Bears and Dead Fish
I don't always agree with him, but I like Richard Russell. Who is he? A guy that has been in the newsletter and Wall Street investment business since 1958. He knows his way around the Street and possesses this thing we call, "wisdom". He may not always be right, as most of us aren't. But he has wisdom, plus he's entertaining, which makes for an interesting read.
On occasion, I get a forwarded e-mail with some of his tidbits and this weekend was one of those "on occasion" occurrences. Here's an observation I just love, which would have taken me this 40+ years to figure out for myself.
"Bull markets die in exhaustion. Bear market's die in exhaustion. Is this bear market exhausted? Has the housing market collapsed? Has CNBC been pulled off the air? Are secondary stocks collapsing? Are people asking, "What's the dividend?" when their broker calls with a new stock to buy? Does anyone believe that the bear market has a long way to go?"
Bulls are not only out to pasture. They appear to be "feasting" on Nevada rangeland, which is to say, "limited greens". Just as in the real-life world of ranching, it's no wonder there are fewer of them per acre. The countryside - the market in this case - can't support them.
So what do we look at without cows for entertainment? How about fish? Dead Fish, that is, as Austin calls the desk-pounding, buy-side analyst crowd. You know, the ones that swim upstream against the market currents only to die on their last can't miss, hot buy, one-pick, focus list, sure winner stocks. How doe they die? In the jaws of patient bears. 'Nuff said.
I won't long dwell on this. We all know that underwriters and analysts are not separated at all. Nor are their co-conspirators, the auditors and consultants at accounting houses. Both are incentified to fluff the numbers. A naked King can only fool the townsfolk for so long until someone with more common sense than imagination blurts out that the King is naked or that stocks are overpriced based on their earnings. That's what it all boils down to.
But unlike a naked King exposed, no single event causes the market to fall. Accountants are investigated. Brokerage firms are investigated. ENE collapses as brokers issue, "compelling value" ratings. Oil prices are falling again now that Iraq wants to sell oil after all to the West. Semiconductors don't sell well. Federal Reserve meets tomorrow and will likely conclude that economic conditions remain week and that it sees no need to raise rates or change bias. The budget surplus expected through 2008 is vaporize within weeks necessitating a raising of the debt ceiling.
Each by itself is a non-event. But together they are symptoms of a bear market born of slowing economy, lack of corporate earnings, and an investing [public coming to grips with the idea of a reverse wealth effect. We can see the sentiment in the charts of the major indexes. The long-term direction of the market is sideways to down. We should get use to it.
Take heart and remember that businesses will not shut down tomorrow; unemployment even at 10% means that 9 of 10 who want to work are working; Safeway, Home Depot and Wal-Mart will pretty much have more than everything we need; and that most importantly, through turmoil and hardship comes opportunity. It's not as bad as it sounds unless you own overpriced stocks that produce no income. Never forget that.
Dow Industrial chart - INDU (weekly/daily/60):
Comments: weekly stochastic in a nose dive on both time frames - bearish. Daily stochastic has rolled over on 5-period lookback - not looking strong either. To boot, the Dow is well below its 20-dma (gray line) of 9921. Yet the fact remains that the Dow is nearing support at the 9700-9750 range on both the weekly and daily chart. Will it hold again or fall through? Who knows? The 60 minute chart is stochastically buried at support, which might give the bulls a pop on calls. But I wouldn't be take a call position on any more than a daytrade. Even then, I'd be bucking the bigger trend that is pretty strong right now. Yes, the Dow is currently the strongest of the major indexes, but a sinking tides lowers all boats, even those with fat pontoons.
NASDAQ chart - COMPX (weekly/daily/60):
A few ants short of a picnic? The NASDAQ IS the weakest link. Good Bye! That's how it went when the COMPX broker under 1600 today. Everything else fell with it. No surprise given the lack of earnings and current over value on many issues. While 1600 will likely become a formidable point of resistance, the stretched lower Bollinger band, the significant decline under the 50 and 200 dmas, and the buried stochastics on all time frames are stretching the NASDAQ hard to the downside. There likely will be a swing trade call play emerge in the not-so distant future, if nothing else, for a bit of respite from the bulls in pain.
S&P 500 chart - SPX (weekly/daily/60):
SPX too suffered as the NASDAQ went south. Again, while the SPX is near support at 1048-1050, the stochastics are still pointed down, which makes me believe there is no relief in sight, especially since a rising support line and a horizontal support line were violated in the process. Still the 60 min chart offers the possibility of technical bounce given the big oversold condition.
Minor mention: VIX is just under 25. Nobody appears scared of a meltdown, nor do they think equities will shoot to the moon either.
For tomorrow? The Fed watch will likely be the big news of the day, but in the end will mean nothing since the outcome is pretty well known (barring any stray, offhand comments). Rate should remain the same, as should the bias to tighten when the time is right.
To boot, we'll see Productivity and Wholesale Inventory reports tomorrow morning followed by the FOMC meting at 2:30 ET, and then Consumer Credit at 3:00. The latter may actually spook some people in the bond market if it comes in reflecting that Americans are again borrowing themselves rich.
In short, this is still a rangebound market. Remember what we noted last Wednesday: What appears to be tradable bullish run will ultimately end up a short opportunity for those who recognize the underlying and patient bear. If support gets broken, I would take that as a cue to consider exiting calls, the reason being that the bear will have likely head-faked us again, which is not all that surprising.
Think of this as the dawn of Spring. Those cute little green sprigs popping up on brown branches will be toast with one night of frost. The green needs some seasoning before it can withstand the unexpected cold. It's too early to start counting the cash from the crop that has yet to mature.
Frost happens, buds die, bears do headfakes. If you take calls on a bounce, they won't be safe for long following today's breakdown below or to support. Market wobbles will persist and except for days like today where the range is huge, it's tough to make money on the range.
See you at the bell.