What Was THAT?!?

Heck of day, Bernie.

Choose your poison: Technical, Fundamental, Macro-Economic — there’s something for everyone in the recent market action:

Macro-Economic: FOMC minutes reveal the Fed is expecting weaker growth, worse employment, with inflation threatening to become more problematic the same day CrudeOil hits $134.

Fundamental: Funny thing about that Oil: Without it, SPX earnings would be the worst in decades.

Technical: Markets have made up about half of their peak to trough losses, from the October highs to the January/March lows. No coincidence either that the 200 Day moving averages were major resistance. 

So what say ye? What is driving this market — and what does this 2 day, 430 point drop mean? Is this a blip, ior something more significant?

~~~

What Say Ye?

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Discussions found on the web:
  1. Owner Earnings commented on May 21

    BR, it might be time to bring out that 750 S&P 500 call you had a few years back.

  2. brent commented on May 21

    I’m just glad to see we’re in a nice summer lull.

  3. John Borchers commented on May 21

    This is as I figured with massive inflows into oil. My oil trade is sold.

    I don’t know how long oil will continue to go up but eventually it will tank and everything else will come with it.

    When oil starts to go down other commodities will come with it and also the stock market. It will start off slowly and unnoticed and then it will get worse.

    People will not understand why oil going down takes the market down. Then panic will eventually result. With no fed cuts to protect the market circuit breakers on the NYSE may get hit. It could also trend down moreso over the year than a complete panic. But one will certainly occur.

    We have all signs of massive deflation to come and not many people see it. It will be the second depression for the US and the world.

    We have had unproperly measured inflation over the last I dunno how many years. Costs have finally gone to a point which people can not afford or pass on.

    Housing deflation is the first sign. If we really had inflation housing prices wouldn’t be falling at the rate they are.

  4. PeterR commented on May 21

    SPY 138 and EMA(409) support better hold here, or it could be “Look Out Below” IMO.

    [daily close-up chart @ middle p. 6]

    Thanks for a great site Barry.

    Peter

  5. exjag commented on May 21

    While I was caught flat-footed on this liquidity driven rally which cost all my accumulated profits for this year, I think we have had a few key down days which say “rally over”,trend now DOWN.Any rally with close over naz 2520 aborts the call.

  6. Owner Earnings commented on May 21

    I don’t know how long oil will continue to go up but eventually it will tank and everything else will come with it.

    It will be the other way around. The economy will continue to decline. The stock market will catch up (contrary to popular belief, the stock market is a lagging indicator during economic slow downs) to the declining economy and the stock market will go down. Finally, oil, and especially food, will catch up to the declining economy and the declining stock market and it too will go down.

  7. tim commented on May 21

    Bah – I showed up to complain about e-bay and paypal but you deleted that post. You do realize that posts you deleted hang out there for a bit of time in the RSS caches of the internets right?

    ~~~

    BR: I rescheduled that for tomorrow — wanted to keep tonites chat timely. The permalink URL actually is still good.

    If I delete it, the link, RSS cache would deliver you to a 404 page not found . . .

  8. Chris Noyes commented on May 21

    The bank I use has cash flow problems.We get large chunks of cash out several times a week and they are having problems keeping large bills in.(own a pawnshop)(maybe 40k a week) I was told last week they ran out of 100 , 50 , and 20 by a teller. This has happen several times in the last 10 weeks. I was going to switch banks , but I think they are all in trouble .

  9. VennData commented on May 21

    As oil becomes as expensive to Americans as it has been to Europeans, America will be come more like Europe.

    Those equity-derived products and services that adapt will go up, those things that can’t, won’t. Won’ts: surburbs, SUV’s, cheap-power-driven manufacturing, toll road infrastructure, airlines, NASCAR, etc.

    Also applies to lobbyists, legislators who derive their power from the same.

  10. Scott commented on May 21

    Try this fun currency converter to see how truly low we have sunk: http://futureboy.homeip.net/fsp/dollar.fsp

    But damnit, Spock, I’m a doctor not a mathematician, so play with this your own bad selves.
    The powers that be have inflated us to a point that the levels of the indices seem sooo much higher than they are…and they are in suckville as it is.
    I think the good old USA is screwed big time and may have reached the event horizon. I’ve basically followed Jim Rogers for the last decade and own virtually nothing in the U.S. but my house. Gold, guns and groceries (plus Petrobras). The hole is too deep, the multinationals have begun the gutting process here, and the expansion has moved to the Orient; for the rest of the century. We are a nation and an empire in decline. The DOW dropped 400 some points in two days…so what? It’s priced in worthless money anyway.

  11. Winston Munn commented on May 21

    There is no panic in this selling.

    I have been watching closely since April 21, and the Dow, Nas, and S&P have each had at least 4 distribution days + some days of simply churning. This is more organized, planned selling. Without a catalyst to set off a panic, we are more likely IMO to see more rangebound sideways churning in a 1000 point Dow range.

    The problems with the financial system and the economy are massive and not easily or quickly solved. At the same time, without a Bear-Stearns-like catastrophe, there is no catalyst for a panic equity selloff.

    With billions of losses still being hidden by rule 157 in level 3 assets, commercial real estate only now beginning to crater, and employment on a slow, steady decline, we are still in the process of the slowmotion train wreck – and we are more likely, when we do start down in earnest, to follow Japan’s lead and grind down, down, down, and down…..as the problems in the U.S. are of the type that feed off one another in a downward spiral, very nasty and very hard to cure.

    Hasn’t anyone stopped to consider that the emergency rules used by the Fed to save Bear-Stearns have not been used since 1929-ish? Think there may be a reason for that? And that rescue job didn’t turn out all that well, if memory serves….

    According to von Mises, the end stage of a credit expansion bubble is the crack-up boom – when currency is eschewed in favor of hard assets – copper, lead, rice, canned goods…oil…while paper assets go begging…U.S. dollar, ABCP, municipal bonds, etc….

    It appears we will now will get to find out if his theories hold.

  12. SteveC commented on May 21

    I’m guessing the 2nd half of 08 could be a bitch for commodities and stocks. Right now, my system is still on buy signal, so not going to 100% cash yet. Before getting too bearish, I always ask: What could go right? Oil falls, consumer doesn’t fold, low interest rates begin to do their work, new administration comes in.. (that alone should improve people’s mood).

  13. flubber commented on May 21

    There will be continuing bad news on the economy, housing market… but the tons of liquidity waiting to jump back in the market when they think they see a bottom will keep volatility high. Higher, even.

    I don’t see a big drop – 10% over the next 6 months. Eventually we’ll end up with higher PE ratios, as profits will suck. Just no where for the liquidity to go.

  14. Donny commented on May 21

    Actually, the markets have been trading irrational up until yesterday, and the last two days have represented a return to reality.

    The Permabulls actually had a good chunk of the country believing that everything was hunky-dory, yet nothing could be further from the truth. I don’t know how many times I heard different PermaFools on CNBC, suggest the Bear Stearns debacle was “the bottom”. WTF? They actually believe that bullshit!

    And to think, the WSJ, CNBC, Barrons etc, etc, etc … were all out there telling people it was okay to get back in the water. Pimping the financials of all sectors … talking up valuations and recovery. COME’ON!

    New lows are coming … not if, but when. AND, some of our most astute media outlets will lose a little more credibility.

  15. DavidB commented on May 21

    It looks like they are doing the yearly selling in May and going away. I guess we’ll see them in the fall again. I’m thinking that since we are getting quite a regular May occurrence this year that we might also see a dog days of summer panic too

  16. JMH commented on May 21

    LCD monitor and VOIP prices are coming down, commuting prices are going up. What will happen to energy consumption if everyone who can telecommute starts doing it? I think some amazing statistics will emerge that indicate how elastic energy demand really is, at least at these prices. Why all of the bearish reversals in energy stocks today? Are we near the tipping point for the oil trade?

  17. Chief Tomahawk commented on May 21

    The FusionIQ “Daily Blog” fell silent today. Was the cast taking the day off, or waiting for market clarity before posting again?

  18. Joe Drake commented on May 21

    The flood of liquidity is causing anything that was in the slightest uptrend to overshoot any reality. I agree with the deflation idea, but cash is seeking a home in a shrinking pool of alternatives.

  19. UrbanDigs commented on May 21

    did people honestly think that all was well because stocks went up for 5 weeks? Its strange. We are only at 12,600 on DOW and already it feels like fear is about to surge. I guess $133 oil does that to traders.

  20. Stuart commented on May 21

    The fallacy that the crunch for banks are over is now being proven to be just that, a deliberately orchestrated, self-serving fallacious spittoon of toxic lies and nonsense. Those that put on trades, you know, shills, are now eating those trades, unwinding them. Throw in the likelihood that foreign money is bailing, perhaps wising up to the charade and deliberate deception over here using them as patsies, they are perhaps finally getting tired of playing 3-card monte and are taking their purses home.

  21. andiron commented on May 21

    Barry,
    Remember Dow 7800?
    It it still in the cards.

  22. DL commented on May 21

    We may not go straight down from here, but a drop to S&P 1250 is likely.

    In addition to the concerns for 2008, there’s also 2009 to think about. If Obama wins the election, all three of the following will rise next year:
    (a) inflation, (b) taxes, and (c) the Fed funds rate.

    (If McCain wins, we’ll get at least 2 out of the 3 next year).

  23. DL commented on May 21

    Interesting comment by Ron Insana on CNBC today. He said (essentially) that all we have to do is impose stricter regulations on the futures traders (of crude oil), and the price of oil around the world will plummet, and inflation will ease.
    About a month ago, he said that most of the increase in agricultural commodity prices was due to the creation of commodity ETF’s and ETN’s, which push up futures prices of grains.

    It’s that kind of perverse logic in the media that suggests much higher commodity prices ahead. (And the worse it gets, the more that the Fed will ultimately have to tighten).

  24. michael schumacher commented on May 21

    DL-

    They can regulate ’till the cows come home. Enforcement of what is already there is the bigger problem.

    I thought that he was on the right track until he said we needed more regs.

    Ciao
    MS

  25. Jim Haygood commented on May 21

    I was struck by Warren Buffett’s comment about Moody’s having overrated some CDOs by three or four notches because of a coding error, and then not promptly disclosing the mistake. Buffett said that it won’t have any long-term effect on Moody’s franchise value.

    Warren — the guy with the reputation as a straight shooter — is either deluded, or lying. The stock dropped 19% today. A state attorney-general is investigating. Civil and criminal lawsuits could follow. No effect on franchise value? Sorry, that won’t wash. It takes a lifetime to polish a reputation, but you can lose it in a day.

    Sadly, it’s looking like Warren Buffett has hung around a year too long. If he’d only used his most recent Omaha shindig to bow out of active management of Berkshire Hathaway, he could waltzed into posterity as an untarnished hero.

    I certainly know the feeling — making just a couple of more no-brainer trades to put the icing on the cake … and blowing away not only the cake but the main course and appetizers too. It’s a damned shame.

  26. Steve Barry commented on May 21

    There are facts and then there are my opinions…first the facts:

    1) 10 day put call has been very reliable and hit a nice low of .85 the other day. This is a very overbought condition. Citigroup Euphoria/Panic Model is at through the roof bullishness. I’m not sure what goes into this model…it changes from year to year. But from what I have read in the past, a lot of thought goes into it and it is a mix of sentiment measures. A high reading would indicate market due for a pullback or worse. Also, VIX must double to reach March highs.

    2) I follow QQQQ closely as you may have heard…I have harped on poor volume during the ENTIRE run off the March low and the shockingly low short interest on major QQQQ names. The index is an accident waiting to happen and the minute volume strengthened today, QQQQ wilted.

    3) Housing has to drop another 40% to bring it to normal historical trends.

    Now for some opinion…oil is about to hit a point that will crush the consumer given the housing issues. Fed and fiscal stimulus will just monetize high oil at this point…any stimulus will get sucked right into the price of oil. I think the PPT is on the ropes…the Fed’s hands are tied now…the inflation genie is out of the bottle. Nobody now believes inflation is tame, even if they say they believe it on CNBS.

  27. Steve Barry commented on May 21

    One more opinion…I have said before and if you caught Kudlow tonight, Stefan Abrams bluntly said it too…the Bear Stearns bailout was really a JP Morgan bailout.

  28. Jim Haygood commented on May 22

    Steve,

    Bloomberg had an article yesterday about all the hedge funds who were raising cash back in 2006 and 2007 by selling ‘protection’ against defaults, via CDS (Credit Default Swaps).

    It’s a one-way trade — thanks to their 2/20 fee structure, hedge fund managers captured a good chunk of that cash. But when the claims come due — as now appears likely, with default rates rising — hedge funds which can’t meet them can just close up shop. What the hell, it’s OPM — Other Peoples’ Money.

    Problem is, if counterparties start walking away, the whole unregulated OTC daisy-chain may go down. Evidently, that’s what the Fed was trying to circumvent with its JPM/Bear Stearns bailout. But nearly half the Fed’s balance sheet is already tranformed into junk as a result. If this is just the second or third inning, then the Fed is going to be out of the game before the 7th-inning stretch.

    Leap into the volcano, Ben. Yes — you can fly!

  29. Eric commented on May 22

    Clearly it’s just a case of hedge fund managers and sinister brokerage houses conspiring to keep the market down for their own benefit. Go variable annuities! Go Nixon! Go teenage girls!

  30. Andy Tabbo commented on May 22

    John Borchers,

    You are exactly correct. Commodity inflation in the NOT the problem; it is merely a symptom of poor medical treatment.

    THE problem is a deflationary asset spiral. This is what keeps Bernanke up at night. The trillions of dollars disappearing in the form of the housing and credit bubble deflating is FAR more serious than the oil bubble generated by too much money chasing returns in a very, very small marketplace.

    Bernanke chose to inflate commodities in an attempt to RE-inflate the housing/credit bubble.

    What has transpired in the teeny tiny oil ring is similar to the high roller card player who goes bust at high limit hold ’em table because he’s a poor player, and then decides to go push around the grannies at the $2/$4 hold em table…he’ll win for a while because his chip stack is so large, but eventually he’ll bust there as well.

    What these FED minutes today are showing is a willingness to recognize the futility of the rate-cutting actions.

    In terms of Elliot Wave analysis, we may have started either a larger C wave down or a third wave down. Either way, it’s not going to be pretty. The targets are 1080 and lower on the S&P. No asset class will be a safe haven, unfortunately. I pray this is not the case.

    But, I’m long puts just in case!!

    -AT

  31. Tiny Pepe commented on May 22

    “Oil prices pass $135 after government report of a drop in crude and gasoline inventories.”

    **6 hours after FOMC said $134 was the end.**

    “Captain, the last bulkhead just gave way.”

    “What are you saying, Manfred?”

    “Sir, the Titanic is sinking.”

  32. Muckdog commented on May 22

    This is the opposite of what we had in the correction.

    As you recall, during the correction the market trended down week after week, but was punctuated by fireworks, ie, one-day wonders to the upside that didn’t last but did give the bulls hope while their longs lost money.

    My guess is that now that we’re in an uptrend, it will also be punctuated by one-day wonders to the downside that will keep the bears inspired as they lose money or sit out on the sidelines.

  33. Daniel Secrest commented on May 22

    Some really sound comments here, IMO. The deflationary scenarios posited above by John Borchers and Winston Munn are devastating…

  34. Michael Glass commented on May 22

    The technical indicators began to show divergence earlier this month. As the market continued to make higher highs in this recent uptrend, Stochastics and MACD started to show divergence.

    As you stated, we also had the new high failure at the 200 XMA. The market needed a catalyst to move the market one direction or the other from the magnet draw of the 200 XMA. Today’s FOMC minutes provided the catalyst for the bears to push the market lower.

    We dont have a lot of economic data to come out tomorrow or Friday. I wonder if the Bears can keep this up into next week.

  35. jagmohan Swain commented on May 22

    Oil at 130 barely makes a dent on consumer’s wallet irrespective of what wall street propaganda machine wants you to beleive.My personal experience is that mere 3% raise year over year in my apartment rent is equivalent to 400% yoy rise in gas expenses.So Oil @130 or oil@150 surely is hard on wallet but not to the extent hyped on cnbc.

    The theme is same.Armageddon is no where in sight.When people say US consumer is tapped out, spent up I have problem buying that line of argument.Didn’t we see 24 years of unprecedented surge in economic prosperity, 2000-2002 bear market aside.Dow is at 12500 right now that is 12.5 times where it was in 1982.Since 401(k) investments in general mimick the indices most households are richer roughly that many times.

    So merely looking at the consumer debt and paying no regard to household assets tells me that armageddon theory is bunk.In fact the households themselves rate their own financial situation highly but remain bleak on general market, no surprises there thx solely to wall street propaganda machine.

    That again brings us to one important point.Why it is that when valuation gets really giddy and irrationalism takes control
    of the market wall street news flow largely supports such irrationalism. Are they really that dumb????

  36. Wim Wonder commented on May 22

    “Oh Willy — No More Iron!”

    You know, if you were an oracle, you might say Typhoon Nargis was just the universe’s warning
    that unregulated carry trade speculation in grain futures was going to drown subsistence peoples.

    You might even say the Sichaun Earthquake was just the universe’s warning that unregulated
    carry trade speculation in oil futures was going to crush subsistence peoples, especially children.

    Overnight, oil has jumped to $135, and it no longer takes an oracle to tell you this is a richochet,
    and now we’re all like this guy: http://www.youtube.com/watch?v=K8JZCyFBR9s&feature=related

  37. Jim commented on May 22

    Jagmohan Swain declared:

    “My personal experience is that [a] mere 3% raise year over year in my apartment rent is equivalent to [a] 400% yoy rise in gas expenses…”

    My quick calculation shows that, if Mr. Swain drives an automobile as the typical American does, his rent must be at least $4,300 a month. That, in turn, would mean he is either one of those investment bank employees whom we would all love to see on the bread lines soon—if only there were any justice—or he is a spoiled trust fund baby.

    Either way, his “personal experience” has no relevance to this discussion.

  38. Jay commented on May 22

    I think this is the start of a very bad rest of 2008 for Equities.

  39. gianluca carrera commented on May 22

    it’s going down… how do they call it? I think “the suckers rally”… it’s a bull market, that’s what it is. For quite a while, I am afraid.

  40. rickrude commented on May 22

    gloom and doom, this is getting ridiculous.
    Am I the only bull on commodities and inflation here ??

    Cheers !!!

  41. Vermont Trader commented on May 22

    Why I’m short.

    1. All the economic data points to a consumer led recession. You don’t even need to adjust the data for birth/death adjustment or seasonality; they are still weak. The economy moves slowly and there are always data points that don’t fit.

    2. CEO’s on conference calls are negative. Many of the companies I listened to this quarter said things got weaker through the first quarter and even worse in April. Margin pressure is the phrase of the quarter and it is happening in every industry. I think the phrase of next quarter will be “orders/deals just dropped off a cliff”, that was a common one in 2002.

    3. The housing/bank situation is scary no matter how you try to gloss it over. The reality is no one knows how it will turn out because no one knows how low housing will go. Housing and banking are caught in a death spiral and you can make a valid case that another leg down will cause massive destruction in the financials. This creates fear and that can drive stocks down very fast and very far.

    4. Technicals are strong but that can be an illusion. In a previous life, I worked at a large commodity trader and we had computer programs that were designed to create a favorable technical picture in order to create a pop to sell into.

    So the fundamentals are weak and getting worse. The macro picture is getting worse for stocks. Yet, over the last 3 weeks we are trying to break out to the upside? Seems like a no brainer to me and oil is just the icing on the cake.

  42. Greg0658 commented on May 22

    The trading volume is not there because mom and pop, grandma grandpa are not play’g; except in mutal funds.

    Then pros will not pull out because its a game ender; except when it time to pull out his Fund Owner Equity for his survival.

    I think we are nearly at the point of family business cash out before there is no buyers; but really that was 2 years ago; just like my chemistry darkroom, 2 years to late.

    If we pull the cord, STOP THE TRAIN NOW, GO ON STRIKE, what would happen? Would the deserving corruptors take the hit or would it be a futile demonstration?

  43. Greg0658 commented on May 22

    Andy wites “trillions of dollars disappearing in the form of the housing and credit bubble deflating is FAR more serious than the oil bubble”

    I think this oil bubble is covering the other bubble. STOP THE TRAIN NOW, GO ON STRIKE, what would happen?

  44. Greg0658 commented on May 22

    jag writes “looking at the consumer debt and paying no regard to household assets tells me that armageddon theory is bunk”

    I’ve been inventing this Apollo 18 landcraft in my head. Outside its got a solar panel floating above a rain catch pan and a tower for radio reception and wind generator. The walls are camouflaged to hide its value and insulated to be comfy anywhere. Its got gray water recycle and tanks, electric hvac, computer entertainment center, furniture, appliances and mini closet garage. Under the hood its electric and lives under the sun and city street lights for free.

    Pros: no property taxes; no utility bills; go anywhere the jobs are
    Cons: nomadic life; needs a legal parking place; still gotta have a job to buy food and landcraft upkeep; life in America survives on all this vehicle attemps to delete.

    Resistance is futile; You will be assimilated.

    Living aint living alone; or in a box.

  45. John commented on May 22

    I agree with some of the comments about large pools of cash looking for a home. Describes me exactly. BUT. This little rally we’ve seen over the past month or so is perverse. Oil at $134 a barrel and American charging $15 to check a bag. My SUV costing $90 to fill when a year ago it was costing $50. Corporate profits if you’re not in commodities, energy or export oriented manufacturing undergoing a huge squeeze. The consumer other than than the top 20% and even some of them in deep shock. The fed waking up to the fact that inflation is hovering. This is not 1929 but we’ve got a serious problem and it’s not going away this year. The markets going to trend down. Any other scenario when you consider all the factors make no sense at all.

  46. TM commented on May 22

    I would like to thank you all for some excellent comments.
    I think most are in agreement we will see one of two possibilities… But I have some naive questions….
    1. Deflationary Spiral – In this situation, would not cash be king? If prices deflate drastically, would that not reflect a strengthening dollar? I do not see any reason why the dollar will strengthen.

    2. Inflationary Spiral – This would be coupled with a dropping dollar. In this situation commodities (oil, gold, silver, etc) would he wise investments? If prices go up faster then wages, how will anyone buy? If no one is buying, how will inflation keep going and not turn into deflation?

    I guess my over all question is, what are the interdependent relations between an inflationary and deflationary spiral given the size of our economy. We are currently in an inflationary spiral with a very weak dollar, how does it transition into deflation? and does this strengthen the dollar?

  47. TM commented on May 22

    I would like to thank you all for some excellent comments.
    I think most are in agreement we will see one of two possibilities… But I have some naive questions….
    1. Deflationary Spiral – In this situation, would not cash be king? If prices deflate drastically, would that not reflect a strengthening dollar? I do not see any reason why the dollar will strengthen.

    2. Inflationary Spiral – This would be coupled with a dropping dollar. In this situation commodities (oil, gold, silver, etc) would he wise investments? If prices go up faster then wages, how will anyone buy? If no one is buying, how will inflation keep going and not turn into deflation?

    I guess my over all question is, what are the interdependent relations between an inflationary and deflationary spiral given the size of our economy. We are currently in an inflationary spiral with a very weak dollar, how does it transition into deflation? and does this strengthen the dollar?

  48. Chad @ Sentient Money commented on May 22

    Well, after reading all those comments, that bridge abutment on the way home is looking mighty inviting.

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