The Perfect Storm has been set in motion

As we wrote last night in our commentary “The Perfect Storm”, all the conditions were right for a significant down ward move today, and today Ben Bernanke cast the first bolt of lightning into the clouds and brought the storm’s fury upon the markets.

The rate cut of 25 on the Fed Funds Rate and 25 on the discount window was not in my view the main reason for the very intense sell off today, it was the statement which accompanied the rate cut numbers. Essentially the Federal Reserve is now acknowledging the economy is getting worse. Recall what I said some many weeks ago, the government is always the last to admit anything is wrong. But conditions continue to worsen and the economy continues to show signs of getting weaker. Today’s selling was more on the fear that recession is back on the table (never off our table) and the markets will eventually follow the economic conditions, down.

The ‘perfect storm’, as we described last night, may indeed becoming a hard reality. those who have been looking towards a year end rally in the markets are likely to be disappointed.

Much more tonight…

FOMC Announcement

The Fed’s cut rates 25bps, and cut the discount rate 25bps.  The market wanted much more for the discount rate.  As Chuck had pointed out, the indices were at major resistance points and a “sell the news” scenario was not completely unexpected, considering the recent run-up.  How we close will tell us more about where we stand and later this evening we’ll have more analysis of charts, as well as the Fed’s decision.

Washington Mutual

It was no surprise to us that Washington Mutual (WM) reported that they will layoff more than 3,000 employees, closing more than half of their home loan and sales offices.  I intended to publish the link for WM earnings report, and I will, along with the FDIC banking quarterly report.  The disturbing financial news is coming at such a fast pace, it’s difficult to keep up.  But, it’s not as if this is “new” news to those in the bigger financial community.  They have actually been trying to figure out how to keep this mess from unwinding too quickly for some time.  The problem is not something that can be fixed with rate cuts, rate freezes, or other political posturing by both sides of the aisle.  It’s anybody’s guess how long the stock market can stay propped up, because we don’t really know just how much is left in the Fed’s arsenal to help things along.  When we write about the financial upheaval, we don’t do so lightly.  In doing our best to research what’s happening, not only do we see the “bad news”, we also look to see what tools are available to combat it and the capability of various governments to use them.  We do not see this as a “subprime” issue, but as a banking issue.  More to the point, everything being done now and in the future will be to save the financial institutions. 

Almost Half of All Institutions Report Lower Profits

Rising levels of troubled loans in all major loan categories, but most notably in residential mortgage portfolios, led to a steep jump in expenses for bad loans in the third quarter. These higher costs, combined with sharply lower trading revenue, caused industry earnings to fall 24.7 percent from a year ago to $28.7 billion — the lowest level for industry earnings since the fourth quarter of 2002. This is the first time since 2003 that quarterly earnings have been below $30 billion. The industry’s return on assets (ROA) for the quarter was 0.92 percent, the lowest ROA since the fourth quarter of 1992. Slightly fewer than half of all insured institutions (48.5 percent) had ROAs of 1 percent or higher.  A year ago, 54.4 percent of institutions attained this benchmark. The year-over-year decline in industry net income was fairly widespread; almost half of all institutions (49 percent) reported lower quarterly earnings compared to the third quarter of 2006. However, most of the decline was attributable to results at a relatively few large institutions. Ten institutions accounted for more than half of the decline in industry earnings. Net income in foreign offices fell by $4.3 billion, from a positive $2.0 billion in the third quarter of 2006 to a negative $2.3 billion in the current quarter.

A lot of money is being “sloshed” into the markets ( see chart ) and there’s no way to know how long this can last.  It’s a stop-gap measure at best.  The constant changes being made to rules and regulations in the financial world can also keep the bubble floating longer than it should. 

Honestly, this mess is bumming me.  It gives me no comfort to know the precarious position in which our financial houses find themselves, as this affects us all.  I hear advisors and pundits say that one thing or another is going to keep our economy going, only to see their theory go up in smoke.  For example, not too long ago it was being bandied about that “overseas” economies were so strong that foreign money would just flow like the Mississippi into U.S. equities and other assets.  Recently, we began to hear more news that other countries are suffering their own GDP slow downs and housing problems (i.e., Japan, New Zealand, UK).  Sometimes it’s difficult to see the bigger picture and still trade the short term, but we will do both in order to survive all of this.

The Day that Was - December 10th 2007

The Perfect Storm

is on the horizon

 

Today the markets made gains in almost every major sector, drug companies being the exception and was in the red today. Looking at the prices of stocks and the indices would tend to make one think that the market is healthy and on it’s way to great heights. That could be, but it would have to get past some large hurdles to do so.

I showed you a chart last night of the Dow Jones Industrial Average, on that chart I showed how the upward moves have been on lower volume than the down ward moves. This is opposite of what we want to see for a healthy market. Today was no different, the advances in the major indices was on low volume again. I am reminded of circus acrobat performers, you know the trick where one guy stands on top of the shoulders of  another guy and then another gets on top of that guy, and another gets on top of that guy, and so on. So you end up with a ladder of people all being supported by one man on the bottom carrying the others on his shoulders. That is what the past few sessions of our markets reminds us of. And it appears that if just one more person gets on top of this human ladder it will come falling down hard. The markets are indeed balancing very precariously right now.

The DOW rose today and closed right at the top of the resistance level I pointed out to you last night, The Nasdaq is also right up at the top of resistance (see chart below), The Russell 2000 on the weekly chart is also at resistance, as well as the transports index, bank index, and others. The market has all of the ingredients for a "perfect storm". What would kick off the storm and make it explode is what Ben Bernanke does tomorrow. For he holds the catalyst to make the storm clouds move apart (for now) or to ignite a large lightning bolt and unleash the storms fury.

The perfect storm is what is said when all the ingredients come together to make for a super storm. In the case of the markets the ingredients are easy to see in the charts as every where one looks something is at a key resistance level, the continuing troubles in the US economy, and more troubles brewing in the foreign economies.

Lisa and I both want to see a return to a healthy market, but we will never put our heads in the sand and ignore what is going on around us. It is obvious that the thousands of readers checking our site every month (and still growing) want to hear what we think about what is happening. We tell it like we see it, and that will never change. We are not thrill seekers here, we play the markets when the conditions are in "our" favor, not the speculators. Money is paramount to us, and it should be to you to. If you like jumping off bridges with a bungee cord on your ankles, go for it and have a blast. But don’t ask us to do it just because you or someone else says "it’s great". As Lisa stated very clearly last night in her excellent commentary, we are more prudent and take our steps with great care. To one of our readers, Tab321, we don’t know your real name or anything about you, but your comment last night reminded us why it is we are here and what our mission is. We thank you ever so much for your comment and we wish more of the thousands of readers would write to us more often. When the final RebelTraders web site is activated it will be much easier for all of our readers and subscribers to be able to converse with us and even each other, but until then, we read your comments and the emails you sent to us and we thank you for them.

Everyone has different levels of risk tolerance, and some even have money to burn, but we don’t play the markets that way.  Some people will by nature be anxious to be "in the game" at what ever the cost. We choose our own rules to be in the game. If you look at a chart of the DOW over the past two months and say to yourself, "if I had only been in this, that, or the other stock" then you are too anxious to make money and you want it ‘now’. Greed leads to the dark side (sorry, another Star Wars line). Being greedy is what makes us want to be in the markets in the first place, we want to make money. But using greed to make decisions is what leads to losing money. Many a trader has started out in the markets and has made a few good trades and thinks he or she has "mastered the game" to only learn down the road, after having lost most or all their money, that the game is not about "getting that perfect stock" time after time. It is about building equity in a controlled manner.

RebelTraders is all about building wealth in a controlled, disciplined manner. We did not wish for this credit disaster to be dumped upon the markets, but it has landed and we have to work around it as best as possible. The potential for major down ward moves in the stock markets still looms over head, and many smart traders and investors know it to, you see it in the charts with the volume on upward advances being lower than during the downward moves (see chart below of the DOW). There is genuine concern facing the US economy and the stock markets are the barometer to that. Some have likened the current state of the markets to the "eye of the hurricane". In the eye of a hurricane the barometric pressure rises back up, the sky is clear, and there is a sense of calm. Is that where we are now, are we in the middle of the perfect storm? Or is it still forming off the coast and we can only see the darkening clouds?

Lisa and I are swing traders, we are day traders, but we are also meteorologists. We stay in port and tie up the boats when the clouds darken and wait it out for a clear day. For there will always be a good time to trade. There will always be the "big catches" out there to trade, they will not vanish. Tomorrow Ben Bernanke will tell the markets what it wants to hear, or he will tell the markets something it does not want to hear. We are meteorologists, not mind readers. So we wait and see how this will unfold, but we still caution you, it will take more than a rate cut to disperse the dark clouds.

 

 

 

 

 

 

 

 

 

 

DOW Industrials (updated to show today’s volume)

 

 

 

 

 

 

 

 

 

 

 

Nasdaq (resistance level shown in red)