ONE MORE LEG DOWN TO GO!
Recap of Previous Blog
While I predicted the market will sneak a quick bounce benefiting no one, it did just that on Tuesday. Bob Pisani over at the CNBC’s NYSE post tried to put a positive spin on the lackluster week at the closing bell Friday stating that DJIA ended the week slightly positive. But the NAZ was down 17.42, and S&P 500 down 0.42. Big deal you said, but instead of Krispy-Krem’ing the week, I am going to call it as it is -- a FLAT week.
I know I am suppose to accentuate the positives, but it’s hard to pull an Allen Greenspan: lying to the public that this wide spread economic slow down is only a "soft patch," and insisted the economy would pick up where it left off soon; thus, he must stay hawkish to fight the inflation with higher interest rates. If you believe the Al-Green rhetoric, then I have the Golden Gate Bridge to sell to you for only $500.
Technical Analysis
All my “big picture” charts are acting as if they are warm-up for a massive leg down (crash) in the near future. Every one of them are now far below the 200MA. Further more, most of the charts are showing flat 200MA, and some heading down. Everyone except for Trannie (DJTA) of course. It is resting just above the 200MA. For bull’s sake, it’s critical that Trannie stay above 200MA next week. If it relents and confirms the weakness with the rest, anything could happen. And don't blame me for not warning you. I don’t think a big one-day drop (over 10%) is in the bear’s playbook, but a never-ending sinking feeling is what the bears have in mind for those who long the market and had pickup a few heavy weights during the last down leg -- warning with the “catching a falling knife” analogy. Another weakness in these charts is that everyone of them, except Trannie of course, is now below the major support line formed by the secular bull trend line back in March 2003. It 'may' mean the secular bull is over. But I’ll hold that prediction back until Trannie joins the rest of its peer.
Addition to reading the pulse of the big indices, I’ve also started to read each major sector with iShare.
Technology related iShares are the weakest and maybe on the verge of bottoming out, as most of them are approaching the major support lines of late 2002 and early 2003. By the way, all of the charts that I am reading have falling so far behind that I have to look back 3 years of history to find the support/resisting lines. That is another negative pulse of the market overall. Three iShares (Network, Semi, Software) caught my attention as they are touching the major 2002 supporting line. Let’s hope a dead-cat bounce instead of a falling knife is in the next act. But with the rest of the market cutting the short term support lines like a warm knife through a butter, I wouldn’t be surprise if these 3 sectors kept their negative momentum, and cut through their 2002 support line. That would be a very bearish setup. Retail (RTH) and Financial (IYG) are holding on to their last lifeline; Utilities (IDU) is looking to break above its resistance and move higher, or hit the ceiling and fall back down; Energy (IYE) is looking okay here, although it’s approaching its intermediate support, and needs to bounce up soon to keep its upward momentum alive.
While everyone in the world plus your mother-in-law are urging you to buy the battered INTC, HP, IBM and the rest of the battered blue chips, I restate that playing the markets at this point is like catching a falling knife -- the chance of catching the blade and bleed is far greater than catching the handle. If people keep insisting that there will be a dead-cat bounce, I’ll point them to last Tuesday’s session as their bounce from the dead and rotting cat.
Technical meltdown in general is not something you should take lightly. Although you shouldn’t rely on technical analysis to dictate your trading strategy, the fundamentals are not looking too bright either. And I will talk about that next week.
I wish the market a better week, technically.
The State of Emergency
Homeland Security Secretary Tome Ridge kick-start August by raising the terror alert level to “orange,” citing “unusually specific” evidence of possible attacks against certain key financial buildings.
I like to start my first August blog in a slightly melodramatic tone as well. My view of the market is worse than July. My last July blog concluded that the market was due for a quick but weak bounce.
DJIA completed a record matching 6 straight up days (MSNBC did a short fanfare to welcoming the news), but it was accomplished with declining volume, and a yawning insignificant 2% increase at the end of the 6th day. After that, DJIA dropped to the year low of 9815 in just four trading sessions. I suspect it has not done dropping. Let’s take a look at the rest of the major indices.
DJTA: The strongest indices of all topped out on the last day of July, and it only took 2 trading session to drop below 100MA, and just 10pts above 200MA. Of course DJTA needs to drop an additional 223pts to confirm DJIA’s weakness. This would not be a pretty sight, when it happens.
NASDAQ 100: With Friday’s nasty slide, NAS100 cracked the 1346 stronghold held since October 2003. There were four attempts to break the stronghold since that time, and none succeeded. 20MA (short-term) and 100MA (intermediate-term) are all below the 200MA (long-term) now, and 200MA is flatting out. This means pretty soon, 200MA may join the downward trend. When that happens, we know the bear is in full strength.
S&P 100: At 521.83, S&P 100 is resting on the old resistance line set in late December of 2003. 100MA is touching 200MA on a downward direction. If we see negative sessions continue on Monday and Tuesday, it will take more than a Viagra to bring this baby up.
S&P 400 Mid Cap: Same ugly chart as its big brother, as it is lower than the previous low set in mid May.
Russell 2k SM Cap: Small cap is acting the same as the mid cap. It’s almost like they are twin sisters.
Value Line: I like to verify a sell off by looking at this index, because if value stocks are also getting the thumbs down, there is nothing out there that is worth buying. This index is now convincingly below 200MA, and is below the previous low, which was also lower than its previous low. Hey, is that a trend?
Wilshire 5k: This is the jumbo index where it contains close to 6000 stocks from NYSE, AMEX and NASDAQ. It is an overview of the whole US stock market, in a sense. And it paints the same picture. With Friday’s drop, it is now lower than previous low, which is also lower than its previous low.
“Killing me softly,” a great remake/remix of Roberta Flack’s greatest hit by Fugees is playing in the background. That is exactly that the markets are doing. It’s like a sniper on the top of the bell tower killing its target one at a time slowly.
Although all major US indices are now below the almighty 200MA (an extreme negative setup and a proven trend reversal signal), a dead cat bounce is coming in the next Act, with one caveat. I am not sure the current Act is near the end or in the process of concluding. Yes, we may see more red next week. FOMC meeting is on Tuesday, and it looks like the markets are already taken 25 basis point raise in.
The general consensus is that the markets are due for a dead-cat bounce--it is time to collect some cheap stocks to profit from it. On the contrary, I think the current market is like a falling knife. The chance of catching the blade and spew blood is the more likely scenario.
Above is the pulse from technical. Now, let’s take a look at the fundamental end.
Carry Trade isn’t over, because 9000+ hedge funds are still in operation, the largest number in history of mankind. Is that good? For contrarians, 9000 hedge fund managers over leveraging OPM (other people’s money) in one of the biggest bubble of mankind is a recipe for disaster of immeasurable proportion.
While many believe the 2000-2002 sell-off was the correction for yester year’s bubble. In reality, since the bubble was built over 10 year back in the 90s, the provincial 2000-2002 correction did nothing to relief the bubble. It is like the balloon-squeezing phenomenon, where you squeeze the air on the balloon from one side to the other. What we had witness in the past 3-4 years is an act of transferring wealth from one bloated sector (stocks) to another (bond and housing). This is not a new phenomenon. Japan experienced the same from 1989 to 2001. When the NIKKIE crashed in 1989, the smart money simply shifted from the stock markets to bonds in an intermediate term, while housing continued to appreciate in an alarming rate for another 2 years. Of course, when the time comes, and it eventually crumbled--NIKKIE tumbled 70% and house value halved.
The sample fact that the current economy is driven entirely by credit (cheaper than free money as short rates now stands at 2.5% below core inflation, and it was put in place after 9/11 by Greenspan to keep the world economy from total distruction). While this was done with good intention, it'd been carry on for too long. At this monment, houses were brought with ultra creative mortgages, where record number of applicants are on 100% loan with interest payments only; retailers have been pushing consumer products with 0% interests financing for 2+ years; auto sales are fuel with incredible 15%+ cash rebates (>$4000) for years, or offering 102% loan to help pay off existing loan for the upgrade. With those in mind, housing prices have skyrocketed, our top two auto makers, GM and Ford, are hitting the estimated earning quarter-by-quarter only because of their financial arms, not from selling cars. And we are seeing increasing number of technology companies with growing inventory problems.
What’s next?
How the markets react in the next two trading days, Monday and Tuesday of next week, will set the tone for the trend. Of course Tuesday is when Greenie and Co. decides on the short-term rates.
Of course the markets will rebound, but it’ll be so swift and brief that retail investors will not be able to benefit a penny from. If you’d listen to my advice since late May to stay in cash, you are now way ahead of the game, as your purchase power has increased without any risk. Adventurous investors can look at shorting the transportation sector. I favor land and water transports. These stocks have a lot of room to go down, as DJTA is heading for conformity with DJIA.
Godspeed.
