Order and Chaos in the Stock Market

It's time to pause and take a look at the past two months, give or take a few days. The top chart is a daily view of the Dow. On 9/29/08 the Dow opened at 11,140 and by 10/10 it cratered to 7882 before closing at 8451 - a 29% drop from top to bottom. A little short of two months later (12/05), the Dow closed at 8665. During this time we have been reading about the forced liquidations and deleveraging amongst hedge funds and massive withdrawals. TrimTabs reports that net outflows of all US equity funds starting 10/1 has been 134 billion dollars; post 10/10 the net outflow has been 69 billion. This number, obviously, does not include hedge funds, privately managed portfolios, individual selling and selling by overseas funds.

Here's my take on this action: the first week of liquidation was horrible and driven by unmitigated fear; that's when half the total liquidation took place. Since then, the liquidation has been controlled (do I dare say managed.) Fund managers, now more level headed, are using short term rallies in the market to liquidate positions. They have some limited patience and are willing to wait for better pricing to sell. Hence, when the market rallies to obvious resistance levels, we have big down days as the funds liquidate what they can.

The bottom chart is a weekly view of the Dow. It shows in even more graphically how the market has remained somewhat level since 10/10.

So now what? I will post my thoughts later.

WSJ Endorses Dope

An Op-Ed in the WSJ today supports the legalization of marijuana.

Another Hidden Cost of the US Automakers

Yesterday, Rick Wagoner said that it was up to individual dealerships if they wanted to stay in business.

However, The Detroit Free Press reports that the dealerships costs the Big 3 $436 per car more than the dealerships of other automakers. Yet another area of expenses that the Big 3 have failed to do anything about over the years.

Jobs - What Jobs?

A really, really ugly jobs number this morning. Over 500,000 jobs lost in a month. At the close yesterday, I had not given up on an up move through 900 on the S&P. The tell today will be if the market rebounds after its initial drop on the jobs number.

Why It's Different

Over the past twenty some-odd years, there have been a number of shocks to the market - 1987, the Asian crisis, LTCM, the internet bubble burst. I liken these events to owning a house that suffers from a hurricane, maybe some flooding, a leaky roof - some problems/damage more serious than others, but all caused by outside or rare events that can be repaired. What we have now is a house that is infested with termites and the only thing left is a thin veneer of paint holding up the walls. It is rot from the inside out. The house needs to be torn down (deleveraged) and rebuilt (new investment and spending in line with real economics, proper regulation and less leverage.) This is a process that will take a long time. It can be helped or hindered by government intervention. Only in hindsight will we know for sure the right thing to do.

The big question for stock market investors and traders is how much of the downside - the tear down - has been priced into the market?

Something Could be Brewing

Just maybe the market is setting up for a nice move. If the S&P can close above 900 then I believe it will go to 1000. See the chart above. However, this market is very skittish and news driven - be careful.

Bad News is Good News

The ADP employment report stunk and the non-manufacturing ISM report was a new all time low and the market is up for the day. One hour does not make a trend but when the market treats bad news as good news, it's good news for the market.

The Stock Market View of Bill Gross

Bill Gross writes an interesting analysis of the market. By traditional measures and rules, the market is well undervalued. However, he claims that the world has changed.

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.

Fear and Order in the Markets

Volume -wise the day started slowly but ended strong. It was a nice gain yesterday in the market. It was a nice orderly day. However, as I mentioned yesterday, when the market goes down. like it did on Monday it is with unmitigated fear. This market, in order to gain some footing, needs orderly down and up days.

Mid-Day Update

The market is up nicely today but it is on lower volume continuing the pattern of big volume on down days and low volume on up days. Also, the comparison of up volume to down volume is telling: yesterday the down volume beat the up volume by a whooping 70 to 1. Today, the up volume is ahead by 8 to 1.

Deflation and the Baltic Dry Index

The Baltic Dry Index is a measure of the cost to ship commodities. It's an index we don't hear much about but it can be a good leading economic indicator just like the Corrugated Box Index (I don't know if CBI is real or not but I had a friend in the box business and the number of cardboard boxes he shipped was a good indicator of economic activity.) In 2003, Daniel Gross wrote about the BDI when it was booming. Currently, the BDI is at 700, a level it has not seen since 1986! Earlier this year it was trading at around 12,000. See this chart from Bloomberg.

Today's Market

This is a chart of the Dow for the past two months. What was today's horrible action about? The government told us we have been in a recession since last fall- not much of surprise. Retail sales in dollars were okay last friday but so much was being given away, probably most sales with slim to no margins. Today's action gave up 50% of the past five trading days' move. I mentioned last week that I didn't trust that move because it was on declining volume.

Please Explain

Bernanke reaffirms that buying long Treasuries is an option the Fed has going forward. Can someone explain how it makes sense for the government to buy it's own debt?

Market at Fair Value

Henry Blodget makes the argument that stocks are back at fair value after being over valued for 15 years.

Where Are We?

This chart is a monthly view of the S&P from 1997 to the present. In 2007, the S&P tried to better its 2000 high and failed. Right now, the market is challenging the 2002-2003 lows. As I pointed out in previous posts, this level is a 50% giveback or retracement of the super-bull that began in 1982. I think the probability is that this level will hold. However, it is heavily dependent on other negative surprises and therefore, is not something to make big bets on. If this level fails I think the S&P will go to about 660 which would represent a 60% retracement.