Tuesday Market update

The stock market just can’t find a reason to rally. That may change soon.

I want you to keep your eye on March 12th. The House Financial services subcommittee is planning a hearing on “mark-to-market” accounting rules.

Mark-to-market accounting requires assets to be valued at current market prices. Some banks say it forces them to mark down assets to artificially low prices in the current financial crisis, even when banks intend to hold the assets past the current reporting period.

It is argued that if the meeting results in the government relaxing these accounting rules, we could see a powerful surge in the financial sector, which would spark a massive short covering squeeze.

Stocks are incredibly extended to the downside and that makes it exceptionally dangerous to get caught on the wrong side of the market given how stretched conditions are.

Yet investors are watching incredible wealth destruction on a magnitude unimaginable on a global basis and it is forcing more and more people to seek cover.

It was reported today that the financial crisis has wiped a staggering $50 trillion off the value of financial assets in 2008. That was last year. We are well on our way to matching these figures this year.

Global GDP will decline this year for the first time since World War II, with growth at least 5ppts below potential. World trade is on track to register its largest decline in 80 years, with the sharpest losses in East Asia, which has lost over $9 trillion alone. Latin America has lost $2.1 trillion.

I would love to think the worst is behind us but if economist Nouriel Roubini is correct, this recession could last up to 36 months, or well into 2010, which means we still have a rough go ahead of us.

Roubini argues that the S&P 500 is heading towards the 500 to 600 point area, with the DOW likely to test 5,000 sometime this year and given what we are seeing in the destruction of earnings of the S&P 500 and the breach of the critical 2002 long term support levels this looks likely.

Warren Buffett told CNBC today the economy “has fallen off a cliff”. Let me show you just what he means.

If you look at the S&P 500 earnings you can see why the stock market is in panic mode.

DATE	S&P 500 EARNINGS
12/31/07	$15.52
03/31/08	$16.62
06/30/08	$17.02
09/30/08	$15.96

With 98% of the earnings accounted for, Standard and Poor’s is now estimating the 12/31/08 earnings will come in at -0.56%.

There has never been a negative earnings report for S&P 500 index – in the red!

What kind of a P/E ratio do you get when there is a negative earnings number?

With little or no expected upside for earnings on the horizon, and the SP 500 trading at current levels, prices are still overvalued. I know this is hard to believe but it is what it is.

It’s no wonder that the government is seeking to get rid of mark to market accounting. They know that earnings are on the decline. They have to do whatever they can to increase or support earnings.

If you look at reasonable valuation levels, there’s no doubt that the S&P 500 could easily be at the 500 to 600 level - very easily.

Monday Market Update

Most investors were relieved early today that the jobs report was essentially no more devastating than last months report. With the revisions to last month’s figures this report looked even slightly better – at least for a short time.

February nonfarm payrolls fell 651,000, in-line with expectations. Last month’s figures were revised to -655,000. The unemployment rate, however, was a negative surprise, climbing more than expected to 8.1%, the highest level seen in 25 years.

But the sighs of relief did not last nor did the buyers as the day wore on. Too many nervous investors who have held on too long are now capitulating on absolutely any kind of market bounce. And though last minute buying managed to pull the indexes back to the black, “selling on a bounce” remains the main story to end a very powerful week of decline.

The S&P 500 ended the week at -7.03%, the Dow at -6.17% and the small cap Russell 2000 index at a whopping –9.76%, suggesting that the broader market is now playing catch up to the frantic fear selling that has dominated the large cap indexes and shoved them to 1996 lows.

The third market session of this year established the highs for the year. Since that time the S&P 500 has fallen 26.9%, the Dow has fallen 26.5% and the small cap Russell 2000 index has fallen 31.8%. If 2009 is going to end in the black there is a lot of climbing ahead.

There is not a major equity index that has not broken below the 2002 closing lows. Prices for many indexes have dropped back to the 1996 or 1997 levels. The intraday lows are still holding up a little better, but only by a whisker.

It has been so bad since the first week in January that one could say that a technical new recession has been set purely during the Obama watch, which started less than two months ago.

March 6 (Bloomberg) -- President Barack Obama now has the distinction of presiding over his own bear market.

The Dow Jones Industrial Average has fallen 20 percent since Inauguration Day, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg.

…

More than $1.6 trillion has been erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse. The president is in danger of breaking a pattern in which the Dow rallied 9.8 percent on average in the 12 months after a Democrat captured the White House, according to data compiled by Bloomberg.

“ People thought there would be a brief Obama rally, and that hasn’t happened,” said Uri Landesman, who oversees about $2.5 billion at ING Groep NV’s asset management unit in New York. “It speaks to the carnage that’s in the economy and the lack of confidence in the measures that have been announced.”

A bear market is defined as a decline of 20 percent or more.

…

The Dow average has dropped 31 percent since Obama’s election. The 30-stock gauge trades at 8.04 times annual earnings, the cheapest since 1995 and down from 10.06 times on Inauguration Day.

…

“ It’s the Obama bear market,” said Dan Veru, who helps oversee $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. “We don’t know what the rules are in so many different areas the government is touching.”

(Bloomberg, March 6, 2009)

By nearly any measure the selling in February and March, following the January presidential inauguration, has clearly pushed the equity market into highly oversold territory - maybe even extreme oversold territory, exhibiting a panic level of indiscriminate selling. By normal technical measures of stochastics and relative strength and mean averages the recent selling is way “overdone”.

Let’s discuss the last statement from the Bloomberg quote: “We don’t know what the rules are in so many different areas the government is touching.”

The masses of America are not personally invested in the stock market. They are doing good to hold down a job and make their payments on housing, food and transportation. Many are without any health benefits at all.

So Obama’s insistence that our current economic misfortunes can be laid at the feet of those responsible for health, education, and energy probably rings true for these masses.

When the new administration comes out of the gates, following the inauguration, with a budget that addresses new social advances for health, education and energy plans for solar and wind these masses likely feel assured that some of their needs will finally be addressed – by the government, no less.

But for investors in the stock market there is a real disconnect here. Investors have felt the crushing blow of the 2008 financial collapse in their personal accounts. And while the social agenda proposed by the administration is laudable, investors also know that behind all that spending there is a tax of some sort, either on them personally or on the companies who get hit with things like the new carbon usage “cap and trade” fees.

Investors know that the increased spending plans and associated taxing schemes are likely going to prolong an already difficult and deep recession. They know that companies are going to have an even harder time being profitable under this budget of spending.

The investors I know are not cold, unfeeling humans. They simply would like to see firm, detailed financial recovery plans and greater attention given to the struggling financial arena first – clean up the financial mess before embracing a new and expensive social agenda.

The administration’s attention to the struggling financial system, as announced by Treasury Secretary Geithner, amounts to mostly a “stress test” of the banking system for a couple of months. That process supposedly will then give the administration enough information to know how to proceed.

Meanwhile, the financial sectors are reeling. This very course of action and lack of detail along with a prolonged bank “stress test” by the new administration has exacerbated this financial ulcer. Investors are developing a sickening “lack of confidence”, as detailed in the Bloomberg article.

I am still hoping for that Obama “honeymoon” rally. I just don’t know what it is going to take before it shows up, though.

Perhaps Geithner or Obama will come out with an early report on the “stress testing”, showing many banks stronger than initially feared. Or perhaps details of the bank recovery plan will be leaked, giving evidence that the new administration really does have its arms around the financial problem.

And perhaps the market will sense that the end has not arrived, that the financial system will right itself. Investors may also see these highly discounted prices as a bargain opportunity for buying. And those who are holding short positions may begin to shudder … and cover … … and then a long-awaited Obama rally will spring to life.

Don’t plan on this next week, though.

In fact, don’t plan on it at all. Wait and make the administration and the market prove it first. There will be plenty of time to get in on the action.

Friday market update

It was another ugly day on Wall Street. I won’t go into the details, other than to say investors are clearly panicking as you can see for yourself.

Fear is a powerful motivator and it is a driving force all by itself. What you must do is to make sure you don’t lose your head in all of this.

People are waking up to the realization they didn’t plan for this to happen. They have had no risk management safe guards in place and they don’t know what to do, other than to head for the hills.

This kind of frantic selling reaches extremes rather quickly. Today we again saw 932 new lows on the NYSE and it won’t take long before the market is washed out again as we saw in November.

I want to show you a couple of charts that I am keeping a close eye on.

This first chart is the monthly chart of the Nasdaq Composite.

Notice that the Nasdaq Composite as well as the Nasdaq 100 has not taken out the 2002 lows. The Russell 2000 is still above its 2002 lows and fast coming up upon it.

As bad as the selling was today the Nasdaq Composite is still above its November lows. The spread between the daily Middle Bollinger Band line and the 50-day moving averages is getting a bit too wide suggesting the risk of a short-term counter short-covering rally may be close at hand.

Notice, the McClellan Oscillator is also near the low part of its range, so given the panic we are seeing a lot of short sellers are going to start to get itchy fingers.

It wouldn’t surprise me at all to see the market rebound once the jobs report is out of the way as the market often discounts ahead of a bad report, then rebounds as shorts take their profits.

My point is we don’t want to chase the shorts here. Shorting the market may seem like the smart play right now but keeping our balance between risk and reward is crucial in such volatility.

I think shorting the market makes sense with a limited amount of funds, but not in the hole like this. Wait for the next short cycle high and then consider taking a position.

Keep your cool and remain steady. This is as difficult a market as you will ever see but we have a plan and when it makes sense to do something we will do it.

Jim Rogers once said: “One of the best rules anybody can learn about investing is do nothing, absolutely nothing, unless there is something to do. Most people always have to be playing--- they always have to be doing something.”

We all want to forward our money, but our emotions of fear and greed are our worst enemy, especially when you have no plan, no discipline and you feel like you just want to run away and never be an investor again.

Stay focused on the market and what it is telling us.

Patience neutralizes risk! Protecting our capital in such volatility is our number one priority. Making returns is our second priority. The first priority always trumps the second priority.

Marty Zweig used to preach: “A small loss, when realized, becomes an opportunity for profit elsewhere. It gives you the chance to turn a liability into an asset instead of just sitting there praying your old stock will come back.”

This is wise counsel, whether you have a small or a large loss.

“ You can think more objectively with cash in your stock account than you can if you are worrying about a stock that has lost money for you.” ---William O’Neil
I am very excited about the next bull market. It may not happen this year. It may not happen next year but when it does come it will all be worth it.

It wasn’t a fluke that we got out near the highs ahead of this bear market.

It won’t be a fluke when we catch the next bull market upswing either, if we listen to what the market is telling us.

Thursday Market update

After falling 12 out of the last 13 days and registering 937 new lows on the NYSE yesterday, overnight buyers gathered to help the DOW open up over 100 points on the news that Premier Wen Jiabao of China will announce a new stimulus plan tomorrow.

After such a strong opening, the stock market managed to pick up some momentum throughout the day as some investors covered short positions and began nibbling on commodity stocks.

Seasonality factors are upon us in that the worst of winter is largely behind us. From this point forward the weather will start to get warmer and that means in most years, the demand for energy picks up. Almost every year this cycle seems to repeat itself, as investors start buying energy stocks at the peak of winter and selling begins at the peak of summer.

With so many stimulus programs coming into play and now China and Japan likely to widen efforts to bolster growth, crude oil prices jumped $3.73 a barrel to close at $45.38.

I have been advising investors that we need to watch crude oil prices closely as it will likely tell us where the next major move in the overall stock market is likely to be.

To be clear, I am getting mixed signals as crude oil prices are now at a very key juncture whose technical picture says intermediate-term cycles are extremely overbought, but whose long-term cycles are deeply oversold.

Let me show you what I am talking about.

From this chart you can see that oil prices have seen an intermediate-term advance, expressed in largely a sideways trading range between $33 on the low of the range and $48 on the high of the range.

Crude is now at a very key resistance level at the weekly middle Bollinger Band line, which is at $46.58. What’s more, the weekly stochastics are at %K 99 and %D 97. The fact that crude is this overbought is an indication that some investors are speculating on an improvement in energy consumption in the second half.

However, if we are to believe the stochastics and downside resistance levels, crude oil prices are apt to fall on an intermediate-term basis and if that develops, add the energy stocks to heap of ruinous sectors and even more new lows on the major indexes.

Yet, at the same time the long-term cycles show oil prices to be oversold. Rather than looking at weekly data, let’s focus on the monthly ranges.

From this perspective, it very much looks like a long-term bottom is trying to emerge here, with %K at 8 and %D at 15. Notice the nesting or base pattern setting up here on the monthly ranges.

Add in seasonality factors and another OPEC cut and oil prices could be ready to stage a spring/summer rally.

Consequently, crude oil traders have to make a decision. Will demand for energy be there to support an advance or will further deterioration in the global economy destroy energy demand further?

I think if investors feel oil prices can be supported in this environment enough to be accumulated it may give us important clues as to any potential spring rally in the stock market, because either the stimulus is working enough to turn energy higher or it isn’t working in which case more downside is coming in both energy and the stock market.

This Friday’s jobs report is projected to be very bad again with estimates now showing job losses of over 600K. What I am interested to see is how crude oil prices react to this. Will seasonality factors trump deteriorating fundamentals?

How the stock market reacts to Friday’s report is also crucial.

I want you to look at this chart of the Nasdaq Composite Index.

The OTC has been the strongest of the indexes. Notice that while the broad market has taken out the November lows the Nasdaq Composite is still fighting to stay above that critical support measure.

Yet, notice the indicators. The MACD indicator (the study at the top of the chart) failed to get above zero and is now curling downward. Notice the weekly stochastics which are now at %K 48 and %D 70. This suggest that the weekly charts could still see more downside pressure, with the weekly ranges breaking to lower lows and lower highs from week to week until it gets oversold again.

Also, the RSI is falling. This suggests we are more apt to see the November lows taken out as all other indexes have already done.

Probabilities are just not with the bulls with so many of the indexes having failed at holding key support.

Remain defensive.

Wednesday market update

The stock market continues to be pressured by bad economic reports that never seem to end, poor technical conditions and a mountain of uncertainty as to whether the Fed and the government are taking the right steps to turn the economy around.

There is just no justification to be invested on the long side of the market. I don’t care how cheap stocks may seem. Yesterday’s breach of important supports means we really don’t have a safety net underneath us. Even still, the stock market could rally in a short covering squeeze given oversold conditions. New lows are pretty high at 931 for the NYSE and 567 for the OTC.

Do you remember a month or two ago when everyone was talking up gold as a safe haven and touting a hyperinflationary explosion that will drive gold to $2000 an ounce in 2009?

In the last seven trading days gold has reversed course from a high of $1,005 to a low today of $906. This safe haven has just fallen 10% in seven days. Intermediate-term cycles are now negative, with %K at 61 and %D at 80.

Fidelity Select Gold (FSAGX) is now trading below both its 50 and 200-day moving averages. FSAGX reached a high of $47.50 in early 2008 and failed to get anywhere near these highs on the latest gold rally.

FSAGX almost touched $34 a share and is now dropping fast. In technical terms, this is a bearish pattern because it has established a much lower high than last years high.

The fact that gold bullion also failed to reach $1017, although very close at $1005, looks more like a double top formation. The fact that gold stocks are significantly below last year highs is confirmation that this is no safe haven. Gold finished down $26.1 an ounce to close at $912.9 an ounce.

I know a lot of investors are getting caught up in the idea of a hyperinflationary scenario, but I think the risk the economy is facing is deflation on a global basis and gold might not play out as you envision it.

What may be a surprise to you is how well the U.S. dollar has been doing, which has been in a steady uptrend and has recently taken out its November highs on an intermediate-term basis. The dollar is now in a bull market and it is pretty clear to understand why, when on a global basis in Asia and Europe as well as in the emerging markets are falling faster than the U.S. markets.

Strange as this may seem, the dollar is being viewed as the safe haven, as foreign currencies are falling much faster. Think globally as if you were a foreign investor. Whatever we might believe about the dollar, the technical realities we see is our currency is now trading well “above” its 50 and 200-day moving averages, with its 50-day moving average trading “above” its 200-day M.A. This means we have a bull market in the U.S. dollar.

Now let’s talk about the stock market. After yesterday’s breach of key support levels, we removed the technical argument that a major bottom had developed last November. What yesterday showed us is the bear market is alive and well.

This is not a surprise as our technical indicators have been struggling for months now, but it did confirm on an intermediate-term basis, the pattern of lower lows and lower highs to still be very much in place. What this tells us is trying to cherry pick cheap stocks in downtrends can kill you.

Last year a subscriber called me asking for some advice. She had inherited a large amount of shares in an oil and gas company that was priced at approximately $15 a share. This was her largest asset and her entire fortune was resting on this company. The stock was considered at the time significantly undervalued and its growth prospects excellent, given the steady rise in oil prices in the first half of last year.

I advised this lady to sell her stock holding as I felt a recession was coming and that crude oil and natural gas prices would fall as the economy deteriorated. The lady sold her shares. I called this lady back to see how she was doing and she told me she repurchased her shares back but at a lower price. I told her this was a mistake. I don’t know what she did with her shares.

However, in the last eight months the stock has fallen from $15 a share to today’s price at 47 cents a share. When the stock was $15 a share it was a value based on its forward looking earnings forecast. At $10 it was an even better value. It was a screaming value at $1 a share. But if you had bought the stock at $1, you would now be down 53 percent.

The moral of this story is cheap stocks don’t make it a buy if it is still in a downtrend. If you buy a stock, have a plan in place to make sure a little loss doesn’t become a big one. This is the first rule of investing!

Remain defensive.

Tuesday Market update

I think the worst news of the day was the inability of the broad market indexes to hold above their November lows, as the DJIA, S&P 500, NYSE, Wilshire 5000 and the Russell 2000 have all now broken long-term support, removing any claim the bulls might have that the market is making a long-term bottom.

The inability of the S&P 500 to hold above 741 and the Wilshire 5000 to hold above 7340, changes the equation. It wasn’t close either, as we clearly closed well below support today with the S&P 500 closing at 700 and the Wilshire 5000 at 7113.

Of course, this doesn’t mean the stock market can’t rally but the technical damage of today has removed any notions of the most basic concept of a technical foundation, a higher low.

If you are holding on, hoping for a recovery, the worst thing we can see is a lower low on the broad market indexes, which argues for a continuous of the downtrend as the market probes for a new market bottom, wherever that might be.

A staggering $61.7 billion in quarterly losses at insurer American International Group Inc. (AIG) touched off fresh fears about the health of the nation's financial system. This is the largest loss in corporate history, crushing any hopes that things might be stabilizing.

Even Warren Buffet now admits that he made a “major mistake” in recommending buying stocks in the last quarter of 2008.

Buffet said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

On Saturday, Warren Buffett’s holding company, Berkshire Hathaway, finally released its numbers, which showed that it had the largest decline in book value in its history. Ouch $50 billion!

Investors all over the world are coming to the realization that risk needs to be managed. The notion of long-term investing is becoming more and more of a risk, especially for the retired, where digging such a big hole as we have seen this last year can take two decades to break even. As an investor, you must protect portfolio and cut little losers before they become huge losses.

Adding to downside pressure was a $4.61 cent drop in crude oil prices, which hammered the energy sector today on increasing doubts that energy demand will recover, given a battered economy. Crude oil failed to penetrate above its weekly middle Bollinger Band line and looks increasingly vulnerable to the next intermediate-term down leg.

We are now left with the question of how low can the stock market go? With the S&P 500 closing at 700, the S&P 500 P/E ratio is now at 12 times earnings. If P/E ratios follow historical troughs we could be looking at P/E ratios of 5X to 8X earnings. That would put the S&P 500 somewhere at around 300 to 500. That’s a lot of downside risk! Check out this article.

We can no longer rule out a continuing collapse before a recovery advance is seen. This is now a very real possibility, something inconceivable a year ago.

Monday Market Update

Market Commentary:

Early today I felt that I had underestimated the significance of a worse-than-expected GDP number. If you remember, yesterday I said that I suspected that today’s revised GDP for Q4 2008 was probably a discounted statistic that should not spur further selling.

I was wrong – and I was right.

Apparently the economy was not just stalled for most of Q4 but was actually in reverse most of the time. According to the Commerce Department, the GDP fell at a 6.2% seasonally adjusted annualized pace in the final three months of 2008, revised from the initial estimate of a 3.8% - making it the worst decline since a 6.4% decrease in the first quarter of 1982.

Stocks sold off hard on the open but quickly gained a footing and rallied into positive territory by mid day. Some late day nervous selling took stocks back down to close moderately in the red but most of them well above the early lows of the day.

The DOW was down 1.6%, the S&P 500 was down 2.3% (near its lows), the Russell 2000 was down 1%, and the Wilshire 5000 was down 1.9% for the day.

The bad news today was not just that the revised GDP reflected a much weaker economy than anyone had suspected last year, it was that another index broke through the November lows.

I was watching television just before work as the S&P 500 initially sold down to its low of the day, 734.52. If you remember, the low for November last year was 741.02.

I watched the monitor closely as the S&P 500 broke down through this low and then immediately shot up, never to hit it again throughout the day – until selling in the last 15 minutes of trading took it back near the lows of the day.

Earlier in the day it was as though buyers were lined up for purchasing once the November lows were hit. And then possibly out of nervousness, the S&P traders got out at the end - ahead of the weekend.

Perhaps it was the secret “Plunge Protection Team” doing their part to lend stability to the markets to keep them from plunging below the November lows. Or perhaps it was just another technical test of the lows to see it support will really hold.

That is why I want to discuss the Dow Jones Wilshire 5000 index today. Let’s see if the broadest of market monitors has also broken the lows of last year.

The Wilshire 5000 index is the most comprehensive of all market indexes, in essence virtually all of the publicly traded stocks in the United States.

The low for the Wilshire 5000 last November was 7340. Today the Wilshire 5000 low was 7447, or about +1.5% above the November low. With the Wilshire 5000 closing today at 7474, it ends the month at +1.8% above the November lows.

While there is little margin to brag about, it is safe to say that the majority of the stock market has not broken below the November lows of last year, let alone the 2002 lows or going back 12 years to 1997 as much of the media is pronouncing.

The 2002 lows for the Wilshire 5000 are at 7273 – today’s close puts it +2.8% above the 2002 low.

And if you take the big cap stocks out of the picture by looking at the Wilshire 4500 index (basically the Wilshire 5000 without the S&P 500 stocks) you get an even more interesting perspective.

The 2008 November low for the Wilshire 4500 is 292. Today’s closing price for the Wilshire 4500 was 321, or +9.9% above the November low. The bottom line is that if you take out all the large cap stocks and the sick financials that are in them, the rest of the market can still fall almost 10% before breaking below the November lows.

Unfortunately, I do not have data for the Wilshire 4500 back to 2002, but my napkin calculations suggest that the broader market without the S&P 500 stocks could fall 12-15% before actually breaking below the 2002 lows.

The broken lows for the DOW and now the S&P 500 are mostly because of the financial beating that has been applied to the financial stocks. If the financial stocks have essentially been beaten to death, then perhaps a look at the broader market measure, i.e., the Wilshire 5000 is a better indicator of the test for support.

Don’t get me wrong here. I am not a crazy bull. If you have been following me you know I have been about as bearish as one can get. That is why my clients have either protected their portfolios or have actually made money in this bear market.

But to simply declare that the 2008 lows have been broken and the 2002 lows have been broken is much like shouting “fire, fire” in an attempt to get the crowds out of the building. And all the time maybe there really is only a hot plate of bank stocks in somebody’s microwave that feels like they are on fire.

Let’s not exit the building until we are sure of the facts. A mass exodus from the stock market at this point would be very foreboding, suggesting that even the first leg down of this bear market may not have been reached yet, that the reprieve in December and early January was not a bear market correction but just a pause in the first leg down.

It could also mean that this bear market, which is already tagged as one of the worst ever, could easily become so.

So from a completely technical basis, once again, most of the stock market has not breached the 2008 lows or the 2002 lows – though the DOW and the S&P 500 have recently done so. (Check out the charts at the end of this update.)

But the margin left to work with is more than slim – so thin it is almost transparent.

For obvious reasons, I am hoping the markets hold here. The alternative is too depressing. And yet I remain a realist, too.

So remain defensive.