Tuesday, March 11, 2008

March 12

First I want to thank everyone who has written to me over the last several days and wished me well with my health. I will email each person back individually to say thank you, but it will take some time, more than I want to have pass before you hear from me. So again, Thank you.
Next, it's going to sound like I'm talking out of both sides of my mouth here in this commentary, typical guru crap, it might go up and then it might go down, but that's the place we find ourselves in.
The Dow Jones Industrial Average experienced its single largest one day move in nearly five years, closing 416 points higher at 12,156.81. The broadly based S&P500 rallied 47.28 points to 1320.65, while the Nasdaq gained a rather staggering 4% for the day, up over 86 points, closing at 2255.76. Volume was much higher across the board, up 14% on the Nasdaq and climbing nearly 18% on the NYSE.
So why all the fuss? Well, on Tuesday the Federal Reserve rode into town with more heroin and the addicts, led by the financial indexes, rallied strongly on the news that the dry spell might be ending. Not only did the Fed ride into town, but it came calling with its friends from the Bank of England, the Bank of Canada and the European Central Bank. The Fed announced that it would be adding more liquidity to the system, $200billion in Treasuries to banks in exchange for their debt. Now, in normal times requires good collateral in order to loan this money to the banks, but, as they did in August the first time they tried this trick, they will be accepting any crap the bank would like to get off its own books and transfer to the Fed (ie. Your's and mine) account. This move comes just ahead of next weeks policy meeting where the spoiled children are kicking and screaming and demanding a new round of rate cuts since the other ones have proven so helpful.
So, now that I've gotten all that off my chest, lets have an objective look at the state the market is in at this point, the good, the bad and the ugly. Each of the major indexes gapped up significantly on the open today, in fact each of them trapped. A trap occurs when on the prior day you have a very strong directional move, with the market opening in this case at the days high and selling off all day to close at or near the lows. The next day, if the market goes over that strong selling days highs a trap is created. This tends to lead to very strong short term moves to the upside, and sometimes it starts off something more significant. Today each major index had created the trap on its open, which is an even stronger trap. Traps that occur on heavy volume are something you ignore at your own peril.
Now with that said lets come back up a little and try to understand what is going on overall. First, this is not the first time the Fed has ridden to the rescue and allowed banks to unload all their junk on them. In fact, they did it back in August as well. The fact that they are having to do it again is not a good sign for the overall health of the market. The fact that they had to recruit all of the major central banks in Europe and Canada is to my way of thinking an even worse sign. Typically when the Fed is lowering rates and adding liquidity to the system markets will rally (thus the saying “never fight the fed”). Right now though the problem is that the cuts and excess liquidity themselves are the culprits to our problem. Adding more of the problem to try to fix a problem is about as smart as, well adding more of your problems to try and fix your problems.
The liquidity infusion and rate cuts that started in August have been unsuccessful to this point, and there is little reason to think that this time will be too much different. I do suspect that we are in for some upside from this point, maybe even substantial upside, however I do not see it as long lasting. In the end none of the problems have been fixed, only added too. What the fed is doing is kind of like offering a kid extra recess time if he stops misbehaving in class, sure he will behave until recess, but you have probably harmed him greatly by giving him the expectation that bed behavior begets rewards. One of the most important thinks I look at are setups. What do I mean? Very simply, each evening as I manually scan about 4000 equities I simply take note of how many stocks are breaking out to the upside and the downside. I also try to get an idea of how many bullish setups (even bad ones) there are compared to bearish ones. Typically when the market is in good shape there are a lot of good setups, even when the market is coming off of a low. This is not the case right now, in fact in the S*P100 I only found 19 stocks I'd classify as having anything remotely close to a buy setup, and most of those were not very good setups. So, that's how I see the market technically.
I also think that the fact of the Fed having to bring in the Bank of England, The Bank of Canada and the ECB is not a good sign at all. I mean, if our banking system is solid and sound, why do we have to rely on CANADA, England and the friggin ECB to bail us out. Does not bode well.
So, what to do from here. I'm personally staying very cautious. If this is a rally that has legs to it that will show up soon enough and there will be plenty of time to make profits off the upside. I have some small long positions in the QQQQ, DIA, URBN, APA. I will try to find some other stocks I can add to my portfolio as the rally moves on, but each of them will have a very tight leash on them, and when the market turns back to the downside, which I think it will in a few weeks, I'll buy some QID and SDS and sit on those for awhile as this all unwinds.

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