Friday market update

The market has yet to give Obama a break. Earlier this week the words he eloquently poured out to congress in his first State of the Union speech should have prepared the market for the actual numbers that were revealed today in the 2010 budget and proposed spending changes for the rest of 2009.

Based on trading since Obama’s speech on Tuesday, the broader market has tested the lows of 2008 (November lows) and held while making higher lows in intra-day trading since Tuesday.

Even the futures market predicted a strong open today and traders were not disappointed. The markets were up nicely by mid morning, with the broader financial market up as much as 4.4%, suggesting that Bernanke and Geithner had succeeded in their assignments to allay fears of bank nationalization.

Then the details and actual bound copies of the new Obama administration budget hit the wires and the hands of congress, revealing a whopping $3.6 trillion budget for 2010, with significant new spending on health care, education and other top priorities while at the same time predicting a $1.75 trillion deficit for 2009.

The budget contained immediate spending changes for 2009 as well, pushing spending for 2009 to a record high $3.94 trillion, resulting in the unexpectedly large deficit prediction figure for this year.

The budget "lays out for the American people the extent of the crisis we inherited, the steps we will take to jumpstart our economy to create new jobs, and our plans to transform our economy for the 21st century," Obama said.

The title of the new budget was “A New Era of Responsibility – Renewing America’s Promise.”

It is clear that investors saw a big disconnect between the words of the administration this week and the proposed spending plans. This week began for Obama with a special economic summit on Monday that explored ways to reduce the deficit and make the government books sound.

Obama himself even stated that he plans to trim the deficit in half during his first term, even with these huge new spending programs.

I am thinking that even his most ardent supporters have a feeling of disconnect between the concepts of huge spending to get out of this economic recession and cutting the deficit in half at the same time. As I said late last week, the only way this can be done is through massive tax increases or dilution of the dollar by having the printing presses run overtime printing fiat money. The market won’t like either of these paths.

I still have faith though that one day this year the markets will rally when something new from the Obama administration hits the press. Nevertheless, the message is clear that the market is voting its disapproval of how things are unfolding from our new administration.

It should be clear to our new administration and the congress that a collapse in the stock market means a collapse in the retirement accounts of millions and millions of people – people who “vote”. Look how the public howled last fall when the markets collapsed after the senate voted the initial TARP plan down.

While it is fine to say the buck stops being passed around and Wall Street is not going to be excused for any more financial abuses, it is disconcerting to many that stock market performance is so low on the list of our leaders right now. True, a poor performing stock market may allow new programs to be rushed through congress under a veil of economic urgency, but these new kids are playing with fire and could get burned if they take this too far too fast.

Fortunately, broad market critical support is still holding, i.e., last November’s lows - but today’s selling was disappointing, nonetheless.

To my knowledge there is no new summit or economic plan being announced by the administration or Fed over the next week. So, perhaps a quiet period from Congress and the Obama administration will allow this window dressing period to move forward and upward next week.

There is one concern in tomorrow’s schedule of economic reports - an updated preliminary GDP for Q4 2008. I suspect that this is a discounted statistic that will not spur further selling, since almost everyone who is still breathing knows in their heart of hearts that 2008 was a bad economic year for everyone and everything. We’ll know more tomorrow.

I know some of you remain nervous and I share your concern. Just know that in the development of market bottoms, whether they are short-cycle bottoms seen once or twice a month or intermediate bottoms seen every few months, there is continued back testing to prove that supports are indeed providing support.

When the market is convinced that the supports are going to hold, then a nice advance often results.

We are simply going through another test of supports. There have been a lot of them lately and there will be many more in the year ahead. For now, just watch what is happening – we will tell you when and if supports are violated.

Remain defensive and in cash.

Thursday Market update

While Obama received lots of applause last night as congressional leaders rose to their feet over and over again, the stock market once again expressed disappointment by falling out of the gate rather than rising, despite a relatively upbeat day for the financial sector.

Yesterday the market rallied strongly after Bernanke did his best to assure congressional leaders and the public that bank nationalization is not a preferred tool to help restore health to the banking system and even if done would not take the form that would wipe out shareholders.

Even Geithner rebuked the idea of bank nationalization when he said, "I think that's the wrong strategy for the country and I don't think it's the necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole."

But there is this “stress test” that Geithner has prepared that began today. What a poor choice of words for what is really nothing more than a specialized audit of several of the largest banks with a little computer simulation of “what if” scenarios.

You see, the banks which likely receive the most government assistance are those which fail the “stress test” the most. Is it any wonder that the bank stocks have been hammered? Even a shareholder would probably welcome the stock prices to dive given this kind of analysis and testing.

Why the public is in on this stress test analysis is beyond me. There are many areas where more transparency in government is needed but this may not be one of them. This squishy kind of analysis is leaving many investors squeamish.

The uncertainty that comes with a formally announced “stress test” that will extend into April sometime leaves many investors unsure of what happens next and/or when “next” is going to be.

Despite the on-going nature of the “stress test” now being conducted, Geithner did his best to assure the public that the Treasury stands ready to support banks that would need more capital to withstand a worse-than-expected recession.

But waiting until April before we know the full approach from the Obama administration regarding their plans for handling the current bank credit/capitalization crisis is stressing the stock market as well.

Despite today’s selling, from a technical perspective the lows reached yesterday were not breached today and the market closed well above the lows of either day, suggesting a short-term bottoming pattern is developing.

Like I said yesterday, Obama was given a nearly perfect opportunity from a technical perspective to have the markets rally on his remarks. But alas, we must wait for another time. I wish him luck on the next go around.

I remind you that we are now in the month-end window dressing period. So any of you with thoughts of shorting the market please be forewarned. Shorting the market in any way or fashion during the last week of the month into the first week of the new month has proven to be a hazardous strategy.

Does this mean that we are assured of a rally over the next two weeks?

Perhaps, it is certainly overdue and the market remains strongly oversold. On the other hand, all it really might mean is that that the odds are against betting on the short side during this period. If the market is true to form, we could just as easily see a lot of sideways trading emerge once again.

One positive that still holds true is that in the broader market picture the November lows are holding and a potential double bottom appears to be playing out. Double bottom patterns are often precursors to an intermediate advance.

If we could just get some concrete details in the numerous plans that are being considered for jump starting the economy, then perhaps the market will gain some footing here as investor confidence begins to increase.

Wednesday market update

Sometimes it doesn’t matter what the news is. When prices move rapidly to one side or the other, a rebound effect occurs – pulling prices closer to what is known as the average mean price.

So it was today.

The Conference Board’s consumer confidence index for February totaled 25.0, the lowest reading on record, and well below the 35.0 anticipated by Wall Street analysts.

Earlier, the S&P/Case-Schiller report on home prices showed that home prices fell a record 18.5% last year, the December 12-month reading. The drop is the larges decline seen in the history of the 21-year old survey. The worst declines occurred in the sunbelt, where prices in Phoenix and Las Vegas fell by more than 30%, year over year.

And to top it off, Bernanke faced Congress in the first session of his 2-day grilling and semiannual testimony on monetary policy and declared that “the view of policymakers is that a full recovery of the economy from the current recession is likely to take more than two or three years.” – suggesting that a bottom to this chaos may not be seen until sometime in 2010.

But Bernanke was resolute and calm this time, unlike the many times before when he has looked nervous. I watched some of his presentation and there was a calm clarity to his description of the economy and the rationale the Fed has taken with regard to the bank bail out strategies.

While many have complained about helping out those who have been most irresponsible, I particularly liked his analogy of the alternative.

In a surreal moment of clarity, the Fed chief faced the critics of government support to the financial sector in the form of government stakes and subsidies that could be seen as rewarding bad behavior. He offered the analogy of a neighbor smoking in bed and setting his house on fire in a neighborhood of wooden houses. The policy options are letting that neighbor's house burn to the ground to teach him a lesson, at the risk of burning the whole neighborhood, or calling out the fire department to put the fire out.

Bernanke chose to call the fire brigade, while imposing sanctions against the neighbor to punish future reckless behavior.

(Business Week, Feb 24, 2009)

Comparing Bernanke’s remarks to the action in the stock market, it appeared as though investors were comforted by the plans laid out by Mr. Bernanke. Perhaps Geithner ought to see if Ben can make the Geithner deliveries in the future.

Though Bernanke didn’t deliver a presentation on “nationalization” it was sure on everyone’s mind as lawmakers peppered Bernanke on his views regarding the nationalization of banks.

Bernanke noted the great technical difficulty in shutting down a major bank or holding company, given its size, many components, and international position. Bernanke also said until it is "safe to close down a big bank, you have to try to avoid it." The Fed also doesn't have the authority to shut down a bank, he said. What's missing currently is a comprehensive resolution authority. Bernanke also believes major banks have significant franchise values, and when the government starts to take over, the companies lose their name value. He believes increasing transparency via stress tests, and putting the asset purchase plan in effect is feasible and will be beneficial in stabilizing the system.

Bernanke said the regulators are not proposing a bank nationalization. He characterized the aid one of the big banks might receive as a "private-public partnership," echoing the Treasury, but declined to call such aid "nationalization" as the government would not wholly own, or even be a majority owner of a bank. Bernanke also reminded lawmakers that should one of the major banks become insolvent, we have the rule of law to outline subsequent procedures. Without the Troubled Asset Relief Program (TARP) aid last fall, many big banks would have failed.

As to why an investor would purchase common stock in a bank today, the Fed chief answered one would not, but the appeal would resurface eventually once stability is restored.

(Business Week, Feb 24, 2009)

Bernanke’s explanations satisfied nervous investors and the financial stocks, along with the broader market, rallied at major support levels and ended the day strongly to the upside.

It looks like Geithner and Obama may need to take speaking lessons from Bernanke. Since they came into office, every time Geithner or Obama have made economic announcements the markets have collapsed in strong disapproval. It may be all in how you say it and the tone conveyed.

Bernanke is very conciliatory, yet firm in his belief, while the Geithner/Obama deliveries have been lacking in detail and more of “this is how it is and you better learn to like it”.

Obama has his chance at redemption tonight, as he once again goes before the cameras to address the nation. There are many who feel that Obama may be overexposing himself and his ideas and that the public may be getting nervous since each time he makes a delivery the markets fall. Check out the DOW chart, below:

The high for the DOW was reached on January 6th, at 9088. The low was reached yesterday, at 7105. The decline from the high on January 6th to yesterday’s low was a whopping -21.8%. The worst declines were the days that Geithner or Obama spoke, introducing plans to fix our ailing economy. The market has no faith in the plans because they lack concrete details.

Let’s hope tonight is different for Obama, that the message he delivers will have strong policy statements that allow the stock market to draw a line in the sand and move forward. If this new address is more of the same, with lots of political rhetoric, then the markets will announce their displeasure with more selling.

I am finally hoping for a “change” – a change in the way the administration has prepared and delivered policy and economic plans for bringing this economic collapse to a halt, if not a rebound.

From a technical basis, Obama has a lot going for him. The broader market indexes are clearly remaining just above the November lows, with today’s strong advance looking like a bullish double bottom.

Bear in mind that while the DOW has collapsed below the November lows and the 2002 lows the other indexes have not. Even the S&P 500 remains above its November low, even though it closed yesterday at a lower closing price. The broader market still remains at support – though barely.

What Obama says tonight and how he delivers the message is important. I believe the message from the “Fiscal Responsibility Summit” yesterday is that deficit spending must come to an end. Obama has hinted at this - and all at the tail end of passing the largest spending bill in the history of the United States.

If this is what Obama wants to say and it becomes an imminent policy that he is intent on pursuing, given the large commitment made to spending our way out of this economic mess, the only resulting conclusion is that taxes are going to go way up for someone or the government is going to seriously go into the money printing business, both of which are bad for the economy and/or the taxpayers.

The market will not like it.

If Obama has a plan that does not crucify the taxpayer during such on onerous economic recession, then the stock market may feel that the implementation is a long way off and not necessarily cast in concrete – and this rebound rally may lift off for a while.

Lots of drama this week – stay tuned and stay on the defense.

Tuesday Market update

William O’Neil once said, “The hard-to-accept great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what seems low and cheap usually goes lower.”

This seems to be a rather astute observation as the S&P 500 index made a new 12-year closing low, as investors continue to run scared of the talk of nationalizing banks.

This just confirms why it isn’t a good idea to buy stocks just because it is cheap or low.

Case in point is General Electric, which last month closed at $12.13 and paid a 15 percent dividend and may have seemed like a real value play.

Now one month later, GE closed today at $8.85. That’s a loss of 27% in just one month as investors grow concern that GE may have to cut its dividend in order to support its GE Capital unit.

I am a firm believer that what you don’t own can’t hurt you! We are seeing the fastest reduction in dividends since 1955, so chasing dividends is a bad idea in this environment!

Technically, on a short-term basis the stock market is oversold. The daily stochastics are at %K 2 and %D at 10, suggesting we could be close to seeing some short covering. The McClellan Oscillator is approaching a low that usually generates a rebound.

This is not a good point to load up on shorts as smart as that may seem!

I want to make a very fine distinction. While we made a closing new 12-year low for the S&P 500, today did not take out the lowest lows for last year, which for the S&P 500 stands at 741.02.

That may be a bit confusing but a closing low can be different that an intra-day low. The intra-day low today was 742.37 for the S&P 500, so we did not take out 2008’s low of 741.02. Granted, we probably will take it out tomorrow as 1 point isn’t much of a cushion. The Wilshire 5000 closed today at 7,525, so it has to break below 7,340 to confirm new lows and that could also happen as early as tomorrow.

Some have pointed out that the Nasdaq Composite is showing a positive divergence, closing today at 1387.7 verses its November lows at 1295. Technology stocks have been doing better than the broad market, but not smaller companies.

Notice that the majority of OTC stocks on the advance/decline line have now broken the November lows. This illustrates how a few big cap technology names like Apple and Google can sometimes paint a false impression of strength. Most stocks that trade on the OTC are struggling.

Sectors leading the market are mining, food and healthcare --- all defensive plays. Investors are hanging out in these sectors hoping they will lose less than other sectors.

Any short term bounces should be used as selling opportunities.

Monday Market Update

Market Commentary:

The DOW is a sorry sight this week. Bank stocks were hammered early today, setting the tone. The DOW suffered the most, reaching new lows and closing at levels not seen since October of 1997.

It’s all about the banks! Citigroup looks poised to go under and Bank of America looks like it is second in the queue.

I’ll get right to the point.

Just last week Treasury Secretary Timothy Geithner announced the new Financial Stability Plan. Since that announcement Citigroup has fallen as much as 59% (at one point today), recovering a bit on late day buying but still managing to close down 51% since the Stability Plan was announced.

Bank of America fared even worse at the lows of today, down 63% since Geithner’s announcement. But the late day buying helped Bank of America the most, recovering a huge early sell-off and ending the day down 46% since the Financial Stability Plan was brought out.

You see, the stability plan was full of more holes than a stainless steel strainer. And the big lump in Geithner’s throat as he announced the plan was his startling declaration that somehow they were going to entice private capital to participate in this stability effort.

On the surface, at least, it appears the administration’s new Financial Stability Plan has created far more instability than stability.

What happened today clearly demonstrates why the banking stocks are tearing the stock market apart, especially the financial sector and the DOW index, in particular.

Senate Banking Committee Chairman, Christopher Dodd, was interviewed on Bloomberg Television and said that some banks may have to be nationalized for a short time, a move he wouldn't "welcome at all" but "could see how it's possible it may happen."

Market selling took off as word of the interview leaked out.

At first glance, nationalization might seem only natural, given how the TARP monies have been used so far by buying up shares in banks and other financial institutions. But take a little time to study the implications and you will better understand the investor fear that dominates the banking sector.

The expectation of bank nationalization is that the current shareholders would be left unprotected – that the government bailout monies infused into the banks would buy shares of stock that would be “preferred” over the common stock holder shares.

If you are an investor in bank stocks, how do you feel? If you think the government is planning on bailing out the banks you hold shares in and putting you at the end of the line, are you willing to follow the principles espoused by Geithner and plow some more money into banks so you can stay at the end of the line when and if the banks finally make good?

How can these two opposites co-exist? The administration talks about luring private capital for banks in their bank stabilization scheme and yet the very aspect of nationalization that is occurring raises serious fears among private investors that they are going to be left out in the cold.

Of course the market is crashing around the banks. The missing details in the “Stability” plan are so obvious that bank investors are truly running scared. You have heard it said many times, “The market hates uncertainty”. Well, uncertainty is exactly what has been delivered so far.

But an interesting change happened later in the day that caused the markets to rally strongly, especially bank stocks. The Obama administration was forced to come out with an announcement countering Dodd’s interview, saying it prefers and supports a private bank system.

" This administration continues to strongly believe that a privately held banking system is ... the correct way to go, ensuring that they are regulated sufficiently by this government," said White House press secretary Robert Gibbs.

" That's been our belief for quite some time, and we continue to have that," he told reporters at the regular White House briefing.

Does the right hand even know what the left hand is doing?

Bank of America stocks recovered nicely, rallying from being down -36.9% to close the day down only -5.5%. That is a nice 31.4% difference, folks!

The simple certainty from the administration that private banks were a preferred approach gave investors confidence to begin buying once again.

That is the sort of thing that needs to be done in so many different areas – simple sticking points that will establish a known base line.

Simple things like changing the “mark to market” for mortgage backed securities, at a time when absolutely no one knows real market values of these instruments. By stating the asset at its face value unless default occurs the banks are not forced into what may be arbitrary valuations and ratios.

Another long-proved and helpful rule was the “up-tick” rule, where a short position could not be placed until there was an up-tick in the stock, slowing the strong hammering that has happened so often in the financial stocks over the last 18 months.

These are just two simple things that would lend “certainty” to the financial sector. I am sure there are hundreds of other simple ideas that don’t cost a trillion dollars – many a lot better and more effective than these two.

The point is that by leaving so much uncertainty, the stock market is left no recourse other than pare down and pare down until things become more certain.

Technically, the largest of the large caps, the DOW has broken down through the November lows, the 2002 recession lows, and gone clear back to 1997. However, the Nasdaq, the NYSE, the small caps, and even the S&P 500 remain a long ways from the 2002 lows and some are even a long way from the recent November lows, leaving us with an unusual bullish divergence.

Today started out and looked like a real slammer of a day – and yet, after the simple pronouncement from the Obama administration, a very nice recovery rally softened much of the day’s losses.

Will it continue, though? Have the short positions been scared into more short-covering over the next few days? Or is more obfuscation and uncertainty from the government on the menu next week?

Do you need a good laugh?

I just read that President Obama is hosting a Fiscal Responsibility Summit this coming Monday at the white house, where selected members of Congress, financial analysts, economists and community leaders will huddle to discuss long term ideas for keeping the government’s books sound. I didn’t catch whether Bank officials were invited.

" The summit's a first step in the process of beginning to lay out how we can bring down the deficit and put our economy back on sound financial footing," White House press secretary Robert Gibbs said on Friday.

Summit participants aren’t expected to announce any policy moves – let’s hope so! The less said the better, in my opinion.

As a wise man once wrote in Proverbs, “Even a fool, when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed a man of understanding.” (Proverbs 17:28)

I like the more common version: “Better to keep your mouth closed and and be thought a fool than to open it and remove all doubt.”

A very nervous and uncertain market could collapse into another hard bearish leg down or could suddenly rise from extremely oversold conditions – but my crystal ball is snowy and hard to see through.

Remain defensive.

Friday market update

It wasn’t a good day for those hoping that the market had put in a bottom on November 20th, at least from the Dow 30’s perspective, as the Dow Jones Industrials finished at the lowest level in six years.

As we discussed yesterday the indexes holding large exposure to the financial sectors continue to get hammered. The S&P 500 Financials Index retreated 5.2 percent to its lowest level since January 1995.

The Dow 30 is having a hard time overcoming its zombie bank positions in Citigroup (C) which fell to a 17-year low to $2.51 and with Bank of America (BAK), which fell for the fifth day in a row, closing at $3.93, which is a 24-year low for this company.

However, even the “Rock” Prudential Financial, the second U.S. largest life insurer, was hammered after Fitch Ratings lowered its short term debt rating, making it now ineligible for the U.S. commercial paper program.

American Express, the biggest U.S. credit-card company by purchases, lost 8.7 percent to $12.87, a 12-year low, as credit card defaults rise to a new high of 7.53% of outstanding credit card loans.

You may be wondering if now is the time to short the stock market and if so, what should you be shorting.

You have to understand that my main concern is getting you through this bear market with your capital intact and since November, the market has been in one whipsaw after another in a mostly sideways trend.

In a whipsaw market, both sides of the market are going to cut you to pieces and that has been painfully obvious over the last few months.

The Federal Reserve is a big buyer of stocks and they have been pouring money into the stock market, to hold these critical lows - desperately trying to keep the capital markets from collapsing.

While the Dow Industrials and Transportation indexes have confirmed the bear market’s primary trend, the S&P 500, the Wilshire 5000, the Nasdaq Composite, the Nasdaq 100 and the Russell 2000 are all well above their November lows, so the jury is still out on this one.

After selling down over the last few days, the stock market is now short-term oversold, as the broad market approaches its November lows, suggesting a short term rally could be in the cards. This makes shorting the stock market just above key support levels a bad timing entry point for the shorts.

Investors have been hiding out in the health care sector, biotechnology, technology and of course gold stocks, hoping these sectors will weather the financial storm.

Whether they will remain in these sectors is a question I can’t really answer. This is why we let the market answer this and from the looks of things we really don’t have to wait long to find out.

Either the broad market will hold its lows or it will violate them. If it holds its lows, the shorts are likely to run for cover and the market could stage a March/April rally, as it typically does from a seasonality perspective.

If the market violates the primary lows, as I think there is a real risk of happening, shorting the stock market only makes sense at the next short cycle high.

This is why the stock market is so tricky right now as timing is everything at such a critical juncture.

From an intra-market perspective, the markets were a boil with today’s news.

The Conference Board index of leading indicators surprised on the upside in January, jumping 0.4%, which to some suggests the pace of the economic deterioration, is starting to slow.

In any case, the US dollar which is short term overbought sank today, along with the news, that for the first time this year, U.S. crude oil inventories shrank, and imports fell by 859,000 barrels a day, according to weekly data compiled by the U.S. Energy Information Administration.

Crude oil prices, which are short-term oversold, but overbought on an intermediate term basis, jumped sharply on this news, climbing $4.86 a barrel.

Then the Federal Reserve says it’s not going to purchase U.S. securities any time now to lower consumer borrowing costs, which sent bonds down for the day.

It looks like the Fed is starting to use some psychology here.

I am starting to get a headache. Just stay out of the market until we see how this unfolds.

Thursday Market update

The stock market is still trying to make up its mind as it hovers above its November lows.

The government said construction of homes and apartments tumbled by 16.8 percent in January to a record low annual rate. Applications for building permits also dropped to a record low and inventories continue to climb. This deflationary cycle continues to get worse.

Investors reacted coolly to a $75 billion mortgage relief plan President Obama introduced on Wednesday, which would provide incentives to mortgage lenders to help borrowers reduce their payments.

SIX MONTH CYCLE

It has been observed that there is a six month period between October/April that is generally a favorable period for the stock market.

Even in the Great Depression, the market bottomed in the fall and rallied to the spring before collapsing in the summer of 1930.

What I have observed in many years is the market advances out of the October/November lows. This is followed by an intermediate term advance lasting approximately six weeks or about to mid-January.

This brings about an intermediate-term correction, retracing a portion of the previous advance during February.

However, in the March/April period we often see the intermediate term cycle turn back up again, with the six month cycle ending at the end of April, followed by a renewed down leg developing in the May-June time period.

If you observe the Fidelity Select Family Stochastic Oscillator, which is set to measure the six month cycle you will see that it remains positive with %K at 59 and %D at 51. This argues that there is more room to go on the upside before this cycle is likely to be completed later this spring.

However, the stock market doesn’t always follow this pattern, so we can’t be guaranteed the market will hold above the November lows given worsening conditions.

MAJOR TESTING

The market is now testing key lows and to be honest it is a toss up whether the market can hold here.

Over the last couple of days the Dow Jones Financial Index has now taken out the November lows (with the Dow Jones Industrials hovering just above its November lows).

Once again the critical financial sector can’t set up a bottom, given the severity of this financial meltdown. I don’t know how far the market can go up if the financial sector keeps crashing.

This is the sector that needs to lead the market out of this hole and it just failed to do so, despite passage of the largest stimulus bill ever.

The Dow Jones Industrial (Dow 30), holding the likes of Citigroup (C), Bank of America (BAC) and General Motors (GM) is just a hundred points above its November lows. A closing breach below 7,449 could induce more serious selling.

It also isn’t a good sign that the Dow Jones Transportation index has also breached its November lows. The recession is taking a big toll on the demand for transportation.

The two key indexes that we need to watch closely now are the S&P 500 and the Wilshire 5000 indexes, both being broader market indexes. What we want to watch is the S&P 500 November lows at 741 and the Wilshire 5000 at 7,340. Today the S&P 500 closed at 788 and the Wilshire 5000 at 7,988.

Inter-market analysis doesn’t bode well that these indexes will hold. As energy and the financial sectors are huge components of the S&P 500, a plunge in crude oil prices will certainly make it difficult for energy stocks to hold above the November lows.

As I have pointed out the weekly stochastics for crude oil are at %K 95 and %D at 93. Oil prices looks primed to sell off here and have been steadily losing ground.

Yesterday I showed you a chart of the US government long bond whose weekly stochastics are at %K 7 and %D 21 and setting up to turn higher. I think if the stock market fails to hold here, it would send investors looking for safety in government bonds again and that seems to be what the charts are telling us.

The S&P Europe Index just established new lows this week and looks vulnerable. A market meltdown is occurring in Central and Eastern Europe on the same scale as the Asian Crisis of 1997. Many of these countries are facing double digit declines in their GDP.

I am also concerned that the weekly stochastics for the Nasdaq 100 is now negative at %K 92 and %D at 93, suggesting there is plenty of downside potential if the bulls are unable to hold the line here.

Notice in the following chart that the advance/decline line for the OTC is fast approaching its 2008 lows.

This certainly argues for caution as the stock market tests not only the November lows but perhaps the 2002 lows as well.

I hate to pile it on, but note that the McClellan Summation Index for both the NYSE and the OTC look to be in a topping pattern---not exactly inspiring.

As you can see from this chart the McClellan Summation Index is now beginning to roll over to the downside and looks poised to fall.

Another issue I see is that the McClellan Summation Index for the OTC continues to trend below the zero line which makes it difficult for the bulls to mount any kind of lasting offense.

Lastly, I don’t think we can ignore the fundamentals.

According to Standard and Poor’s, the quarterly, year-over-year earnings are now projected to be at a negative 62%. These are horrendous losses.

" This is the worst; after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst at Standard & Poor's.

A sixth quarter of negative growth ties the record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952.

Next quarter, we're expecting a new record of seven quarters of negative growth.

Has the stock market fully discounted this? We are about to find out.

My advice for investors is to stay on the sidelines, protecting capital as the market proves whether the lows can hold or not.

Wednesday market update

When Ronald Reagan ran for President, there was 9% savings rate.

The bull market started in 1982. That means, that when the savings rate is again 9%, wait two years, and then a new bull market may be beginning.

The S&P 500 price to book ratio is not yet 1.0 like it was in 1980. So therefore, it appears that as the price to book goes down, savings go up, and then when everyone gives up, it's time to buy.

When you're at a cocktail party, if people can afford it in a few years and you mention stocks, people will look at you with contempt. Then it will be time to buy. That is, if the buyers have any money. But they will, since savings will continue to go up.

Selling was severe today. New lows for the NYSE shot up to 331 and 224 for the OTC, a sign the bulls are losing this battle.

Unable to hold the trend either within the wedge formation or breakout above the wedge, a break down has occurred, forcing the market to test the November lows where the next major support level rest.

I think until the government can put forth a clear strategy for dealing with the housing/banking crisis, it is clear investors are stepping back from the plate.

The sad fact is the economy is beginning to paint the picture of the risks of a deflationary spiral developing and since most investors have never experienced deflation it is not clearly understood.

A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. Since reductions in general price levels is called deflation, a deflationary spiral is when reductions in prices lead to a vicious circle, where a problem exacerbates its own cause.

The Great Depression was regarded as a deflationary spiral.

There are three self-reinforcing adverse cycles that are worsening- we should all understand them.

SOARING UNEMPLOYMENT CAN CREATE MORE JOB LOSSES

Some 3.6 million jobs have been lost since the downturn began over a year ago. The new stimulus package promises some 3 million jobs out of this bill, but the stock market is coming to realize that millions of jobs are likely to be lost in the coming quarters if the economy is still contracting.

With job losses (or underemployment) comes the evitable - a cut in consumer spending.

As this worsens businesses reduce their payrolls, sales keep falling fast and firms are forced to cut prices to sell their goods.

Any business with debt is finding it increasingly difficult to service the debt, especially if you have to keep cutting prices to move goods. Consequently, companies produce less and what follows are more job losses in a vicious circle.

GLOBAL CREDIT CRISIS DEEPENS

As loan defaults skyrocket financial institutions have no choice but to rein in lending and in the age of globalization, where loans are parceled out around the globe, the credit crisis is spreading globally.

For example, Japan’s economy is in the worst shape in 35 years as Japan’s leaders are powerless to prevent this economic meltdown. Projections are that Japan’s GDP will slip at an annualize rate of 9.6% from January through March. Anything close to 10% contraction is thought to be a depression.

This was a big factor in depressing US equities today as more and more investors realize just how serious this decline is affecting our trading partners.

The sad fact is this will only force businesses to cut back even further on spending, which in turn creates more credit problems.

As loan losses grow, banks are not able to stop their liabilities from exceeding their assets and they grow insolvent. Perhaps you’ve heard that some banks have become zombies, with their shingles out for business but unable to function, unable to loan. Citigroup and Bank of America are two prime examples.

I think the reason why the government has been reluctant to reveal details about their plan to deal with the banking crisis is they are trying to see how much private investments they can raise to address these issues before they reveal how much the government is going to have to pony up.

Naturally, private sources of capital are reluctant to lend given the sheer size of this problem, so we still don’t know how this card is going to play out or how much time it will take to break this cycle.

Estimates of capital still needed even with this stimulus bill, range from at least $600 billion to two trillion dollars to just get banks solvent again, much less lend again. Unless these losses are stunted or unless more capital is quickly found, the tightening credit spigot freezes ever more solid.

FORECLOSURES ADD TO THE SPIRAL

This is the heart of the problem and the government has not really addressed this issue to the satisfaction of the stock market.

It is estimated that 13.8 million are underwater on their homes. These people are locked in unable to refinance their homes. As prices continue to fall, their debt to equity ratios make people more vulnerable to foreclosures.

As people lose their jobs or become underemployed more homes become subject to defaults. It is estimated that some 21 million people are underemployed and this number keeps skyrocketing.

Consequently, more homes are being forced upon the market, with banks being forced to unload a steady supply of foreclosed homes, driving prices ever lower which is at the heart of this severe deflationary downward spiral.

NO GOOD SOLUTIONS

I think the stock market is telling us that it remains skeptical that such a severe downward spiral can be stopped any time soon, especially with a plan that is more designed for helping people cope with the recession/depression than a plan designed to fix what is truly ailing the economy.

In a sense, the government is telling us it has to help people deal with a potential depression as its first priority and hope over time that it can stop the bloodletting.

This isn’t what the stock market wants to hear as it is realizing the government can only do so much. It doesn’t have a solution that’s going to turn the economy around anytime soon.

It is going to take perhaps several stimulus packages in the next few years before we start to see growth again. This doesn’t give the bulls much hope here.

INVESTING

I want you to understand that my main mission is to help get you through this perfect financial storm with your capital intact. This isn’t an easy task given the uncertainty of this situation.

We have to make the right decisions here and use strict discipline to maneuver correctly through this massive bear market as the market is brutal to those who judge risk incorrectly.

Since the first of January the DOW has fallen 1,482 points or 16.4% and this with a government that has given the President the bill he asked for.

I want you to look at the weekly chart of the long term US government bond.

Notice that government bonds have formed a bottom at the weekly middle Bollinger Band line, with the weekly stochastics at %K 8 and %D 21 and are now starting to nest upward.

My point is that government bonds are poised to rally again. This chart suggests that a rebound in government bonds would mean a flight to safety out of equities into government bonds again.

This is another cautionary signal that the intra-markets have a set up for a possible break down through the November lows. Certainly we have to be on the watch for this as this is a risk that might prove very costly to ignore.

From a technical perspective, unable to break out above the wedge formation, the stock market has broken down through the wedge support. Consequently, the next support is at the November lows – and the DOW 30 is now only 103 points away from testing it. The Nasdaq and small caps have much further to fall.

We are not only testing the November lows but if you look at the long-term charts we are also beginning to test the lows of the last bear market in 2002 – at least for the DOW.

Testing and retesting is all about proving whether a major bottom has been established.

Looking at the government bond market on an intermediate term basis, poised to rally on a flight for safety and with crude oil poised to sell off on a deflationary scare and the deteriorating technicals for the stock market---investors need to be extremely careful here!

Thoughts on the market

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street.

Phil Collins - Land of Confusion

Listen to entire song here: http://www.jango.com/music/Genesis?l=0

Proponents of reinstating the draft claim it is needed to protect liberty from enemies abroad. But what about the enemies of liberty right here at home? I am convinced that there are more threats to American liberty within the 10 mile radius of my office on Capitol Hill than there are on the rest of the globe. - Ron Paul http://www.campaignforliberty.com/

U.S. Rep. Walter Jones, R-N.C., has introduced legislation that would impose fines or prison time on presidents or executive-branch officials who "knowingly and willfully" mislead Congress to gain authorization to use U.S. military forces.

Disarming the People, then oppressing them

State of Emergency Executive Power.



What About the Markets

Europe and Asia were down on Monday. Remember what I wrote a few months ago here. That the S&P 500 price to book ratio was 1.0 in 1982. Even today it's above 1.0. This is the best long term indicator there is.

Last week we made 15% shorting SSO, British pound, and Euro.

It ain't over yet. JP Morgan has a market cap of $92 Billion. That's a lot. It could be the next big one to go. Remember, the Feds knew about all of this. The SEC didn't care. These are all Business school grads who have no clue what they're doing. A few years out of school. so, the entire financial sector was wrecked by a bunch of 28 year olds and their bosses who were clueless. You didn't really think they were experts did you?

In 2002 JP Morgan bottomed at $12 bucks. It's at twice that right now. It's not a good short at this exact moment, but when the time comes, I think it will be.


Good Trading,

Tuesday Market update

We had a good week last week shorting. If you don't like to short, there's no reason to not have it be part of your strategies. All great traders short. For now, steel is the best sector I can tell that is shaping up. But even so, you never know what the market can take down with it. There may be a rebound in the market here, but the overall trend is negative. I'd like to see things shape up for a day or two before getting into new trades. Remember, two weeks ago, we didn't trade, and then we have three winning trades. Being in cash is never a bad thing. We trade when there is real opportunity, not just when things are "sort of ok". That's why we've consistently been making winning trades, and getting out of losing trades very quickly with tiny losses. So, let's wait out Monday.

Please view this trend video:
http://www.youtube.com/watch?v=9nJ7LM3iyNg

Main stream news networks like CNBC and Fox News and Bloomberg won't give you the real deal. Glenn Beck will, but other than that, you won't get too much from the main stream media.

There was little in the way of political or economic news to move the markets much Friday in either direction. While it is known that the Obama stimulus plan is likely to be voted and passed by both houses of congress before the week comes to a final conclusion, there were no takers betting on this.

In fact, quite the opposite happened when the Obama administration announced today that they had a plan to help stem foreclosures. Though the market rallied for a moment, it was all in vain as selling quickly took over and cast a cloud over the remainder of the day.

You see, a week or more ago the Obama administration announced that they had a bank recovery plan they were going to announce on Monday of this week that would settle this banking problem for once and all. The Vice President even got in on the action by pronouncing along with Goldman Sachs officials that it is going to take at least $2-4$ trillion to properly solve the banking crisis.

And what did Mr. Geithner do for President Obama in his first outing? First the administration postponed the announcement until Tuesday, saying that they were concentrating on the important stimulus plan. But when Geithner finally spoke on Tuesday and Wednesday it was as though we were watching a college freshmen give his first college paper.

The bottom line was that the administration was going to start with $500 billion and somehow convince private capital to help with relieving these troubled and toxic assets from the balance sheets of these poor banks. He actually said that the details hadn't been worked out, but the administration was going to try things that have never been tried before and they might make some mistakes along the way. (I had the uneasy feeling that they wanted the market to tank that day!)

WOW! Did the market ever show its displeasure to the unprofessional and juvenile presentation from our new Treasury Secretary? Tuesday's sell off was the largest market decline since Obama was officially elected President.

So what do you think is going to happen when Geithner or Obama steps to the microphone next week and delivers Act II of this play? Will there really be anything of substance regarding foreclosures that will bring the market around to applause rather than a chorus of "booo" selling?

It hasn't happened so far, and I don't hold out much hope that this is going to be any different. …But - maybe because the public now has extremely low expectations after the first Geithner performance it will "be different this time".

In a MarketWatch article by Kate Gibson today, we learned that nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss -- even excluding financials.

" This is the worst, after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's.

A sixth quarter of negative growth ties the prior record set when Harry Truman was president, and ran from the first quarter of 1951 to the second quarter of 1952.

" And next quarter we're expected a new record of seven quarters of negative growth," Silverblatt said.

One would think that with the drastic drop in stock prices over the last six months that at least the price/earnings ratios would look favorable and perhaps point to "cheap stocks" – some that could be picked up at bargain prices.

Not so!

Mark Hulbert countered by clearly illustrating that earnings are actually falling faster than share prices, if you can believe it.

Here's today's investment pop quiz: Where do price/earnings ratios stand today relative to several months ago, as well as to the beginning of this bear market in October 2007?

If you're like most investors, your answer to this pop quiz is that p/e ratios have come way down. After all, the stock market - which, needless to say, is the "p" in the p/e ratio -- has fallen by more than 40% over the last year and a half, and by more than 30% over the last four months.

But if that's how you answered, you just failed the test.

Based on earnings on an "as-reported" over the trailing 12-months, the p/e ratio for the S&P 500 index stood at around 20 at the stock market's top in October 2007. At the beginning of 2008's fourth quarter, furthermore, the ratio stood at 25.4.

Are you sitting down?

The comparable p/e ratio as of Thursday night, based on data from Standard & Poor's, is 29.1.

How can this be, you might ask?

The answer is simple: Earnings in this bear market have fallen even faster than has the market itself. And no matter how fast the "p" in the ratio is falling, the ratio has to climb if the "e" is falling even faster.

Indeed, today's p/e ratio is higher than 97.8% of the monthly readings dating back to 1871, according to data compiled by Yale University Finance Professor Robert Shiller. (MarketWatch, Feb 13, 2009)

The triangle of trading that has persisted over the last two months is looking very tired, with prices falling back to the rising support trend line numerous times and breaking through it recently. An advance to the top resistance trend line is looking more and more unlikely as prices now hover right on the lower support levels.

The public, traders and investors all need to be positively moved by the passing of the stimulus plan this weekend, the further development of a "real" bank recovery plan and the much awaited new foreclosure tourniquet to be announced early next week for prices to advance. Sounds like a pretty tall order.

Stranger things have happened, though.

The market remains mired in a sideways trading pattern that is frustrating and challenging the patience of the bulls, who wonder if they should keep pulling their wallets out or go sit on some pine for a while. The bears have gotten their breath back and if they are now substituted into the game we are going see the markets back at the November lows.

Remain defensive.