Good Evening: As a witness in recent days to unambiguously bad economic news, increasingly poor earnings guidance from U.S. corporations, and heightened selling pressure in the U.S. stock market, I had a foreboding sense that today’s session would be both important and impactful. Jobless claims pierced above the 500,000 mark, Intel, Applied Materials, and a couple of retailers joined the growing list of companies reporting disappointments, and the S&P 500 futures this morning were pointing to an imminent break below the October 10 lows. Like many market participants, I girded myself for what promised to be a very rough ride in the equity markets.
And then we opened flat and traded sideways until lunch. It was very anticlimactic, and the S&P 500 hovered in a tight and nervous range just above its October low of 840. Presently, the anticlimax gave way to a selling climax. Once 840 was taken out, the S&P quickly whooshed another 2.5% lower. But that was it. No crash ensued. No exchange official tried to halt trading, and no government employee proposed a bailout for equity investors. Left to its own devices, guess what the market did? I’ll let the chart below describe better than I can what occurred after 1 pm est.
Yes, the market rallied a full 11% from its mid day low. The key, at least for me, was the lack of follow through to the downside once the October 10 lows gave way. Also, in the parlance of market technicians, we had a “successful downside retest with an important non confirmation from the Dow Jones Industrial average”. In laymen’s terms, this jargon means that most averages broke through their October lows, but the Dow didn’t. It held above its old lows, and when all the indexes rallied in unison in the afternoon, the “retest” was deemed successful. Shorts were suffocated by the speed and persistence of the afternoon rocket launch, but since bear market rallies (and we’ve seen more than one in 2008) are notorious for being violent and brief, what we all want to know is whether today qualifies as an important bottom or just another flashy rally that will once again end in tears.
Nobody knows, but there are some clues today’s low might stick for a while. In addition to the aforementioned positive technical traits and the fact that the indexes went up in harmony, some confirmation can be seen in the action of the other markets. Bonds were up in the morning, but they rode the elevator down in the afternoon. A poor 30 year auction gets part of the blame, but so does today’s posting of the largest monthly budget deficit in our nation’s history (see Merrill’s take below). The poor auction implied lower demand might become an issue just when the gaping deficit figures implied an increase in supply. The U.S. dollar reversed as well, as early strength gave way to afternoon weakness. The opposite occurred in commodities, which also confirms today’s move higher in equities. Oil was getting clubbed once again this morning, but it finished the day galloping to the upside (which itself was confirmed by a massive up move in oil stocks). The ag sector lagged behind, but metals both precious and base levitated along with oil. Down big in the morning, the CRB index managed a 1% gain by the bell.
If all the markets moved together and basically delivered the same message, doesn’t this action mean we’ve now seen THE bottom? I’m from Missouri on that score, and I still think the economy has too many nasty surprises in store to blindly become bullish right now. Likewise, the crazy volatility won’t give retail investors the warm fuzzies. 11% moves in one day are hard on professionals, let alone for those who take an occasional online shot at the markets from the home computer. In short, we had a nice, strong bear market rally today. It was helped along by oversold readings (the major averages were down almost 20% from last Wednesday’s high to this afternoon’s low) and very poor sentiment. Fear and loathing toward stocks has been building of late, and the latest evidence can be found in the last link you can click on below. Michael Lewis broke into Wall Street just over 20 years ago, and he broke into the ranks of financial authorship just a few years later with “Liar’s Poker”. It was a funny, behind the scenes look at Wall Street in general and Salomon Brothers in particular. Mr. Lewis’s latest piece is his attempt to write an epitaph for Wall Street. “The End”, therefore, is the type of article we see not at the end of a long rally, but at the tail end of a sharp down move instead. It won’t rank up there with the 1982 Business Week cover article proclaiming “The Death of Equities”, but it will do nicely for today’s turn in so many markets.
U.S. Jobless Claims Reach Seven-Year High of 516,000
The End, by Michael Lewis