Finally, the Steer Rally is back again. Piggish shorts, eager to book a 325 point move in the Nasdaq, and Asshole Dip Buyers, sensing the extremely oversold market was ripe for a squeeze, brought forth the much-awaited bounce.
The charts, after 8 days of heavy selling, have a lot to say.
- There are gaps to fill. I expect the gaps in the Nasdaq and the SPY to fill during this bounce.
- Volume was relatively good on the Nasdaq and fairly unimpressive on the SPY.
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The indexes are exiting conditions that were more short-term oversold than anytime the previous year.
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MACD did not confirm the lower-low.
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The Nasdaq’s 50 day average will cross under the 200 day average this month.
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The SPY’s death cross shows no signs of coming undone.
Do not make the most grave mistake of getting long here and expecting to stay long more than a week. This is not THE bottom. The bears WILL sell this rally as soon it approaches overbought. I hope that the indexes get back near moving-average resistance (indicated by the Honey Hole) before reversing, but one can never be sure.
Some crucial points to ponder:
1. As the market was deathly oversold for 3 days, it is possible that the snapback rally will be violent to the upside. This will be normal. Do not mistake it as an “all clear” signal.
2. The MACD did not confirm the lower-low, which means the Steers still have some fight left in them. This too means any rally may appear to have strong legs.
3. The RSI(2) is already in the neutral zone after today’s bounce. The market may move to overbought very quickly.
4. As the indexes are trading beneath the 200 day average, some will say this means we are officially in a bear market. If the market returns to the 200 day average and cannot overtake it, then you will have confirmation of a bear market. Let me repeat myself: If the market cannot overtake the 200 day average, you are trading in a Bear Market. As you would not be overweight short in a Bull Market, similarly, you must not be overweight long in a Bear Market. Do not fight reality, as this will be a crucial realization, necessary for survival over the coming months.
Finally, with my money, I will keep my eyes peeled on my short watchlist while playing an oversold bounce or two.
A history of 0 credit cards is much better than one of mortgage, or more scarily foreclosures. Often credit card consolidation leads people to pushing their mortgage limits. This often results in people borrowing more personal loans to consolidate, and eventually spending their health insurance on this too.
Also notice where the Dow closed today…almost EXACTLY at the low from November (12,735).
Potential resistance for even this minor bounce/bear-market-correction/gap fill/whatever you want to call it?
Great analysis. I had been thinking the same thing.
I agree with you woody…
I’m selling the rips.
Dip buying high beta only for scalps.
Wood,
Even if you removed all the indicators, simple price action, lower highs, lower lows, confirms that the higher highs, higher lows trend has broken.
jog
Wood,
It would also be ironic if, with so many looking for the bounce and bull rally, that this turned out to be as good as it got….with further declines into the end of the week.
jog
wood,
there were quite a few bullish non-confirmations today. while the dow took out the august lows, the spx, nya, comp, qqqq, and broad index wilshire, a/d line, new lows, rate of change oscillators, macd did not i repeat did not take out the august lows. all this while the fed is easing and probably getting more aggressive, some sort of fiscal stimulus and a market very undervalued. in addition insiders are still buying. there has never ever been a decline of more than 12% with the fed model showing this kind of undervaluation. can we have a retest or undercut, sure, but this could be setting up for one hell of buying opportunity not unlike 2003- 1998- 1991- 1987.
Damn these charts.
Someone needs to post some fundamental analysis. Anyone besides “The Ducati of Death and Famine.”
Honey Holes are meant to be raided.
Chivas:
The problem with your numbers is that they are wrong, oddly enough.
By mid-2008, you will see that the “E” in PE is significantly lower than expected.
Hence, the term “earnings shortfall.”
Aside from the red in financials, expect lack of consumer funds to tap out the retailers.
The trickle down effect will be complete by October of 2008, hurting the earnings of tech titans, like CSCO, RIMM and AAPL.
fly,
even with earnings shortfall of expected foward earnings of 40%, the mkt would still be undervalued according to the fed model. i think with aggressive fed cuts and fiscal stimulus the consumer is going to be just fine.
Nice work Woody …. thanks for the DD!
real PE’s will be closer to 20, by late 2008.
chivasontherocks,
The Fed cuts are not for the consumer, they are for the banks.
In point of fact, the Fed cuts will hurt the consumer further via rising inflation.
Fiscal stimulus…from what revenue source?
*Falling corporate taxes
*Falling individual taxes
*Increasing unemployment
*Rising costs in Iraq/Afghanistan
*Rising Medicare
*Rising Medicaid
*Pension deficits
Currently, the DJIA is 40% overvalued, based on the Fed Model
jog
Duc:
The reduction in rates will alleviate some pressure from the consumer, especially those with variable rate mortgages or lines of credit.
Also, I still believe the real threat is massive deflation, not inflation—despite recent data.
So, rate cuts may help a bit, but not now.
Drosophilius,
Minor, if any relief for the consumer. The ones who will need to refinance, probably can’t.
Monetary inflation, with credit deflation. This is what makes it so dangerous.
US$ abroad, for Oil, etc are hit by inflationary pressures.
But US$ in the US are compressed via credit deflation.
You can, it seems have both, simultaneously.
In the 1930’s, due to the Gold Standard, when deflation hit, it didn’t have the inflationary aspect.
This scenario, that is gradually building, has real nightmare consequences, unless, the velocity of money can be stimulated.
jog
What about the death crosses in the SPY near bottoms on 7/18/06 and 8/18/04? Don’t those pretty much negate predictive value for that cross?
ducati,
current budget deficit is only 1.2% of gdp, very low by historical standards of the last 40 yrs. govertment because of the above has the flexibility to do almost anything they want to do as far as fiscal stimulus. ckeck with goldman research and they say the same thing. they can do all of the following.
1- lower corporate and individual tax rates.
2- tax rebates, like they have done in the past.
3- bail out homeowners aggressively and not call it a bailout.
4- offer 100 yr mortgages for first time homebuyers at low interst rates.
the rate cuts are for everybody. if cost of doing business goes down because of rate cuts it benifits everybody.
if cost of capital goes down because of rate cuts, it benifits everybody.
on a short term basis because of the above inflation actually goea down. check out the fed research on this.
if the problem ouy there is one of deleveraging and too much bad debt, that has a deflationary effect not inflationary.
p/e of 20 on its own is meaningless. tell where the 10 yr yield is, the slope of the yield curve and also inflation rate.
Wow, I step out for a while, and I miss some good stuff.
Chivas- I noticed that there were some bullish non-confirmations. I haven’t look at the breadth since right before the close, but breadth on the Nasdaq was just awful. So, while we have some bullish divergences, I think there are still many bearish elements to keep things, well, bearish.
Oh, and I believe that when this is done, whether it is 6 months or 18 months from now, that it will be ONE HELLUVA buying opportunity. Believe me, part of my motivation is to make sure that I plenty of capital when we reach that point.
Ducati, when I started noticing that the RSI(2) was already reading neutral, I had the same though, viz., what if this is the bounce? And tomorrow the selling resumes? Anyway, doubtful, I think, but still, it is worth considering.
chivas,
Too many points to cover here.
I’ll address them all in a longer post.
My supper is also being served.
jog
according to the fed model at the present time the spx is 45% undervalued. do you know what the fed model is?
Kansas School Board- you are very astute, re: the death cross.
You should read my previous post on the subject. I have put the link for you here.
http://www.ibankcoin.com/woodshedderblog/index.php/2007/12/19/the-death-cross/
Basically, in 12 years, there have been 5 death crosses on the SPY. 3 of the 5 were buying ops. 1 of the 5 was the 2000 top. And 1 we are currently experiencing.
Here is the KEY to understanding and trading the death cross over the last 12 years. During this time, during every death cross, when it was a buying op, the price re-took the shorter average (50 day) approximately 2 weeks after the cross. The one time price didn’t almost immediately cross above the shorter average was 2000.
Here is the bad news- this is the 4th week since the death cross occurred, and the SPY shows no signs of closing above the 50 day, on a weekly basis.
To put it in perspective, to invalidate the signal, the SPY needs to close Friday above 147, and then stay above that level.
Doubtful.
In 2000, it took 9 weeks for the SPY to regain the 50 day.
Chivas –
Its the deleveraging issue.
If that trend sticks, it will be ugly for most asset classes.
leawoodblues,
imo, if it’s orderly, then it’s not a problem.
Thanks for your patient explanation.
Chivas, why would it be orderly?
I mean, if everyone knows it is a deleveraging issue, then why wouldn’t one guy rush to deleverage before the rest of them? Who’s gonna say, “I think I’ll wait to deleverage so that it is orderly”?
I know I sound like an ass, but I’m serious. I don’t see any reason for it to be orderly. Hell, we’ve had 3 days of the market being seriously oversold, and not bouncing. That is not orderly.
Kansas, no problem.
wood,
the mkt did bounce today, lol.
the deleveraging of financial companies balance sheets and the stk mkt are two different things.
so far it has been orderly and you can really see how orderly it has been by looking at the asset backed commercial paper mkt.
wood,
btw, i enjoy the work that you do and find it very beneficial. keep up the good work. nite guys.
Important distinction you make balance sheets vs. commercial paper mkt. Good point.
The key to everything is jobs.
If we go to 6.5% unemployment, like GS is predicting, by 2009, we’re fucked.
I don’t think I’d call the slow stoch a buy signal until after it crosses the 20 line, no?
Wood,
This bounce looks rather anaemic.
jog
CFC having an insane day 70%’ish
jog
Great stuff Wood, look forward to your next post.