Another Stellar Day in the Markets
FusionIQ Morning Market Comments (12-05-08)
Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. Prior to joining Fusion Analytics, Mr. Lane enjoyed success as the Chief Market Strategist for several sell side institutional brokerage firms, where he made unique and savvy market predictions. In those capacities he oversaw the firms’ research departments and was the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane produced a broad range of widely followed institutional research publications ranging from industry specific notes to quantitative/fundamental reports on individual stocks. His buy side clientele consisted of many of the nations top money managers and hedge fund managers. Mr. Lane is a member of the Market Technicians Association and earned a B.S. in Business Management from the State University of New York at Plattsburgh.
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Yesterday remained another stellar day according to the tape (not the sarcasm !) as the NYSE scored 2.8 decliners for every one advancer and declining volume bested advancing volume by a rate of 3.59 to 1. The NASDAQ fared no better with 2.37 decliners for every advancer while down volume bested up volume by an alarming 6:17 to 1 ratio. This clearly paints a picture that distribution is still the dominant theme and there is still supply in the market place until we can see these ratios reverse course consistently with advancers trouncing decliners and up volume trouncing down volume we are likely to see another retest and possibly a new low. Like we said the other day anecdotal stories of investors burying their heads in the sand by hiding statements in their draws and refusing to look at the carnage is not the type of sentiment one sees at ultimate lows. Real lows are formed even after substantial declines investors are still calling for the end of the world (not looking for the silver lining).
We are starting to believe this drop is still the concern stage but not yet the capitulation. During major corrections investors go through three phases in this order; Denial, Concern and Capitulation. The Denial phase is the first leg down and investors brush it off because the previous bull run had been so good to them and also saw corrective phases along the way. The Concern phase is when the correction goes much deeper than the investor originally thought and has now cause grave concern. However that grave concern still searches for hope of a comeback. Intermittent rallies along the way sometimes alleviate the concern momentarily. However after the many minor rallies continue to fade (even after a very deep correction from the peak) one last sell-off drains the last hope out of anyone clinging to the log of hope. It is this last sell down that brings in the capitulatory action and that my friends sets the low.
While I am an optimist by nature I do need to read the tea leaves and anecdotal sentiment evidence objectively and at this point complacency still seems to be the general theme.
THE MARKET WILL TELL YOU WHEN IT HAS BOTTOMED IF YOU LISTEN: THERE WILL BE FEAR IN EVERYONE’S VOICES AND IRRATIONAL BEHAVIOR IN THEIR ACTIONS AND THROUGH ALL THE BAD HEADLINE NEWS THE MARKET WILL BREAK BUT WILL SNAP BACK WITH A VENGEANCE. THIS HAS NOT YET HAPPENED. THE RALLIES FAIL BECAUSE THEY ARE MET WITH TEPID BUYING AND SHORT COVERING, HOWEVER AT SOME POINT THE REAL BUYERS (SUSTAINABLE BUYING) WILL STEP IN AND IT WILL BE OBVIOUS.
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December 5th, 2008 at 1:29 pm
People were completely crapping their pants on October 20th (for the second time) when Paulson shifted the deck chairs (TARP) and the specter of global financial meltdown loomed for the second time. The first part (fear) you’ve written in ALL CAPS took place already. October 20th was a knock-down punch. From this point forward we’re looking at jabs to the nose.
The snap back is most going to take longer because the implosion is broader based; across all asset classes. I think it’s gaining momentum/gathering its legs now. By the time the real buyers step in, the bottom will have been months away.
December 5th, 2008 at 2:02 pm
By the way – capitulation is a choice. Forced selling isn’t. We’ve seen unprecedented forced selling and may continue to see a lot more. Above, you don’t really speak to what has had, to date, the most dramatic impact on falling prices in commodities and equities – unbelievably leveraged hedge fund forced sales.
December 5th, 2008 at 2:48 pm
Buying 3 month treasuries at .01% is not irrational action? A ten year at 2.5% when investment grade corporates are at 9%? Irrationality is here bud.
December 5th, 2008 at 3:15 pm
Mike,
When all asset classes are falling in value (except T’s) it IS rational to buy low yielding Treasuries (especially short) until markets stabilize. Furthmore, we are in a deflation and your .01% return is
higher adjusted for it. Having said that, I agree with you that investment grade corps are trading
irrational cheap to the T’s. Junk even more so.
I put a small trade on a few weeks ago. Short 30 yr. T’s/ long junk via ETF’s. It’s down a little now
but I think it will work out.
I think the short term low is in and we will see the final low next year or maybe longer.
December 5th, 2008 at 3:29 pm
We’re seeing a flight to security. Wafer thin USTs. Super high spreads. That is called crapping in your pants.
December 5th, 2008 at 3:53 pm
Oops!
December 5th, 2008 at 4:05 pm
BKM,
I agree with you that buying treasuries is generally rational in times of declining markets but at this extreme, is it rational?
The deflation investment theme is now widespread and the story there is not finished. Perhaps the FED massively expanding its balance sheet ruins this story? I do not know the answer.
Personally, I feel the panic is on a banking/institutional investor/hedge fund level. Car loans are at 6% and mortgages at 5.5% (and are easily qualified for with decent credit and a modest down payment) yet cash rich investment grade corporations must pay close to 10%? Sounds more like a panic than a credit crunch.
December 5th, 2008 at 4:17 pm
It would seem that the public has not forgotten the lessons of 2000-1. On the other hand the pros came up with a new crop of geniuses who developed another risk free way to the promised land and then leveraged it 30 to 1. The volatility we’re seeing is result of huge daily percentage moves in the beaten down financial sector, and at the end of the day its meaningless. Another example of the current situation is the trading in GBX. Some outfit named Tontine Partners has obviously not had any choice about selling selling selling no matter the price and its obvious this has gone on in the commodity markets as well. Meanwhile back at the big swing (as Mr Livermore might have it), all the kings “morons” like Buffet and Grantham are out there with bushel baskets and a big smile.
December 5th, 2008 at 9:45 pm
Most people are certainly upset about the decline that has occurred in the last 13 months, and surprised by the rate of decline during September and October. But at the same time, there seems to be a “too late to sell” sort of attitude on the part of most, i.e., that if you didn’t get out in August, or earlier, that you might as well just stay in and ride it out. I don’t sense any fear or panic.
I wasn’t paying any attention at all to the stock market back in the 1970’s. But I’m not sure how much fear there was then either, apart from a few months during late 1974.
Maybe the market just goes nowhere (on an inflation-adjusted basis) for the next 5 or 10 years. Whatever happens, there’s not going to be any rocket ship back to SPX 1500.
December 6th, 2008 at 12:35 pm
here a couple of few quick points:
1. The Dow has been holding 8k since oct.10
2. The last time we lost this many jobs–Dec 1974, we had a similar situation…
a.the dow was down 30%…the dow was holding its september lows (600)…it was also in a similar range 600 to 700…starting in january 75 we had a rip snorting rally..the dow that month opened at 619 and closed at 713, by june 30th 1975 the dow closed at 879..a 41% gain…
3. investors intellegence numbers hit a 20 year low..this week
4. what is the next shoe to drop?
5. seasonally this is a great time to buy stocks, new president that exudes confidence and with a plan, should we just hold our nose and buy ?
6. can anyone tell me how you can say that the recent buy the bad news action is not positive…
7. should we now be buying the dips and not fading the rallies..?