Bearly Solvent

Random Thoughts

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With my neck brace firmly in place, I am watching the market intensely. I am feeling a little better about my stance as a bear, after taking that beating on Monday. This market was extremely ready for a bounce, not necessarily extremely oversold. It was just moderately oversold in my opinion, although news commentators were crying loudly that it was extreme.

I wish we could have seen a dramatic downturn on Monday that would have been a definite bottom. Instead the Fed chose to again make this whole debacle play out as long as possible. We need to make some of these market participants quit cold turkey during their stint in credit rehab. What the Fed chose to do is the market equivalent of passing out the methadone.

The amount of negativity is overwhelming and I see no signs of daylight at the end of this credit crunch tunnel. For the first time in history the Fed is going to directly be exposed to the housing market by allowing distressed banks to put up risky home-loan packages as collateral. This bears witness to the fact of how severe our financial system's problems are. I have no doubt there will be a major bank failure this year and possibly more to follow. Bear Stearns is likely to fail and probably Citi as well. Make no mistake, this is serious situation. JP Morgan is trying to bail out Bear Stearns with the Fed's blessing. This quote is from an AP news article, "Senior Federal Reserve staffers said the arrangement allows JP Morgan Chase to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans. JP Morgan, a bank, has access to the discount window to obtain direct loans from the Fed, but Bear Stearns, an investment house, does not. This type of procedure, Fed officials said, dates back to the Great Depression of the 1930s but has rarely been used since that time." What strikes me is that the Fed is using more unorthodox methods than ever in its history, and still the crisis continues to worsen. If the Fed had never tried to keep the bubbles inflated in the first place, we would not be in this dire situation. The only cure for this ill is to let nature takes its course and we are going to just have to endure the pain. The problem is that the Fed will not willingly let this happen and is in fact contributing to the pain and doesn't even realize it. Its a real mess with no easy answers. I am not envious of Helicopter Ben.

I expect the markets to react positively if the Fed cuts rates by 75bp, at least initially. Anything less and we could be facing another minor market meltdown to the new support levels. I see short term support currently at the 1270 level on the S&P. If we break down from there, I see the next support levels at 1220, 1160, 1140, and 1060. It will take a miracle to keep us above the 1270 mark with the fast deteriorating situation in the financial arena.

Since we are in an established downtrend, you can draw a symmetrical trend channel starting on October 11, 2007. The Bollinger Bands in conjunction with a 20 day SMA indicate that volatility is just beginning to increase again. We are starting to bounce in between the bottom band and the 20 day SMA. If the bands begin to narrow again, I am willing to bet that the markets are going to break to the downside again. If it breaks through the 20 day SMA, it should carry through to the upper band for at least a few days.

There are my thoughts on the current market conditions. Whether they are right or wrong, I know one thing for sure. This market is giving me gray hair...at least the ones that aren't falling out. ;-)

Be safe out there.

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Little Red Trader Cheeks

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OK, I got spanked today by Mr. Bear Rally. I knew I should have followed my gut about the markets being oversold. Woulda, coulda, shoulda.... The combination of oversold conditions and the latest "Fed to the rescue" scenario created a buying storm and short covering tsunami today.

Now for the million dollar question, how long will the rally continue? I could go on about how bad the financial sector is, that the Fed action is too little too late, and other negatives, but that really doesn't matter in a bear market rally. What matters is the psychology of the moment. I believe the market psychology today can be summed up in one word, PANIC. Panic buying to not miss out on the rally, and panic short covering to not lose too much during the rally. (I kind of wish I had panicked today.)

I can't really give advice about panic one way or the other, because I rarely ever do. I'm not trying to be conceited, because I think it is a fault of mine. Oh, I get the gut wrenching feeling every time a trade goes south, and want to rip every key from the keyboard and chuck the thing at my monitor. I feel the panic, but I've taught myself to ignore it, step back from the moment, breath a little, and access the situation. That's where I fall apart. I over over analyze and then I tend to freeze up. I tend to hold on to a long or short when I should just let the sour trade go. If I have one major flaw as an investor/trader it is this.

Today was another one of those days. I almost gave in to the panic this morning and covered at the market low, but again I overanalyzed the situation and thought that maybe the markets were going to trend lower the rest of the day. Bad move....again. Now don't get me wrong, I am not advocating panic as a great way to trade. What I'm trying to say is I want to follow my instincts more. I'm really going to try to start following my gut in these situations. My gut really is right more times than not.

Back to the million dollar question, I have no idea which way the markets are headed. If I had to make a choice as to where we will be three months from now, I would have to say lower. The markets were oversold, but not too severely. They rallied back above the breakdown point, but they did break down to new lows, lest we forget. The fundamental problems have not disappeared. The Fed has not been able to make a difference since they began cutting rates last year. The housing mess continues. Financial's are still stinking up the joint. And so on, and so on.....

The next few days are critical in my opinion. Lately, the way to trade this market is to buy before the Fed and sell after. It seems to be holding true again. If we can sustain the rally after the Fed's next helicopter drop, we might just have ourselves a nice springtime rally.

Be safe out there.

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Let's try this again...

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For some reason my previous post went missing so here goes again.

A few years ago I was trying to make my point about how the consumers couldn't continue on the fiscally irresponsible path of abusing easy credit without dire consequences to our economy. The housing ATM was just getting into the full swing and housing markets were rising at a bubble inflating rate because of a negligent Fed. I tried to think of a way to visualize what I thought would end up happening and came up with what I think is very relevant considering how predatory the creditors ended up being, so here it is....again.

The consumer (Spendus alotus) has not taken notice of the creditor-predator (Loanus toomuchus) sneaking up through the credit jungle. The creditor-predator is about to leap out of the credit jungle and won't hesitate to take a bite out of the consumer. The unwary consumer's head pops up and it sees its enormous enemy, but too late. The blood curdling shrieks of terror the consumer emanates are unnerving. The consumer begins running wild-eyed through the credit jungle trying to escape. It almost escapes with a quick refinance to the right and a home equity loan to the left, but to no avail. The creditor-predator, not to be deterred, is sustained only by the consumer's blood and is relentless in its pursuit. Its aim is not to kill. It only wants to maim the helpless consumer, never to let it escape so it can quaff its blood on a steady schedule. Finally it catches its prey, and in with one smooth and shockingly accurate motion, bites it right in the wallet-heart. What the creditor-predator does not realize is that the consumer is far weaker that it estimated and the bite is more than it can survive. Alas, the exhausted consumer falls to the floor of the beautiful credit jungle that it thrived in for so long. Every beat of its wallet-heart spills more of its lifeblood which never quite satisfies the creditor-predator's voracious appetite. With one last gasp the consumer lurches upward in a desperate second mortgage move but collapses back to the cash rich Fedscue grass. With a nonplussed gaze at it's lifeless prey, the creditor-predator laps up the last of the blood, and moves stealthily on through the jungle in search of heartier prey.

In reality not a lot has turned out too differently than my little story except the creditor-predators are having a little trouble finding the next meal. Let's hope the consumers survive and creditor-predators don't all starve because we don't want the credit jungle eco(nomic)system to become unbalanced. ;-)

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Broken Support

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The Dow broke support at 12000 and the S&P 500 broke the 1300 level. This signals the start of another down leg in the bear market. I see short term support around 11450 and 1220.

As painful as it is to endure, what this market needs is to have a good old fashioned wash out bottom. We need a large volume sell off to get the speculators and weak holders out. Until that happens we are in for more of the same. For the faint of heart, cash is king. For swing traders the safest side of the market to be on is the short side. Right now it is much harder to find a good long to buy. Many charts are broken and it will take time to repair the damage. There are plenty of good solid companies to buy, but why take the risk in a down market. You will be able to buy them cheaper.

The markets almost always move farther than people expect. This is true in bull as well as bear markets. Just as bears were frustrated for years when "the markets should not be going up", the bulls will be frustrated that "the markets should not be going down". Market psychology is not rational, it is emotional, and right now hope is the emotion of the moment. Until the hope is lost and it turns into a real market moving panic, we will continue to drift lower. There will be occasional oversold rallies, but the overall trend is down.

Next week will be interesting. I won't be shocked to see the Fed try to stop the bleeding with another surprise rate cut of 50bp before the regular meeting. The markets will probably jump higher for a few sessions if that happens, but the fundamentals underneath this downtrend will not have changed. The technical damage alone is enough to keep the downward momentum going for a while even if there were a some positives on the horizon.

I know I sound like a broken record, but until we see a real bottom, there really is only one way to play this market unless you are a professional trader. "Buy and hold" has turned into "hold and lose" in this bear market. The pros can keep an eye on their stock all day and get in or out at a moments notice. The average Joe trying to maximize his IRA returns while holding down a job has to play major market swings. That is what I do and it has served me well.

Be safe out there.

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Another line in the sand.

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The jobs number (-63,000) is not what this market needed to hear today. A decidedly negative tone has entered the market and it will take a major miracle to find a positive large enough to offset the constant barrage of bad news.

The Ambac story seems to be coming to a positive end with the CEO on CNBC positively giddy this morning. Will it be enough? I doubt it, but this market seems to do exactly what everyone least expects.

The line in the sand is the 1300 level on the S&P 500. If we can hold the 1300 level today with the massive amount of negativity, I will view that as a huge win for the bulls. If not, the next support is the 1220 to 1240 level from June 06.

This quote from Warren Buffet perfectly sums up where we are today. "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Be safe out there.

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Short is still the play of the day.

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It has been a tough market lately whether you are long or short. I would like to reiterate that unless the S&P 500 can break out above 1400, the markets are stuck in a trading range with the downside as I see it where we are today (1300ish). What Mr. Market needs is to break up or down out of the trading range. That will give investors the data needed to press the shorts or cover and go long.

For my own strategy, I am doing fairly well as a "short and hold" at the moment. Since the January breakdown, I see the markets headed lower rather than higher for the remainder of 2008 unless something happens to bring a dramatic end to the pain in the financial sector. Housing continues its crash and foreclosures are at an all-time high which tells me the pain is still being priced into the markets. The Fed is virtually useless now, energy costs keep climbing, food prices are up. I could go on but you see my point. There will be a day when all this is a not-so-fond memory, but it won't be any time soon I'm afraid.

We are at a critical crossroads right now. If the S&P breaks down from here, it will be a long summer for the people brave enough to stay long.

Be safe out there

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