards? An article by David Leonhardt in today's NY Times tries to answer that question. There are two problems in trying to answer: 1) The bull market of the last twenty years skews the average P/E upward. It's a bit like averaging the net worth of 100 random people with Bill Gates as one of the folks chosen at random. 2) The E in P/E, corporate earnings are probably on the decline for awhile and we don't know by how much.

Complacency Continued

So what could end complacency - the next crisis. The NY Times reports on the pending problems with credit cards. Credit card debt has been securitized and sold much like mortgages. We can only assume that there is just as much leverage involved so when this securitized market tanks it will tank hard. Of course, the problems here are nothing new. Check out this article from Fortune. And, here's a good article from Businessweek. But, the Fed's Stern said this last week: "Credit Card debt securitization by the market has performed well, US economy is fundamentally sound." The market performs well until it doesn't.

Complacency Settles In?

Great day in the market and the volume built as the market went up this afternoon - that's good. The market is all about perception - not reality. For two weeks, the market has bounced along what may turn out to be the bottom - only time will tell. But during this time no more disasters, bank failures, no new crisis. People are getting comfortable, the human mind has the amazing ability to adapt to new circumstances and to justify what it perceives. We're getting use to the market moving down 600 points in one day and up 600 points on another. We may be reaching the point when no bad news equals good news and that is enough for the market to rise. This is just an observation, nothing to bet on.

Who Are You Killing?

Was there insider trading based on secret plans of CIA-led coups? Read here an article from Slate.

What Did They Know and When Did They Know It

I came across this speech given by Frederic Mishkin, formerly a member of the Federal Reserve. He spoke in February of this year (the Dow was still above 12000.) He reviews a scholarly paper about the mortgage crisis. The authors of the paper argued that because banks are leverage 10 to 1, mortgage loses will lead to forced selling which will lead to the loss of credit availability. They posit that for every $1 loss by a bank, there will be $10 less to lend.

This raises the question, if the Fed knew this was a serious possibility why wasn't a plan devised at that time to deal with this potential crisis? Why did it seem like Bernanke and Paulson were pulling plans out of dark and smelly places in early September when they had many months to think through their options?

Then again, Mishkin also wrote this article about the strength of Iceland's economy.

When Rational Thinking Fails

I'm sure that most of us have had the experience of sitting on a train that has not yet left the station and seeing another train across the tracks that is also at a stand still. One of the trains starts moving and we think "finally, we're going" only to see the other train leave our field of vision and then realize we are still sitting at the station. Moving and not moving looks the same.

But this is not always true, sometimes are eyes trick us another way. Natalie Angier writes in today's NY Times about how we perceive motion and our body's movement. She writes about about an easy experiment to try:

"If you want to glimpse the handiwork of one of your body’s unsung sensory heroes, try this little experiment. Hold your index finger a few inches in front of your face and sweep it back and forth at a rate of maybe once or twice a second. What do you see? A blurry finger. Now hold your finger steady and instead shake your head back and forth at the same half-second pace. This time, no blur, no Marcel Duchamp’s “Nude Descending a Staircase” effect. The finger stays in focus even as your head vigorously pantomimes its denial. "

If we can't trust our perception of reality then how can we trust the resulting behavior. David Brooks, also in today's NY Times, writes about how this relates to the economic crisis we face today. He quotes from Taleb's book, "The Black Swan" which I have listed in the right hand column. If you still believe in rational markets, it's a must read.

The Most Expensive Car in the World

Volkswagen's market cap. exceeded that of Exxon-Mobile yesterday, becoming the most valuable company in the world, when a short squeeze forced tons of buying. Read here.

If All else Fails (Off-Topic)

If all else fails, here's an option.

Triangle Update #2

The S&P has broken the triangle downward. The only thing keeping it from a 100 point free fall to the 10/10/2002 level is the intra-day low of 839.80 on 10/10/2008 (interesting symmetry!)

See previous Triangle post here and here.

Hang on to Your Hats

The difference between the high and low for each week of October is unbelievable. Below I list the trading range for each week as a percentage for the S&P:

For week ending:

10/3: 9%
10/10: 25%
10/17: 20%
10/24: 17%


These are the kinds of numbers you expect to see in a year!

What a Laff(er)

Check out this Op-Ed by Arthur Laffer in today's WSJ. There is much to agree with in this piece, particularly, his lack of faith in the government being able to correct things (though, I don't know what he proposes as an alternative now that we are saddled with this mess.) The big problem, and this diminishes his credibility (if he has any after the total demise of trickle-down theory) is how much he politicizes this issue with statements like this:

" If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street."

I don't claim that Barney Frank and Congress will make all the right decisions, but let's be fair, Barney Frank and the Democrats have only been in charge of Congress for less than two years. Laffer cannot not possibly claim with any credibility that all the current problems have to do with policy set by Frank and friends, especially with Bush in the White House with veto power. Admittedly, some of the problems began under Clinton (lessening lending standards for Freddie and Fannie) but were severely compounded by deregulation and lack of oversight under Bush and a Republican Congress. There is plenty of blame to go around.

A Bottom Man

I love bottoms. I just wish I could take advantage of every bottom I see. I can't but I still look. Contrary to what all the experts are saying, bottoms come in many shapes and sizes: some are skinny and fast moving, other are large and lumbering and others bounce along. I've posted some pictures to show you.

The top chart shows the Dow from the mid-60's to the mid-80's, a period of time where the market went nowhere. It was the end of a twenty year bull market followed by major macro-economics hits to the market: inflation from too much spending (large growing deficits) by government on war and new social programs, the oil crisis and stagnating growth. The market bounced along (granted there were big bounces which offered an opportunity to make money for the nimble) for almost twenty years.

The second chart shows the Dow for the 1987 market crash. A crash caused by a crisis in confidence after the Hong Kong market crashed. The Fed quickly pumped money into the economy allowing for a quick recovery (Greenspan emerged as a genius) - a somewhat rare V-shaped recovery.

The bottom chart shows the 2002 bottom of the S&P. This decline began in 2000 with the internet bubble burst and the economy was further damaged after 9/11. It was a drawn out, painful decline. It took about eight months for the bottom to form - the market bouncing around in a tight range.

If I had to guess, which I am doing, I'd say we are in store for a 60's type recovery (see the Dow chart from this previous post.) The good news, if you want to call it that, is that we are almost 10 years into the process. The market levels we reached starting 10/10 and have played around since then, were the levels where I thought we would have major support. However, I do believe we have a good chance of revisiting the 2002 lows, reach on 10/10/2002 (I hope I'm wrong.)

Here's a good article from the WSJ about bear market bottoms.

"The Bet that Blew Up Wall Street"

... a segment from 60 Minutes. If you didn't see it, you can read or watch it here.

ED - Editorial Dysfunction

Bono writing for the NY Times - Does anyone else think this will be a waste of paper?

No One Knows Anything

Here's a good article about the so called smart people trying to figure out this economic mess. And here's a good article about the stupid people who got us into this mess.

Finding Something Positive

The day was a bust, but... All the major averages closed above their opening lows and more importantly, they all closed above the intraday low of 10/10. What started off as panic ended as just another lousy day. So smile. I'll post more later this weekend.

WSJ vs. Bernanke

The WSJ doesn't like the fact that Bernanke supports some of the policies put forth by Obama. They claim his credibility is destroyed by his partisanship. Hmmm. And if he had said he supported further tax cuts?

Junk in a Box

And now for something completely different. Check this out. Hilarious. Click here for the original Junk in a Box.

What to Watch for Today

The Dow and the S&P are liable to open much lower but above the intra-day lows of October 10th; for the Dow that is 7882 and for the S&P it is 839. The Nasdaq will be a lower low.

The triangle I've been talking about for a few days will be broken to the down side. If the market does not turn up quickly then we have a very good chance of revisiting the lows of October 2002 which I've been writing about since my first post. That would be Dow 7500 and S&P 800 (approximately.)

Market traders always like to see a big high-volume swoosh down at the bottom of markets - capitulation is what they call it. Everyone who wants to sell, whose been thinking of selling, long-term investors who are scared of losing their entire life savings and have lost faith in the long term prospects of the market, sell and when the market finally shakes out every weak hand in the market, then we will have reached bottom.

What a Surprise!

The New York Times endorses Obama.

Losing Confidence

From an article in Asian Investor:

"The Insurance Bureau at the Financial Supervisory Commission in Taipei announced revised rules on how insurance companies can treat investments in mortgage-backed securities (MBS). The FSC says in improving the monitoring and control of risk management in the industry, it will revise previous gaps left under Article nine of its offshore investment regulations."


"Where previously there was no limit to investments in MBS issued by US federal housing loan agencies, namely Fannie Mae, Freddie Mac and Ginnie Mae, insurers will now be given a maximum ceiling of 50% of their offshore investment limit to such products by the three institutions. Maximum exposure to MBS and collateralized issues by any of the individual agencies will be set at 25%."


Further fuel to the fire if more countries follow and limit their exposure to US government backed securities, in this case, specifically mortgage-backed securities.

Limit Down

Limited down rules have gone into effect this morning, pre-market. The Dow futures are down 550 points. Limit down rules set a floor on the futures, not allowing them to drop any lower. The S&P and Nasdaq futures are also limit down. The futures pretty much dictate at what level the market will open.

It's going to be a wild day.

Hidden Power

For the past 24 trading days, when the market closed down, the ratio of down volume to up volume averaged 13:1. On up days, the ratio of up volume to down volume has averaged 6.5:1. What this tells me is that there is a lot more power behind the down moves than the up moves. This ratio needs to balance out before any sustainable up move takes place.

Did Atlas Shrug?

Greenspan, before congress, just disavowed his ideology of forty years. Bye, bye Ayn.

Sound and Fury Signifying Nothing

The CDS (Credit Default Swap Market) was one of the precipitating factors of this financial crisis. A CDS is an insurance policy on corporate bonds. If a company defaults on its bonds then the CDS pays off. This sounds like a good idea and a conservative strategy if you own lots of bonds. However, the CDS market was unregulated and institutions could buy a CDS even if they did not own the bonds that were being insured. That is like buying an insurance policy on someone elses house. More so, it's like having many people buy a policy for the same house. If the house burns down, then the insurance company is on the hook for many times the value of the house. Not a good thing. Additionally, there was and is no public market for these contracts so no one knew who owned what.

Lehman was the tipping point in this market. At the time Lehman went down there was $400 billion in outstanding CDS contracts. AIG was a big seller of these contracts and was on the hook for a good chunk of this money. This partially led to the government bail out of AIG.

One more thing and this is important. Many companies both bought and sold CDS contracts netting out their exposure and pocketing the difference between the selling and buying costs. This, apparently was done a lot and is reflected in the final settlement.

Yesterday, all the CDS contracts settled. Here are the results: a total of $5.2 billion (vs. $400 billion in CDS contracts) was paid out and AIG only paid out $6.2 million.

Is it possible that if transparent markets existed for CDS contracts that some of the current pain could have been avoided?

Triangle Update

All the major averages closed at or close to the previous lows. As I said before, if we go through these then the market will probably test the lows of October 2002.

This morning I wrote about the triangle formation. Here is an updated chart as of today's close. The S&P is touching the bottom of the triangle. There are no predictions to make here. It's just interesting watching market psychology.

Bi-Polar

It's not just that price is swinging wildly everyday, the advance-decline line shows a truly manic market: one day everyone is buying everything and the next everyone is selling everything. There is zero conviction in the market.

The Devil in the Details

David Leonhardt writes in today's New York Times (The Trouble with a Homeowner Bailout) about the complications that would be involved in trying to bailout individual homeowners.

Redistribution of Wealth

Capitalism or Communism? The following quotes are taken from an article in the New Yorker by Steve Coll. It's a short and good read. From the article, here's what Obama said to Joe, the so called plumber:

"I do believe that for folks like me who’ve worked hard but frankly also been lucky, I don’t mind paying just a little bit more than the waitress who I just met over there. . . . She can barely make the rent. . . . And I think that when you spread the wealth around, it’s good for everybody. "

And here's what Adam Smith wrote in "The Wealth of Nations", his defining book on capitalism:

"The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion. "


The emphasis is mine. It's called common sense, not socialism and not communism. Someone needs to pay the bills.

Reading the Teas Leaves

Chart readers like to look for patterns. A triangle is a popular formation but a symmetrical triangle leaves one sitting and waiting. The above chart shows the triangle that has formed with the S&P on a daily chart. A similar triangle has formed with all the major averages. A symmetrical triangle is not very predictive but when it breaks it can break big time up or down. This formation represents a market that trades in a tighter and tighter range one each successive day. One way to think about this, is that traders are not willing to take big bets when the market gets close to recent highs or lows. It represents an uncertain, skittish market, but when it breaks everyone will pile on.

Bet Your Bottom Dollar

Take a look at the above chart of the dollar. There are a couple of things to note: 1) The dollar moved up in the 90's along with the US's declining deficit and eventual surplus. Starting in 2002, the dollar began its long decline along with the US's growing budget deficit. The dollar busted through previous long term support reached in 1995 and 2005. The financial crisis has caused a re-evaluation of the dollar as a safe haven and it has climbed back to that support level. I believe that the dollar has seen its lows and will continue to strengthen (or at least not decline much.) The importance of this to your portfolio goes to your asset allocation. If you were invested in Europe for the past few years, you probably did very well. However, much of your gain was not due to the genius of your money manager it was due to the euro strengthening in relationship to the dollar. With a rising dollar, it will be difficult for European stocks to outperform American stocks. It's a good time to rethink your overseas investments.

Dumb Money. Blind Government. Good Pot.

Check out this letter from a retiring hedge fund manager here - so much to agree with.

The Second Shoe Poised to Drop

American Express had its credit rating lowered by Moody's this morning. Credit card debt has been securitized and sold much like mortgages. For years any one could get a credit card and rack up debt. Before my son could read he received solicitations in the mail to apply for a credit card. If I had a dog I could have gotten him a credit card.

I recently read that people stopped paying their mortgages before they stopped paying their credit card bills because the credit card minimum payment was less. Now people are starting to default on their credit card debt and when that happens the credit card backed securities will go under.

This market is much smaller than the mortgage back securities market but given all the uncertainty in the market and the uncertainty of what exactly is on all the banks' balance sheets, this does not help.

I'll Take It

Today was not tepid but it was orderly and up, so no complaints. What is positive is that we made it back to Friday's highs before the afternoon sell-off.

The Ecology of the Market

The stock market can be looked at in many ways: at its most macro level, it can be viewed as a reflection of the over health of the economy and at its most micro level, from second to second, it reflects the sentiment of twitchy-fingered traders trying to make money on movements of pennies. Using the tools on my laptop, at anytime I can view the market moving in real time with every trade or I can change my perspective to the more glacial movements of the market on a monthly or yearly scale. One of the interesting characteristics of the market is that if someone shows me a chart of minute-by-minute moves and a chart of yearly moves, without any scale on the X or Y axis, I could not tell you which chart is which. If you have ever heard someone refer to the fractal nature of the market, this is what they mean. Market movement looks the same at every scale. What this implies to me is that market psychology is the same on every scale. Fear and greed rule regardless of whether your trading time-frame is minutes or years.

One path to success in the market is being able to measure fear and greed. When fear is at its max, it’s time to buy and when greed is at its max, it’s to sell. Even Warren Buffet, who claims not to be a market timer, relies upon this idea. Read here.

Why does this adage make sense? When greed is at its apex, everyone is buying. This is a time when people who normally do not buy stocks start buying stocks because everything is going up. Here’s the thing: if everyone who has money to put into the market has done so, then there is no one left to buy and if no one is buying, stocks can only go one way – down! The inverse is also true about fear. When everyone has sold and there is no one else who wants to sell, then prices can only go up.

Hoping for Boring

I'd love to see a really boring week. No big moves, up or down. Tepid reaction to news, economic numbers and Ben B's pronouncements. We need this market to settle down.

Add it All Up

The Dow ended up almost 5% for the week but was up almost 16% at one point. The Dow ended up almost 400 points but traded in a 1567 point range. If we ignore the in-between, a 400 pt. gain is a good week but it's a fraction of the 1874 point loss of last week. Lots of heart wrenching volatility.

Today was volatile in itself but given that we hung on to a good part of yesterday's gain, I would call it a win. As I said before, a lot of traders do not want to hang on to long positions over the weekend.

Repo Man

Anyone remember Emilio Estevez in Repo Man.

Here's a little tidbit that most of us never hear about: Continued loosening in the financing arena with JPM the cited party that opened up the 3 month term repo window earlier. Repo is shorthand for Repurchase Agreement. It's a lending facility or a short-term note whereby a bank or a corporation sells equities for cash with an agreement to repurchase those equities at a later date. It's essentially a collateralized loan, in this case for 3 months. This is good news for the market. An article in the New York Times this morning pointed out that even though the big banks had received all this cash, billions and billions, from the government, they were not lending it out. The money needs to get into the system in order for our economy to function and this is a first step. This news may be pushing the market higher.

The Dukes of Hazzard

Bo and Luke usually tried to do the right thing. They would challenge Boss Hogg who was always trying a new get rich quick scheme or trying to rip off others with some shady activity. Sometimes they succeeded but other times they would inadvertently help Boss Hogg get his way. The local sherriff, Rosco, was an ineffectual police officer and did little to stop Boss Hogg. Bo and Luke didn't always understand the consequences of their actions. Let's face it - they liked making moonshine and racing around in the General Lee - their car. (If you didn't watch TV in the early 80's then I'm sure this is all lost on you.)

Anyway, take a look at the above chart of the Dow from the early 80's until now. I circled three market crisis'. In the 1970's Paul Volker made the Fed an active participant in curing our inflation woes. In the late 80's Greenspan took over. He was a true free-market capitalists and devotee of Ayn Rand. That is, the free market was great as long as everyone (read Wall St.) was making money. Greenspan encouraged speculation and assumed that the market would self-correct but in three crashes, two caused by market speculation and the third (9/11) caused by outside forces, he did not let the market self-correct. He pumped liquidity, through lower interest rates, into the market to get it moving back up as quickly as possible.

Here's the problem: for those who started investing for themselves or working on Wall St. sometime within the past thirty years, we have never seen a market crash that the Fed could not correct. If we think that the Fed will always save us then we are encouraged to take on more risk - we have nothing to lose because the market always quickly recovers (this is called a moral hazzard).

The Fed has done a good job of smoothing out the economic cycles and insulating the market from extreme risk. However, like Bo and Luke, the Fed didn't understand that sometimes they were not helping the right people and unfortunately, our other regulatory agencies acted more like Sherriff Rosco than Elliot Ness.

The Thing About Fridays

The market is holding up okay this morning. It's down but off the lows. The close will be the tell today. Given all the fear and trembling (any Kierkegaard fans out there?) will traders be willing to go into the weekend long? No way to know until 4pm. It will take some faith to hold long over the weekend.

Been Down So Long Looks Like Up to Me

One measure of long term sentiment is the McClellan Summation Index. In brief, it is a long term measure of advancing issues vs. declining issues. It closed yesterday at -4612. It has not been that low for over twenty years - not even close. Only twice before has it been below -3000. This is real fear and negativity.

Read this piece by Warren Buffet in today's New York Times. This is what he does in times of fear.

Happy Ending

Today started looking like another miserable day, until about 11:00 when the market began a slow climb and ended on a very positive note. It was a nice turnaround for a change - no cliff jumping at the end of the day. Traders went home holding long positions.

It's too early to know anything but - take a look at the chart of the Dow (top chart). It's just possible that the market is building a base. This is a healthy way to start a good up move but - only time will tell.

On the other hand, as I've said before, if this level doesn't hold then the market will revisit the Oct. 2002 lows. See the second chart which shows the monthly moves of the Dow. You can also see by that right-most, big red bar, how terrible this month has been.

I Thought I was Alone

I watch CNBC a lot, but over the past year I hit the mute button when Power Lunch comes on and I see Dennis Kneale. I cannot not figure out why they keep this guy on the air. This past Tuesday I put the volume back on to listen to the report on Apple's new laptops only to hear Kneale reach a new low. After watching part of Jobs' presentation, Kneale chimmed in and said something to the effect that he was jealous of Jobs because he looked like he could eat all the Haagen Daz he wanted. That was almost as bad as McCain's comment last night that a woman's (insert finger quotes here) health was a liberal tool for allowing later-term abortions.

Anyway, just for the heck of it, I googled Dennis Kneale and discovered dozens of Kneale is an idiot blogs. I am not alone.

Off a Cliff

Yesterday was negative but boring until about 3:00 pm when the market was pushed off a cliff. All the major averages closed within spitting distance of last week's closing lows but well above the intra-day lows.

If you want to listen to market news with a humorous twist check out www.wallstrip.com.

UGLY!

All technical indicators look way oversold BUT that doesn't seem to mean much these days when fear rules. It looks like the market will retest last week's lows. If they don't hold then I think the market will test the 2002 lows as stated in my Oct. 10th post.

The Smell of Fear

During the day I watch the ratio of Declining Volume to Advancing Volume. Up until a few weeks ago a ratio of 5:1 would have been considered an extremely negative day. Over the past few weeks I have seen numbers in the range of 20:1 and as extreme as 200:1.

The Boxer

I'm listening to The Boxer by Simon and Garfunkel - how appropriate the opening lyrics:

I am just a poor boy and my storys seldom told
Ive squandered my resistance for a pocketful of mumbles, such are promises
All lies and jest, still the man hears what he wants to hear
And disregards the rest, hmmmm

Bad News is still Bad News

The lousy retail sales tanked the market this morning. The SPY fell through its retracement support level. The market may eventually retest last week's lows - that would not be unusual. One way to know that the market is turning is when it treats bad news like good news. When that happens, the market will have priced in all the bad news it expects.

SPY Chart

This is a chart showing the movement of SPY yesterday and its bounce from the 38% retracement.

A SPY Amongst Us

At the present time, I only trade the SP500 E-mini futures contract. A good proxy for that contract is the SPY (the SP500 ETF.) I trade both long and short based on a proprietary system that I developed. I may write more about that in future posts. I also read (but don’t trade on) the tea-leaves, otherwise known as technical indicators. I watch pivot points, moving averages, Fibonacci levels and price support and resistance levels. I’ll write more about these in future posts as well.

This afternoon, as I watch the market give back some of yesterday’s gain, I am watching the 38% Fibonacci retracement level at 97.20 for the SPY. This is a 38% retracement for the up move starting at last Friday’s lows to this morning’s highs. This type of retracement is not unusual for such a large move. Short term traders are taking profit. Often times, people who missed out on a big move will see a 38% (or 40% if you want to round) and decide that it’s a good time to initiate a trade. If the market moves below that level then it’s probably more than profit taking.

The Best We Can Hope For

If, in fact, the latest rescue plan (is it number three or four?) gets money flowing again and re-establishes faith in the banking system, then our daily fretting will shift from 'which bank will fail today?' to 'how bad is the recession going to be?' We can focus on earnings, consumer spending and employment - all of which may continue to decline for awhile.

Hail Britannia!

We have the Brits to thank for this rally. They came up with a plan to help the banks that is simpler and, on the surface, appears more effective than the original Treasury plan. The G7 and G20 committed to this plan over the weekend. We also have to thank the mystery congressman who put the language into the 400+ page rescue bill giving the government the flexibility to take an equity stake in the banks.

How bad has it been?

The bull market ran from October 2002 to October 2007. Since Oct. 07 through last Friday's close, the DOW has given up 85% of its gain; the SP500 has given up 90% and the Nasdaq has given up 60%.

A Good Start

A good start to the day but I don't trust Mondays and days when the bond market is closed.

If you're too lazy to read The Black Swan then at least read this piece in today's WSJ.

The 1% Panic by L. Gordon Crovitz

Bon Dia

A friend called me Friday afternoon while the Dow was doing its 1000 point swing. He was smart, he took a good chunk of cash out of the market awhile ago. He wanted to know if I thought it was time to start looking for some bargains.

I don't think there is any rush. I think the market will be going up and down in a range for about five years (look at a chart of the Dow for the 20th century.) However, one market stands out to me - Brazil.

Look at the iShares MSCI Brazil Index Fund(EWZ. EWZ has fallen 65% since its high four months ago. Brazil's economy is still strong and the government has stashed away plenty of reserves over the past few years as a cushion against economic disruptions. I told my friend he could wait for the market to settle or he could start nibbling with a small position.

Happy Anniversary

Here are two charts to compare. One of the DJ30 from the 1920s-1930s and the other the Nasdaq from the late 90s to present. I numbered critical points of comparison on both. Both times stock market bubbles were followed by banking crisis'. It's a bit like studying tea leaves. We only know if predictions are true after the fact.

I don't think the collapse of tech after 2000 did enough to take speculation out of the market, particularly after 9/11 with interest rates being cut, money was cheap and leverage was easy and largely unregulated. The big question which I can't answer is if the lows of 2002 will hold. For DJ30 that is 7200, for SP500 768 and NASDAQ 1108. Those are intra-day lows and they occurred on 10/10/2002 (today??). The market ended up much higher that day. I think the DJ30 and the SP could challenge those lows but unlikely the NASDAQ will. If that happens, I think it will be true capitulation with huge selling. The explosion in the derivatives market largely started in 2002 and there is some intuitive sense to the stock market getting back to those levels as all the leverage unwinds. I'm hoping the US follows Britain and provides a guarantee for inter-bank lending. If Morgan Stanley goes under this weekend, the few banks remaining will all be too big to fail (TBTF) and the government will end up partially nationalizing them (making equity investments.) All that being said, I don't think we will see a bull market for another 8 years, give or take (I base that on looking at the 30s and the 70s.)

I initially thought, as of a few weeks ago, that the levels we reached today would be the lows and they could still be, however, today being Friday it's unlikely that many people will want to go into the weekend buying.