ZZZZZZZZ. . .Lulled to Sleep Awaiting the Fed
Investors stopped their horses mid-stream today figuring that the Fed's FOMC decision will weight heavily on the market's future. Indecision became today's hallmark, not that that's a bad thing. As Eric, Austin and Jeff frequently point out, our jobs as traders are to manage risks, not predict market direction, though I personally harbor opinions, and at times will act on them. (See tomorrow's Trader's Corner titled, "A Personal Bet on Market Direction")
But before we get started talking about the current market and goings on today, I have been itching to share the following joke about Enron (though no laughing matter) that may help laymen understand, or at least laugh at what passes for intelligent accounting practice and corporate financial wisdom in this era of "pro-forma" profit/loss statements and balance sheets. It was sent by friend of mine who swears he does not know the author, as it has been passed down five times. So if anyone reading this is the author, the credit is yours!
Two Enron auditors walk into a bar. The bartender asks them if capitalism failed Enron or Enron failed capitalism.
First auditor says, "Capitalism is when you have two cows. You sell one cow and buy a bull. Your herd multiplies and the economy grows. You sell the herd and retire on the income."
Second auditor says, "Enron capitalism is when you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank. You then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. You then transfer the milk rights of six cows via an intermediary to a Cayman Island company secretly owned by the majority shareholder of your publicly listed company who sells the rights to all seven cows back to your publicly listed company. The Annual Report to Shareholders says the company owns eight cows, with an option on one more.
[Editor's note: the first two cows were probably leased.]
OK, to the markets. . .This just in. . .Americans continue to borrow themselves rich. With layoffs mounting and consumer debt rising to all time highs in recent months, consumers spent themselves silly on new homes in December. 946K new homes were sold last month, greater than the 925K expected, and far greater than the post 9/11 October low of 851K. The takeaway is that not even poor economic fundamentals stalled the interest rate sensitive housing sector. Though rising rates may dim the hope of yet higher sales, housing is on solid ground.
Yet scant attention was paid to the "revision" of November's numbers, which went from 934K reported last month down to 895K when released this morning. Wonder what December's 946K will be revised to in January. No clue, but it is a safe bet that the numbers will not be upward. Seems the commerce department has taken to reporting "pro-forma" numbers too, and should not be trusted to mean all that they imply.
I promise this is not all prose tonight and that there are charts to decipher further down, however. . .
More from the sheer lunacy department, I did not hear this for myself - another editor who was listening to CNBC at the time passed it on - but CIBC has come out with the most bullish market projection I've heard since Henry Blodgett predicted AMZN would rise to $1000 per share. Get this. CIBC expects the NASDAQ to rise 50% in 2002 to 3300 and the S&P 500 to rise 25% to over 1400.
Seems they have borrowed a page of Ken Fisher's Great Humiliator theory. Under the theory that the market will seek to embarrass as many as possible, Fisher contends that the majority can never be right. After polling more than 50 major brokerage analysts and noting their best guess for market gains, he postulates that the market will produce returns where there are no estimates. Since most estimated gains range from 0% to 40% (excepting some 20% loss and greater guesses), Fisher's thinking is that the market will lose money in the minus 10% to minus 2% range (see article in Forbes February 4th issue). CIBC apparently took the opposite bet and is expecting over 40%, at least on the NASDAQ. Even the CNBC talking heads were snickering over that one.
Maybe CIBC will be right, but it will be a stroke of luck, not genius.
Elsewhere in the news, Global Crossing (GBLX), the debt-racked 800 lb. gorilla overseeing the world's largest fiber optic network filed for bankruptcy today wiping out all hope of the stock's recovery. Swooping in for the kill was Hutchinson-Wampoa, the lucky soon-to-be owner of the ports at either end of the Panama Canal, who along with Singapore Technologies (Fundamentals Guy is itching to know the backers) has made a $750 mln bid for a 60% interest in GBLX. Many years from now, this will be viewed as one of the great buys in industrial and technological infrastructure. Unfortunately for current shareholders, they will be wiped out completely if/when the bankruptcy judge approves the deal.
Another notched scribed by a bear claw in this market. Add it to Ford layoffs, K-Mart bankruptcy, Enron implosion, etc. GBLX is not an isolated market incident, and as I've noted in previous writings, these are commons threads that form a rope from which bull market believers may swing. Get use to it. This is a bear market.
I have to add one more corporate musing before we turn to the charts tonight. Texas Instruments (TXN) reported numbers that blew away the estimates. That's great - good for them! Their stock price popped nicely after hours tonight. So just one question. If the CFO says that the 3rd quarter was the bottom and recovery is underway, why did he also say that TXN was reducing its R&D budget from $1.8 bln to $800 mln in 2002? Does that sound like a company gearing up for recovery? Not to me, which is why I always look at a company's actions, not its words when separating deceit from truth. In my opinion, TXN has a credibility problem and I wouldn't trust the spin they want us to believe.
So Mr. Doom and Gloom is alive and well. The market is going to heck in a hand basket. The sky is falling, etc. Maybe so. Maybe not. But we can still earn a living in this crazy ol' market if we become agnostic and let the market give us the direction rather than us predict its direction! Profits are where you find them, not in what you believe. As traders we don't care which way the market moves just so long as it does, and we can scalp a couple of points from it "as the oscillators oscillate". (That would make a great soap opera, eh Austin?) So let's see what the market is trying to tell us.
Dow Industrials chart (INDU - weekly/daily/60/30):
Bears are having a tough time believing this, but the instruments don't lie. Weekly trend still supports the bears' position. However, the daily charts have reversed over the past four days and are moving bullishly up. Trouble is that 9900 has become a resistance point on the daily/60/30 setup. Then confounding that are daily/60/30 stochastics that are pointed bullishly up on the 5-period lookback. I have the 10-period stochastic in there too, which is sending a mixed message on true strength of the move.
NASDAQ chart (COMPX - weekly/daily/60/30):
I don't usually run a QQQ chart in place of the NDX, but tonight I will because it is easier to focus on the price action. In short, the long-term down trend is still intact. The daily is squirrelly with no clear-cut direction either. Resistance at the 200/50/20 dma's are not far off at just under $40. The 60/30 charts are showing indecisive whipsawing too as evidenced by the neutral wedge on the 60-min chart, yet the stochastic is showing less strength as it hits lower highs. Still the oscillators on all but the weekly chart are bullishly pointing up. Confounded and confused, the market waits for breadcrumbs from Uncle Al.
S&P 500 chart (SPX - weekly/daily/60/30):
SPX is a better measure of the market, but it too has no definable direction even though, like the others, daily/60/30 stochastics are now pointed up. But where's the price move to match? Beats me? Definitely not a sign of strength, but hope lingers strong in the air. Note resistance at 1140 on the daily chart and a broken ascending support line on the 60-min chart - could prove tough to penetrate.
Confused? The market is too. On one hand, the market is looking for good news from the Fed on Wednesday. On the other hand, fundamentals still stink despite corporate spin on lousy numbers (MSFT and IBM proved that two weeks ago), and government spin on indicators. There is tug-o-war going on here or more to the point, at midstream, nobody knows which way to take the horses.
With prices acting like they want to rise, but seemingly afraid to do so, it is interesting to me that the VIX and the VXN have staged new 52-week lows. That's a splurge of optimism and/or complacency undeserved based on candles' lack of conviction and merely average exchange volume. I think we may be setting up for the big downdraft, as the 21.78 VIX reading and the 43.06 VXN are huge red flags signaling the bulls charge. Surprise! There may be a brick wall of bears on the other side of the market matador's cape. Every time in the last few years the VIX has been this low, it has proven an opportune time to buy puts for nice returns.
Now, I'm not suggesting everyone load up on put plays tomorrow at the open. In fact, charts would suggest that day traders will get their first scalp on the bullish side of the trade if stochastics are any indication. However, the long-term traders among us should heed the warnings of the VIX and VXN as it represents substantial risk to bullish trades at this level. We've all heard the warning, "VIX is low, time to go." I've missed that too many times and had to close losing trades fast as a result. I am mindful of it now.
Fact is that until the Fed does its thing, it's going to be tough to make $$$ on directional trades. The best we can hope for are scalps until the Fed announces its policy, which at this point, will likely go unchanged. To me, that would be a disappointment, and the market may yet come to that conclusion. But for now, I stay on my horse and keep my powder dry until I know which river bank - with bulls or bears - looks more attractive.
See you at the bell!