I was out of the office all day yesterday (more on this later) so I missed all of the fireworks. This is the 40,000 foot view, once removed, from someone not staring at the screen all day.
Following Tuesday’s 250 point swoon, by mid-day Wednesday, markets had tagged on another 1% drop. That 2-day 3% or so fall set up conditions of a counter-move. (See Marcello’s charts at right).
Indeed, yesterday morning, the oft bearish Doug Kass was a buyer of money center banks (JPM, BAC, C), Brokers (MER) and Google — so much for his perma-bear label.
With the markets ripe for an oversold bounce, there were several likely sources of the synchronized move up:
• Whatever selling pressure from overseas abated when European markets closed
• The round number 12,000 (psychologically important to some) was briefly penetrated, bringing out buyers;
• CME sources had Morgan as a huge buyer of SPMs on the rally.
• Stocks rallied sharply in what eerily resembled the action of a currency intervention (via Bill King).
• Anticipation of a pre-option expiration rally on Thursday had some people jumping the gun a day early; King describes this as "competition for trading profits forces traders to front-run other
traders’ proclivities. Ergo, traders tend to jump the gun once a
pattern becomes evident."
Why jumping the gun? Consider the corrections over the past few years (closing basis peak to trough):
2004 – 9.2%
2005 – 8.5%
2006 – 8.0%
2007 at 12:55pm 3/14, about 7%.
Traders keep doing what has been working until it stops. That pattern of anticipating what the rest of the trading community is about to do and then jumping in front appears to be alive and well.
The key question facing investors (as opposed to traders) is what happens as makets head back towards prior "missed" selling opportunities — will resistance bring out the sellers, or will momentum propel us to new highs?
Think about it this way: If you missed the opportunity to sell, to hedge or to get short prior to the initial 2/27 plunge, what will you be doing as we approach those levels this time?
“Think about it this way: If you missed the opportunity to sell, to hedge or to get short prior to the initial 2/27 plunge, what will you be doing as we approach those levels this time?”
Sitting with a bowl of popcorn watching CNBC in anticipation. Gosh, I can hardly wait.
As you said, people will do what has worked in the past.
My opinion is that last years May-June drop will be a useful model for this year. This is not to say it will culminate with a massive run-up. Unless bad news scares investors away, buyers will return for not other reason than ‘that is what buyers do’.
Basically, the market will gently recover and return to the early year highs. And possibly pass them a little on occasion.
My personal speculation is that this will be a mirror image to 2004. At that time, the market was highly volatile below the mean rate of growth for the market. I think this year the market will show high volatility above the mean rate of growth.
The market has nowhere to go but up because stocks are not a zero sum game. If they were, the average of all markets would be flat since, in a zero sum game, the winners cancel out the losers. Since essentially all markets are going up over time, this means that new money is continually entering the game.
Whether this money is from trade deficits, carry trade printing presses, or the savings of new investors is unknown. However, as long as the flows in remain in force, the markets will continue to rise. Scares will just create opportunity.
“as long as the flows in remain in force, the markets will continue to rise”
And that’s the trick. Money flows have to continue at a faster pace to keep this party going. If the flows stop, watch out. I think I hear the music coming to an end but either way, is the risk reward really that attractive to jump in now? Given how far markets have run, the direction of the economy, profit margins/buybacks/LBOs at all-time highs…does it really seem that stocks offer value in here? Just because someone offers you a piece of crap product for 20% off doesn’t mean it’s a worth buying. Yes, there are still individual stocks worth buying/owning but I’d rather buy a 5% CD than an index fund right now.
We covered all shorts except GOOG
“The market has nowhere to go but up because stocks are not a zero sum game. If they were, the average of all markets would be flat since, in a zero sum game, the winners cancel out the losers. Since essentially all markets are going up over time, this means that new money is continually entering the game.”
This is pretty much the same rationalization used on the real estate blogs to explain why real estate only ever goes up and never down. I think the ancients called the attitude on display ‘hubris’. People like this are necessary so market professionals have someone to fleece when the time comes. (Perhaps the writer is a stockbroker in training? This does have that mantra-like sound…) Odd to see this on display here at Barry’s place.
Forgive the snark, Mr. R. That post just boggled my mind for a bit.
Barry, In defence of Doug Kass, yesterday before market close he shorted the spys. His broker bank trade was more or less intraday, I believe. He also closed out his goog trade early.
Yesterday, the Fed pumped in 10.75 billion in overnight repos verses 0.00 expirations.
See the below link to a post from David Fry of Seeking Alpha in which he reports that almost of $28 billion was “lent” to primary dealers from both the Fed and the Treasury yesterday.
http://biz.yahoo.com/seekingalpha/070315/29620_id.html?.v=1
It must be nice to be a primary dealer on a day when the markets are threatening to breach critical support levels.
Mike F
Seriously, how long are the Fed and Treasury expecting to prop up this market? Clear through to the next election?
Art Cashin (on CNBC) said he didn’t think the reversal yesterday was anything to get excited about. He didn’t see the volume, and the mad rush to keep from missing the train that he usually sees on real intraday reversals…for what it’s worth.
1.3 percent PPI? … I think the party is over.
JPM has lots of SPM exposure? How about BAC?
Was Yesterday a Key Reversal Day?
For a trade, maybe. Otherwise, I wouldn’t think so.
Why? The sub-prime mess hasn’t even scratched the surface of the economy. If so many sub-prime lenders are in such a mess, that would mean the sub-prime holders (aka consumers) are in an equal mess. And we haven’t even seen them pull in their reigns as of yet.
When they do, we will know it.
Wally-
Well, 1.3% PPI and dead NY manufacturing seems to have the markets on an upswing. All news is good news once again. At least for now.
I used to be a floor trader at the Coffee, Sugar, Cocoa exchange (now NYBOT). I cleared through MBF, whose founder Mark Fisher, gave trading lessons to his clearing customers. Fisher started as a clerk on the mercantile exchange, and traded his way into owning his own clearing brokerage. I believe I learned a lot of value from him. Here is what he had to say about Key Reversals. By his definition, a Key Reversal up was a bar where the OPEN was below the previous bar’s low, and the CLOSE was above previous bar’s high. By that definition, yesterday wasn’t a key reversal. It wasn’t even an outside day. Perhaps more useful is his thoughts on the value of Key Reversals. Fisher said that Key reversals on a daily chart weren’t very predictive (he did the backtesting to prove this out). Weekly key reversals (5 day chart) are considered valuable, more so if they occur if the open is a 52 week high or low, and especially so if the open is an all time high or low. An all time high weekly key reversal marked the top of the equity indexes in 2000.
Was Yesterday a Key Reversal Day?
Well yeah the PPT borrowed $27.75 billion from the Fed yesterday to pay for it. And why would the markets be up today? Well at least inflation isn’t an issue as we go into a recession, oh wait…..
I have a short question, about the post, to anyone who could help me out.
I am familiar with the CME, but what is SPM an abbreviation for?
Nikki,
Right you are… I guess I got ‘up’ and ‘down’ all confused in my mind again. Clearly, I’m stupid when measured by the market. If only I had understood that stupidity years ago, I’d be rich today.
:-)
SPM = Spam = Sub-Prime Mortgage. Eat it for lunch? Not I!
NFI – there’s an acromym. what does that stand for? Novaf#*$%? Well I did own it in the day. and it did pay a nice dividend and gave great price appreciation. Until it didn’t.
But today. NFI is up almost 30% Is this a CLASSIC SHORT SQUEEZE?
when I sent the figure to BR, I was looking for an explanation of two things : the big move at ~12:55pm across the indices, AND the strong correlation of the smaller bumps and wiggles during the day. BR answered the former more-than-ably (as usual, thanks !).
But how about the strong correlation in the smaller feature ?(early morning peak-dip-bulge, the peak-dip just after 2, then the double-peak followed by rise to close at the end) Can traders really anticipate each others moves so well than they act in concert like that ? or is there some other reason ? (computer trading across indices, PPT intervention ?)
love this blog. thanks for the info
One reason for correlation is that many stocks are in multiple indices. I think all the DOW 30 are in SPX, and probably most of NDX is also in SPX. Any broad market-cap weighted index that doesn’t exclude large caps will have a substantial overlap with SPX, leading to at least a 20% correlation just from having the same stocks with the same weights (and often much higher). The small cap and sector indices probably move with them from people watching the large caps for clues about where the market is going.
dark1p said:
This is pretty much the same rationalization used on the real estate blogs to explain why real estate only ever goes up and never down. I think the ancients called the attitude on display ‘hubris’. People like this are necessary so market professionals have someone to fleece when the time comes.
Reply:
Sorry but YOU have it wrong. And the evidence is right in front of you if you care to spend one or two minutes looking at it.
Look at the chart for every major index for the past three years. Go to Yahoo. They have everything.
You will see that ALL indexes trend upwards at a rather constant slope. Yes there are variations up and down, but the overall trend on each is UP.
The definition of a zero sum game is that the winners offset the losers and the net gain and net loss are both zero. If the stock market was a zero sum game, long term chart trends would be both up and down. Instead you see only UP as the long term trend.
The ONLY WAY ALL CHARTS CAN GO UP is if new money is entering the game. The interesting question is where the money is coming from and will it continue. Options include carry trade printing presses, dollars from the current account deficit flowing back into the markets (in effect too much money chasing too few stocks), or new market entrants buying stocks.
Thus, this is evidence of increases in the money supply, as it relates to stock markets world wide.
Get yourself an education. In actuality, people such as you are the easiest to fleece because you would rather assume knowledge flows into you by exerting attitude, and not by thinking, reading, or other forms of actual education.
My guess is that you are a sucker on a regular basis, and you probably thank who takes advantage of you because they stopped to offer flattery along the way.
To continue, I suspect that too much money is chasing too few stock opportunities. The US trade deficit is a major culprit. The wonderful Japanese are also culpable with the carry trade. Newly affluent Chinese are also helping, but they are probably not having much effect worldwide. the lowly 401k is also helping out.
If the world were to suddenly stop the printing presses, the result would be a world wide panic of such intensity, that it would dwarf all prior panics.
I have faith that a little corruption is OK, as far as those who regulate their respective corners of the world see it. The money growth in the funds that make it to the markets will continue, with periodic smaller panics that instantly drop the stock prices to acceptable levels.
If I missed out on getting out of LEND @ $12 on Tuesday…I sure know what I’d be doing now in this environment…especially after some guns just made 80% on the upside today… chk. the time, my post then the chart.
It hought a key reversal day occurs when the stock opens or goes down below the low of the previous day, and then closes higher than the high of the previous day. THis is visible only on daily bar charts. So, how can the line charts shown display a key reversal day? I don’t see one on the Dow daily bar chart.
yesterday feels too convienient for reversal day, I kind of get the impression that people are willing it to be one, but the market doesn’t listen to that kind of stuff. We see this with every moderate decline these days, constant bottom calling. I’m not sure its as easy as that.
Charts showing 2003 to 3/2007 are not long term in my book.
yes, Barry misused the jargon. a key reversal is the same as an engulfing candlestick. Perhaps he merely meant important midday reversal.
Key or not a reversal/turnaround is on the charts for discusion.
3 points…
1) Barry, you need to address Greenspan’s 10% increase comment today. This guy really is something else….oh yeah, if only we make the bubble larger and more unsustainable we will be fine…WTF!!!
2) Please keep posting when you will be on Kudlow. That show is completely unwatchable now and I really hope people don’t go there for financial advice. I will now only watch when you are on.
3) “5 Things” from Minyanville had a must read sarcastic look at the subprime mess that is completely isolated (wink wink). Amazing that I still hear all this bottoming talk…how can any rational person even think about a bottom???
Where does the new money come from? It is created wealth, people extract cheap materials from the earth and fashion it into useful things (as just one example).
When the anticipation of new wealth rises faster than its creation a bubble forms bringing out the “greater fools.”
So where are we? Bubblephobia brought on by the 2000 crash has kept the greater fools at bay, for now.
I still call tax day capitulation, the national liquidity crunch day based on my own situation, I want to cash out at the highest peak before Apr. 15. Maybe tomorrow?
Andi – FYI, March 15th is agriculture tax day, last I knew.
“I am familiar with the CME, but what is SPM an abbreviation for?”
The SPM they are referring to is the large S&P futures contract traded on the CME and that expires in June.
“Andi – FYI, March 15th is agriculture tax day, last I knew.”
Greg, I spelled it out, “Apr. 15” which is tax day for individuals in the U.S. While the Dow drops only occasionally on (this) tax day a bottom is likely then based simply on the length of the past few corrections. In any case I plan to start buying then–but my buying won’t be moving the market. :)
I caught that, no problem, just wanted to add depth to your presentation since it was posted on the 3/15 and the coincidence caught my eye, ie Agricultures % of the total market, just making a point.
ps – I take my taxes in post 3/15 so my accountant can do the farmers 1st.