Just when the suckers are buying

Market Commentary:

Quite amazing isn’t it? Just when the public was buying the idea of a recovery and sentiment is now showing more bulls than bears, slam goes down the trap door with huge volume showing up on the sell side.

Notice that the market gapped down sharply on the opening, giving no notice, as programmed selling hit the market hard before the market opened and that ladies and gentlemen is how it is done, get the suckers to buy and catch them before they have a chance to react.

What changed from Friday to Monday that wasn’t already known on Friday?

The market is now shifting its focus past earnings and now toward the bank stress test and the program traders wanted to be ahead of any rumors that might be starting to fly.

Economist Nouriel Roubini writes: “The spin machine about the banks’ stress test is already in full motion; some banking regulators or other US government officials have already leaked to the New York Times the spin that all 19 banks who are subject to the stress test will pass it, i.e. none of them will fail it.

But if you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in U.S. government baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.”

The Turner Radio Network argued they have obtained the stress test results. Here’s their spin:

“1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America’s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank’s was 278 percent; JPMorgan Chase’s, 382 percent; and HSBC America’s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC’s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.”

What is the truth? We’ll probably never know the real truth but the markets will sort this out.

For example, Bank of America reported today that it made $4.2 billion in profits, so why did Bank of America stock fall over 28 percent from its highs on Friday?

One day! That’s all it takes to lose nearly a third of its value! So much for stop loss limits on this stock as the stock gapped sharply lower before the opening, closing today at $8.02 a share.

Let’s examine this stress test a bit closer.

RGE Monitor noted the government appears to be aiming for banks to have a “Tier 1” (common stock, preferred stock and hybrid debt-equity instruments) capital ratio of 6% and a total common equity ratio of 3%.

The Wall Street Journal wrote that as part of the stress tests, the Federal Reserve is expected to dwell on the “tangible common equity” (TCE) measurement as a gauge of bank health.

By “Tier 1” measurements, most big banks, including Citigroup, appear healthy. Citigroup’s Tier 1 ratio is 11.8%, well above the level needed to be classified as well capitalized.

By contrast, most banks “tangible common equity” ratios indicate severe weakness. Citigroup’s TCE ratio stood at about 1.5% of assets at December 31st, well below the 3% level that investors regard as safe.

“ If Citigroup and Bank of America are forced to dole out common stock to get to the 3 percent level, the government could end up owning 59 percent of Citigroup and 19 percent of Bank of America. That is a whole lot more than the maximum 40 percent ownership stake of Citi that has been talked about in Washington.” RGE Monitor.

Let’s look at today’s market action in terms of the technicals as they have been warning us that we could be getting close to an intermediate-term high.

As we noted over the last week or two, volume has been falling, until today! Price was narrowing within an ever tightening wedge pattern, which was broken to the downside today.

Intermediate-term cycles were overbought.

It appears that the next intermediate-term correction is about to begin soon or may have begun today. It wouldn’t surprise me to see the bulls try and muster upside support at the 50-day ema, but once the intermediate-term cycle rolls over, investors will start selling the rallies.

Last week the stock market was bumping against its back test resistance. But the left translation pattern remains intact and given the force of the selling today suggests investors are growing nervous of pushing their luck ahead of May.

It wasn’t just the stock market that fell. Crude oil prices fell $4.45 a share to close at $45.86 on a surge in the US dollar.

The markets do not trust the government to be straight with them. We saw this in the currency markets, where a flight toward the dollar reveals that foreign investors would rather own the dollar than some foreign currencies---so the dollar rallied today.

This undercut crude oil. Oil supplies are surging given the severity of this recession. Traders awaited the Energy Information Administration's weekly inventory report on Wednesday.

Last week's data showed crude oil inventories increased by 5.6 million barrels for the week ended April 10. Experts were looking for a build of 2.5 million barrels. Total motor gasoline inventories decreased by 900,000 barrels last week.

Also, notice that gold rallied today, up $19.6 an ounce. If the stock market rolls over here, gold is likely to advance as a default investment. This is where it gets very tricky, because the truth is very uncertain.

If we are just in the eye of the financial storm, the March lows will be tested again soon and gold is likely to be testing $1,000 again.

Keep your focus on protecting capital as the market sorts out the truth. This market is still controlled by the bears and that is the truth as long as it continues to set lower lows and lower highs from one intermediate-term cycle to the next!