Market Commentary

This was a quiet week in the market. Until Friday, each day was a narrow range day with very little volume. For the first time in a while there seemed to be very little external influence on the market. Governments weren’t overtly buying or selling to push an agenda. Giant funds weren’t trying desperately to hedge positions or cover margin calls. Instead, it was just the normal fear and greed of market participants. It was the dance of the undecided.

There were attempts to move the market down, only to have the market close relatively unchanged. There also were moves to push the markets higher, only to come back down and close, again, relatively unchanged. To me, though, that was good news. All-in-all I thought it was a constructive week of base-building that will serve the market well in the weeks ahead.

On Thursday, I told one our portfolio managers that it would be very easy to see some selling so close to important overhead and down-trend resistance. Also I expected a re-test of the 50-day moving average.  From a chartist’s standpoint, these are common-sense "Technical Analysis 101" comments and expectations.

Friday was interesting. It is earnings season and GE announced results that fell far short of expectations.  The markets sold off pretty hard.  And now investors are twitchy again.  Everywhere I turned pundits blamed the sell-off on GE and were predicting the next bear leg down.

This is why they say that "markets climb a wall of worry." Experienced traders know that it is not the news that matters, it is the reaction to the news.  In my opinion, GE simply stirred-up emotions that were already there.  A little selling and over-reaction were expected, even if GE’s announcement wasn’t.

A Wild Ride:

"Six 180-degree turns. Twelve drops. Sixteen changes of direction. Twenty-seven elevation changes. Those stats describe Coney Island’s famous vertigo-inducing Cyclone roller coaster. But it could just as easily describe the hair-raising ride that Wall Street investors have been on this year."

I don’t normally turn to USAToday for trading information, but they had a clever piece, with some interesting market stats, worth sharing.

Q1 brought some pretty frightening results.

• According to The Economist,
  the American market was down 9.9%, Europe dropped 9.2%, the MSCI World index was down 9.5%, and emerging markets lost 11.3%;
• March was the 5th month in a row
  that the S&P declined.
• Bespoke reports that the average stock in the S&P 500 is down 31 % from it’s 52-week high;
• employers cut jobs for the third month in a row, as unempolyment becomes a bigger problem; and
• the Government announced it was undertaking a sweeping overhaul of the country’s financial system.

The next chart is a simple daily view of the Dow.  Despite recent events, it shows that we’re back up to resistance again.

Only, this time, the VIX is showing
very little investor fear – and that scares
me.  Tickersense had this chart.


However, since this comes so soon after mass panic, "lack of fear" may actually be
a sign of strength.  That’s kind of funny, a contrary indication of a contrary indicator.  Even Freud admits that sometimes a "cigar is just a cigar" … So why is it so hard to interpret subsiding fear and rising prices as a positive?

A Wild Ride:

"Six 180-degree turns. Twelve drops. Sixteen changes of direction. Twenty-seven elevation changes. Those stats describe Coney Island’s famous vertigo-inducing Cyclone roller coaster. But it could just as easily describe the hair-raising ride that Wall Street investors have been on this year."

I don’t normally turn to USAToday for trading information, but they had a clever piece, with some interesting market stats, worth sharing.

Q1 brought some pretty frightening results.

• According to The Economist,
  the American market was down 9.9%, Europe dropped 9.2%, the MSCI World index was down 9.5%, and emerging markets lost 11.3%;
• March was the 5th month in a row
  that the S&P declined.
• Bespoke reports that the average stock in the S&P 500 is down 31 % from it’s 52-week high;
• employers cut jobs for the third month in a row, as unempolyment becomes a bigger problem; and
• the Government announced it was undertaking a sweeping overhaul of the country’s financial system.

The next chart is a simple daily view of the Dow.  Despite recent events, it shows that we’re back up to resistance again.

Only, this time, the VIX is showing
very little investor fear – and that scares
me.  Tickersense had this chart.


However, since this comes so soon after mass panic, "lack of fear" may actually be
a sign of strength.  That’s kind of funny, a contrary indication of a contrary indicator.  Even Freud admits that sometimes a "cigar is just a cigar" … So why is it so hard to interpret subsiding fear and rising prices as a positive?

This was an interesting week in the Markets. Most of the major indices broke above their 50-day moving averages, only to come back down.

It won’t take much to throw a scare into the markets at this point in time. Consumer confidence and retail investor sentiment are both incredibly bearish – which is actually a bullish sign for most sophisticated investors.

The chart below shows a monthly view of the S&P 500 with an interesting look at RSI.  I found it at Headline Charts, which is another blog I enjoy reading. 

This is what intermediate bottoms are made from. As the panic builds this time, realize that the weakest holders have already sold. There may be a panic spike coming; but the downward momentum isn’t as strong. This is where positive divergences start to show-up. And each time this level holds it becomes stronger support.  The trick here, of course, is for that level to hold.

What, Me Worry?   According to the NYTimes, the White House is seeking new Fed power to keep markets stable. On Monday, the Bush administration plans to propose broad new authority for the Federal Reserve to oversee market stability, possibly exposing Wall Street firms to greater scrutiny, but avoiding a call for tighter regulation. Is that supposed to make the markets feel better?

This was an interesting week in the Markets. Most of the major indices broke above their 50-day moving averages, only to come back down.

It won’t take much to throw a scare into the markets at this point in time. Consumer confidence and retail investor sentiment are both incredibly bearish – which is actually a bullish sign for most sophisticated investors.

The chart below shows a monthly view of the S&P 500 with an interesting look at RSI.  I found it at Headline Charts, which is another blog I enjoy reading. 

This is what intermediate bottoms are made from. As the panic builds this time, realize that the weakest holders have already sold. There may be a panic spike coming; but the downward momentum isn’t as strong. This is where positive divergences start to show-up. And each time this level holds it becomes stronger support.  The trick here, of course, is for that level to hold.

What, Me Worry?   According to the NYTimes, the White House is seeking new Fed power to keep markets stable. On Monday, the Bush administration plans to propose broad new authority for the Federal Reserve to oversee market stability, possibly exposing Wall Street firms to greater scrutiny, but avoiding a call for tighter regulation. Is that supposed to make the markets feel better?

I thought that the Fed jumped in at a very appropriate time, this time. Panic was everywhere.

Moreover, I like the fact that they have not simply been reducing rates. We’re seeing a new form of global coordination with economic allies and novel approaches to serve as a catalyst for stable and growing markets. I know that is not a popular stance. 

• The 25-plus-year trend in the S&P index was in danger of being broken;
• Bear Stearns was about to fail; and
• We were about to break through the January intraday lows.

I don’t know about you, but as these things happened, I sensed that a cascading series of bad events could take the market down much further than where we currently stand.

graphic from FT

Sentiment has been so bearish and fear has been so pervasive, that
my sense is that people were looking for a reason to get out of the
Markets to avoid an apocalypse. Believe or not, that’s the fuel needed
for the next big up-move in the market.

We’ve been seeing extraordinary levels of fear. It doesn’t matter which
sentiment indicator you look at, we’re seeing readings that have only
been seen at market bottoms of a significant degree. Yet, sentiment is a secondary indicator. Price is primary.

This brings me to another good sign in the markets this week. While I
would stop short of calling what happened in the broader markets
"capitulation" – in my opinion, capitulation-selling happened in many
of the financial stocks. Specifically, take a look at Lehman (LEH),
Goldman Sachs (GS), and MF Global (MF). Each of these stocks lost
incredible amounts of money and came back. This is a very good sign.

In my experience, big volatility (like we’ve seen recently) is followed by much smaller volatility.  My sense is that as long as the line in the sand on the S&P holds, then we’ll see an intermediate move upwards without too much scariness for the time being. That’s going out on a limb because we’re really not much different than where we were at the end of last week. Yet there is a difference, in the battle between bulls and bears, for the moment, it looks like the bulls have a little bit of momentum.

I thought that the Fed jumped in at a very appropriate time, this time. Panic was everywhere.

Moreover, I like the fact that they have not simply been reducing rates. We’re seeing a new form of global coordination with economic allies and novel approaches to serve as a catalyst for stable and growing markets. I know that is not a popular stance. 

• The 25-plus-year trend in the S&P index was in danger of being broken;
• Bear Stearns was about to fail; and
• We were about to break through the January intraday lows.

I don’t know about you, but as these things happened, I sensed that a cascading series of bad events could take the market down much further than where we currently stand.

graphic from FT

Sentiment has been so bearish and fear has been so pervasive, that
my sense is that people were looking for a reason to get out of the
Markets to avoid an apocalypse. Believe or not, that’s the fuel needed
for the next big up-move in the market.

We’ve been seeing extraordinary levels of fear. It doesn’t matter which
sentiment indicator you look at, we’re seeing readings that have only
been seen at market bottoms of a significant degree. Yet, sentiment is a secondary indicator. Price is primary.

This brings me to another good sign in the markets this week. While I
would stop short of calling what happened in the broader markets
"capitulation" – in my opinion, capitulation-selling happened in many
of the financial stocks. Specifically, take a look at Lehman (LEH),
Goldman Sachs (GS), and MF Global (MF). Each of these stocks lost
incredible amounts of money and came back. This is a very good sign.

In my experience, big volatility (like we’ve seen recently) is followed by much smaller volatility.  My sense is that as long as the line in the sand on the S&P holds, then we’ll see an intermediate move upwards without too much scariness for the time being. That’s going out on a limb because we’re really not much different than where we were at the end of last week. Yet there is a difference, in the battle between bulls and bears, for the moment, it looks like the bulls have a little bit of momentum.

Despite Tuesday’s huge rally, equities were mostly flat for the week, with the S&P 500 losing 0.4%. Nonetheless, it is a good sign that the Market held recent lows despite a flood of bad news and bearish sentiment.

There is a saying that "it is not the news that matters, it is the reaction to the news." Normally, I would have considered last week’s performance by the Market to be quite bullish. However, we were faced with two big news items during the weekend.

First, Bear Stearns reached an agreement to sell itself to JPMorgan Chase for $2 a share in a stock-swap transaction. Second, the Fed announced two initiatives designed to bolster market liquidity and promote orderly market functioning.

In a bull market, these might be interpreted as bullish (or at least cause a bunch of short-covering). However, we are not in a bull market and I am waiting to see the "reaction" to this news. Expect to hear rumors of other banks in trouble too.

With regard to the sale of Bear, let’s be clear, this was not a bailout; it was an orderly liquidation. For context, Bear’s market value went from $20BB (in January, last year) to $3.5BB on Friday – and the sale to JPMorgan was at just $236MM (millions, not billions).

Remember, because of Good Friday, there are only four trading days this week. Also the FOMC meets on Tuesday, and will announce whether it will continue to cut interest rates. So, I’m expecting an interesting week.

Despite Tuesday’s huge rally, equities were mostly flat for the week, with the S&P 500 losing 0.4%. Nonetheless, it is a good sign that the Market held recent lows despite a flood of bad news and bearish sentiment.

There is a saying that "it is not the news that matters, it is the reaction to the news." Normally, I would have considered last week’s performance by the Market to be quite bullish. However, we were faced with two big news items during the weekend.

First, Bear Stearns reached an agreement to sell itself to JPMorgan Chase for $2 a share in a stock-swap transaction. Second, the Fed announced two initiatives designed to bolster market liquidity and promote orderly market functioning.

In a bull market, these might be interpreted as bullish (or at least cause a bunch of short-covering). However, we are not in a bull market and I am waiting to see the "reaction" to this news. Expect to hear rumors of other banks in trouble too.

With regard to the sale of Bear, let’s be clear, this was not a bailout; it was an orderly liquidation. For context, Bear’s market value went from $20BB (in January, last year) to $3.5BB on Friday – and the sale to JPMorgan was at just $236MM (millions, not billions).

Remember, because of Good Friday, there are only four trading days this week. Also the FOMC meets on Tuesday, and will announce whether it will continue to cut interest rates. So, I’m expecting an interesting week.

This week had everything: gaps, market-moving comments and whipsaws. The Russell 2000 was down 3.8%, and the other US Equity Indices didn’t fare much better. But, in my opinion, short-term movements here are simply noise.

Clearly the Markets are in short-term oversold conditions and toying with Support Levels. Still, the CBOE’s Equity Put/Call Ratio hit the highest reading seen since February 2003. According to SentimenTrader readings like this often precede major intermediate-term lows in the market.

Longer-term charts might provide better context. Markets sank to 18-month lows on heavy selling. The S&P 500 Index closed at its lowest level of the year and is very close to breaking through support. In the chart below, the green line marks the trendline support since the year 1981.

As an aside, do you really think a trendline with so few touches since 1981 is really a market mover? It’s possible that it "describes" what happened better than it "predicts" or "affects" what happens next.

The other major indexes also are sitting just above critical support areas. This will be an interesting week. Don’t be surprised if prices shoot through a widely-watched technical level, only to reverse and head back the other way.

For a little extra credit, I saw an interesting chart on Bespoke’s site. It shows all S&P 500 corrections of 10% or more since 1927. Each point on the scatter chart below represents the percent of the decline along with the number of days it lasted. So how does the current correction stack-up? Compared to historical corrections of 10% or more, while the current period has been longer than average, the declines have so far been milder.