Shocker! More Bad News . . .
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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I don’t like to be a Bull or a Bear. I like to be impartial, sort of like Switzerland and let the weight of the evidence direct me. If the evidence suggests that the market has a better chance to go up I will employ long strategies. Conversely if the evidence suggests the market will go down I will raise cash and employ short strategies. So I try not to pick a side but rather let the data and unbiased/unemotional evidence steer me in the potentially right direction. Sometime the evidence screams bullish, other times bearish and still other times (like presently) the tea leaves are mixed. In this scenario it is best as I said yesterday to make smaller commitments until the evidence is more convincing.
That said I believe the market is a discounting mechanism and the reason we dropped 46 % from the recent S&P 500 peak is because the market was anticipating the nasty headlines you see today and last week and probably over the next several months and boy when you read them it makes you not want to get out of bed today (lol !) However if it is in print then astute market players have long since factored in the news I believe. So as the horrendous headline news hits the tape each day watch it is important to watch how the market reacts. If it continues to drop and drop well then this news hitting the tape was not in fact discounted, however if we continue to rally on bad news then that would be a good sign.
Go ahead take a gander at today’s collection of headline news:
AP – New Jobless Claims Jump to 26-Year High
Reuters – Durable goods drop 1 percent in
AP – Oil falls towards $37, tracking global equity losses
AP – World markets slip after gloomy US economic data
Reuters – Toyota’s global sales mark worst in 8 yrs.
In summary it is hard to put any stock in days leading up to the holidays since volume tends to be light and the real decision makers at large institutions leave early but we will know soon enough as the New Year approaches if the bad news is already baked in. My best guess is the market knows all this bad news already it is more trying to handicap how good the current bailout and multiple stimulus packages will work. If we go lower then the market is saying its not enough. If we can rally then the market is saying we believe the globally concentrated effort to stave of this chasm is going to work.
Volume and internals will signal which way the market will go. Over the last 5 months there has been consistently more down volume than up volume, more decliners than advancers and more new lows than new highs (day after day after day). However of late the negative skew is dissipating so the idea now is to watch for the turn in internals the other way (i.e. a consistency of more up than down volume, more advancers than decliners and more new highs than new lows.) Technically the 50-day moving average stalled all the major indices recently (as well as the 9,000 level on the Dow). To get any sustained move up we need to break above these levels.
Of note one group is starting to show some consistent strength in this mess; Biotechs. Keep your eye on this group as they may emerge as a leadership area of the market when the tape turns. We will put together a list of good looking biotech names for next Monday.
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December 24th, 2008 at 12:45 pm
my 2 cents: the market is waiting to get some sort of glimpse into the 1Q, which won’t be know for a few more weeks. If orders start returning to semi-normal, a nice rally is possible, but I think there is a greater possibility that the first quarter will be dismal, 1Q conference calls will be ugly and we will see another leg down.
December 24th, 2008 at 12:54 pm
Thanks for the perspective, very much like my own. Armageddon is priced in, which means to say that the market no longer sells off heavily in response to bad news.
My main reservations going forward are: a) continued write-downs, b) hedge fund redemptions and c) heavy job losses in January and February. The latter in particular could lead to a re-test of the lows or to making new lows.
But I think that there is still room for certain sectors to rally substantially during Q1, while others (retail/banks) can be predicted to struggle. Some of the commodity-related stocks may already have bottomed in November.
December 24th, 2008 at 1:19 pm
OK, Ill be the voice of dissent. There are a lot of markets. Let’s focus on the SPX.
From a technical perspective, we have a massive double top on the 20 year monthly chart. Very bearish going forward. On the daily chart, we approached but could not get through the 50 day EMA. I suspect we’ll try again, but until we do, no reason to go all in on the buy side. Looking at those two charts give me the uneasy feeling that we’re going to 500-600.
From a very simple fundamental perspective, we should, as business conditions deteriorate, move closer to a traditional bear market PE ratio of in the 10-12 range. Couple that with many earnings forecasts on the SPX of $50-$60/ per share and we are in that 500-600 range on a fundamental basis as well.
I know that the bad news is typically baked in, but what is typical about this market? The VIX is still in the mid 40s. The retail investor has pulled back but not given up on stocks yet, hence, no capitulation. Investors seem to have trouble conceptualizing that the auto bailouts, for example, may wipe out the common equity. That’s pretty basic stuff, especially when someone like DB has the stones to slap a target price of zero on GM, yet on the bailout news they rallied. Not exactly a rational, efficient market IMO.
Finally, Mr. Lane may be a genius, but his intro says he is a technician and all he looks at are fundamentals, and commonly discounted ones at that. I may be wrong, but it sounds more like cheerleading or wishful thinking than substantive analysis to me.
December 24th, 2008 at 1:34 pm
Tex: All very reasonable and I do not rule out a 6-handle for SPX at some point in Q1. I reserve the right to turn on a dime in my investment philosophy once we enter the earnings season, but just at this moment I am bullish. I would point out that my longs are extremely selective and are predicated on a longer-term declining $ outlook that requires only the most modest of recoveries to be profitable by way of increased commodity demand.
December 24th, 2008 at 1:57 pm
This sounds like Lord of the Rings:
“Go not to the Elves for counsel, for they will say both no and yes.”
December 24th, 2008 at 2:13 pm
@ Mike: Nice one. Compliments of the season, sir.
To put it another way, Mish says: rally into Inauguration Day, then release the hounds of hell…..
December 24th, 2008 at 2:39 pm
Here is one thing that the market has not discounted:
http://www.nytimes.com/2008/12/22/opinion/22krugman.html?_r=1&partner=rssnyt&emc=rss.
How do you “discount” an economy that has been hollowed out from the inside?
December 24th, 2008 at 2:41 pm
leftback:
Happy Holidays to you. I agree with you, but my jumping in w/ both feet 6-8 weeks ago cost me so I’m sitting out til next week. I still think we have to go through an actual rally before the collapse.
December 24th, 2008 at 2:57 pm
I am long SANTA today. Ho, Ho, Ho to all.
December 24th, 2008 at 3:05 pm
I use technicals as well and I agree most strongly with your statement that the tea leaves are mixed. In theory, I believe the statement about the market being a discounting mechanism only because most of the time, I think the smart guys in the room have a good handle on what is really going on and it is only shown via charts because most people do not have access to the smart guys. But, I think this year that is nearly done is the best indication I have ever had that even the smart guys got it wrong, or very much underestimated the potential systematic damage.
I have been short term bullish, long term bear from a technical stand. The charts still say this is what to be. For a long term investor, I think the risks are still high. If you look at some moving averages on weekly charts of major indices, mid-term moving averages are nowhere close to crossing long-term moving averages. This very simple exercise of following moving averages has yielded excellent results for several decades and has avoided catastrophes. The trend for the market is still negative and deserves respect, unless you are a trader. I don’t work with traders.
The equity market will not solve this mess. The credit markets will. If you see the credit markets acting completely normal, the equity market will soon follow. Part of the reason I think so many strategists have had such a difficult time with this year is because most only have a point of view in equities. Everything that has happened this year in the equity markets is symptomatic of the real problems elsewhere (credit). Until some rigor ous work has been done to incorporate the credit markets into a strategist’s thesis, you are simply listening to a doctor talking about a cough that doesn’t know if it is an upper GI infection, bronchitis, whooping cough, or something more serious like a small cell tumor… Does this make sense?
The TED spread indicates lending is better than it was in October, but not much else. It still indicates a stressed credit market. Most other spreads are equally if not more horrible.
There is no indication to me that the market has “built in” anything worse than a mild recession. There are too many “unprecedented” financial numbers popping up all over the place for this recession to be anything buy “Abby-something”. Abby Normal? Yeah, that’s it…
Could we see a rally happen to 1000, or 1100? Sure. The first major rally in 2000 was in excess of 30% before it petered out and hit a new low. The second was in the high 20s. The third was similar… I am not saying there won’t be rallys. I’m saying the rallys are for suckers because most participating have no mechanism to recognize that it’s over. And if you don’t have all the tools, you shouldn’t be playing b/c you are going to get hurt.
Hope and anticipation are part of the Christmas story, but they shouldn’t be part of your investment process.
December 24th, 2008 at 10:33 pm
A “U” shaped recession ending by mid-year ’09 has been priced in, IMO, but not an “L” shaped on lasting into 2010, and certainly not Armageddon, which would need to be something like the GD to qualify for that moniker.
As earnings estimates fall in ‘09, the stock markets falls with them, and multiples become more compressed as volume continues to dry up.