Tuesday, March 10, 2009

End of Day 3/10

No doubt about it, that was quite the impressive launch!

Boston – The Launch:

For the day, the DOW rocketed 379 points (5.8%), the S&P launched for 6.4%, the NDX blasted off for 6.6%, and the RUT performed a 7.1% moonshot! It was led by the XLF which made it to Mars by gaining nearly 15% (93 cents, BIIIG Whoop), and IYR gained $3 gaining 13%. Nasty day for SRS as it lost 26%, proving once again that the 2X inverse are NOT buy and hold!

While these rallies sound very impressive in percentage terms, the math is just a bitch. For example, the markets could rally 50% and still only be at S&P 1,000… the same area people were looking for a rally to last month (we didn’t get close)! Does anyone think that rallying to 1,000 is more likely this month?

Citi rallied 38 amazing percent… or 40 cents. WFC rallied 18%, that was a hefty $1.84 per share! Yes, great gains if you timed that purchase perfectly. But you better not only be able to time that purchase perfectly, once you get it you have to time when to sell perfectly too. That’s the way Bear markets work. They give you just enough to take your money and destroy it.

“No, no… really… this is THE bottom!” LOL – Again, simply amazing how many people want to call the bottom. Where were those happy idiots in late ’07? Were they calling the top? NO? Didn’t think so.

Just as a reminder, here is the chart of the DOW during the Great Depression… where is that elusive 50% rally on that chart? Well, we’d still have to rally significantly just to catch up to rate of descent during the Depression. Note that once a level is left, it becomes overhead resistance and not once for 2.5 years did the market make it past the previous overhead. We are only 18 month into this decline and likewise have failed to rally past the prior support level once it becomes resistance:

So, did the debts suddenly go away today? Did people all of the sudden begin to earn more to service those debts? No? Then the fundamentals have not changed! Citi posting a memo stating that they are turning an operating profit for two months does not change the fact that they are ignoring the massive decline in value of their assets which if taken would immediately bankrupt them. Cash flow? Let’s see them pay back the government, build proper banking reserves, and bring all their assets back onto their balance sheet at what they’re worth, and then I’ll believe. Not going to happen. Stress test? LOL, run by who? What a joke. Suspend Mark to Market? Oh yeah, that’ll cure all the problems, just turn your head and look away, it’ll get better. Bring back the uptick rule? That’s it, WE’RE SAVED!!

Imagine what would happen if we didn’t have corporations, like the federal banks, influencing politicians. Common sense might actually leak in there. Not going to happen, is it?

Back to the markets…

Internals were obviously extreme on the bullish side… a buying panic. Don’t want to miss that rally or I might get fired! That’s the psychology that keeps us from reaching a true bottom. Advancing issues exceeded decliners by a 12+ to 1 margin, 96% of the volume was on the plus side, and there were only 93 new lows today, WAY down from the past few days.

Getting to the charts, let’s start with the past 10 days of SPX action. Here you can see the red lines defining the wave 3 down channel. We broke above that and appear to be making a new bullish channel that I have tentatively outlined in green too (don’t ask). If that does turn into a bullish channel, it’s fairly wide which suggests this rally could be sizeable as the general rule is the wider the channel, the longer it will last. Tomorrow will give us a better sense if this is correct. We may have just overthrown the current down channel, but I don’t think so, mainly because of how convincingly the NDX has broken out. Anyway, note that we made it above the 696 pivot and closed above the one at 717… it is now support. The next pivot up is at 734… that’s where the volume resistance is and you can see there’s a small open gap up there too. If we continue higher, that would be my objective for this leg. Note that all the stochastic indicators are overbought up to the 60 minute timeframe and thus some selling can be expected tomorrow. If we make it to the 734 pivot straight off, it will be a very overbought rally and the selling could come later in the day:

Let’s zoom out just a little to view the past 60 days. The big green channel is my wave 5 channel. You can see that wave 1 landed on the red uptrend line and bounced producing wave 2. That gave way to the red channel, wave 3, which may be giving way to wave 4. If wave 4 is the equal to wave 2, it should move up/sideways for a couple of weeks and then we should still get wave 5 down of 5. I know there are some EW people who see 5 complete waves but I don’t as the wave in the middle of the red channel was not large enough to be a higher level wave 4. The reality is that the rally so far may still be a lower level wave 4, I have not yet ruled that out. Note the overbought stochastic on this 60 minute timeframe… there is just a little room for the slow, but not much. There is also a positive RSI divergence here when you look at the last peak and compare it to the RSI on this peak… the RSI is higher here, that’s a positive divergence. Just doing some mental projection, I could see us following that new green channel sideways to touch the top of the larger green channel prior to descending significantly again – that’s just one possibility, but it would fit wave 4’s which tend to be flat overall. Note that today’s rally ended exactly on the 23.6% retrace of wave 3:

Now let’s zoom out further and we’ll find that we made a great big bullish candle that closed right on its highs. All the indices produced new buy signals on the daily stochastic by having the fast exit oversold. You can see that there’s precedence to just peak above and pull back, but usually once the fast exits it runs all the way to overbought. That would fit the larger wave 4 scenario, while pulling right back in would fit the smaller wave 4 scenario. Note that the inverted hammers I showed last night all confirmed the reversal:

Next up is the DOW. Break of the smaller channel, a buy signal and on heavier volume. The volume was not nearly as significant on the DIA or SPY:

Here’s the DIA showing much more anemic volume:

The NDX had a powerful looking rocket launch out of its channel… that inverted hammer reversal is a classic. However, when I go over and check the volume on the Q’s, I see a slight DECLINE in volume… Pay attention to that, this move may not be as strong as it seemed:

And that brings me to the dilemma of this market… is there enough money for stocks to rally and to buy up enough debt to keep interest rates low? I don’t think so, and for proof, let’s look at what TLT did today while stocks were rallying… Plunged right to the bottom of its current channel. For stocks to rally further, bonds may break that support sending rates higher. That’s the threat, and I think it’s very real. That’s where the “money on the sidelines” resides! Pull that money out and up go rates. No free lunches, sorry:

Normally, when a real bottom is found in rough times, it is led by commodities. That’s because MANUFACTURING picks up and we start to burn more oil and use more materials. So, what did U.S. Oil fund do today? DOWN nearly 3%! Again, people are talking about the stunning breadth of the rally because financials caught a 40 cent bid, but where did that money come from? There is not enough money to elevate all the bubbles back to full bubble status! There will not be more credit created than last year, people cannot service the debt they already have (yes, I’m talking about oil and debt in the same paragraph – take note as I could talk about debt in all the paragraphs):

Next, let’s look at the Put/Call ratio. At just .72, it’s getting close to an extreme reading. Sometimes rallies can come from this area, but most of the times readings this low are associated with selling in the near future. This chart only goes back 6 months, but if you look back farther that’s what you’ll find:

Here is a series of CMBX charts showing the distress level in commercial real estate. I showed a set earlier in the day on the market thread, but they curled down by the close reflecting a little of the upbeat mood:

Yesterday, Doc and I talked about LQD as a proxy for credit stress as it’s a high quality debt fund. Note the inside day… barely recovered half of yesterday’s losses. I’d call that a negative credit divergence with today’s rally:

Overall, it would appear that we are beginning a wave 4 move… from what I see I’d say it’s the higher level wave 4, but I do not rule out a small one. There is no free lunch in economics or the markets. For equities to zoom, something else must suffer. Cash on the sidelines is exactly what is supporting all the debt for the time being. Pull that out, what happens? Markets like this are designed to suck in money and destroy it, don’t let it destroy yours.

Hey, that was quite the rocket shot rally, that’s for sure! They only happen in a bear market. Note that the most heavily shorted segments rally the most… that’s short covering. Look at IYR and the XLF. If the bulls think it was a whole lot more than that, I’d say they had better cool their engines…

Boston - Cool The Engines: