Mar

30

Stock Market Summary for Sunday - March 30th 2008

By Chuck

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Last week, in spite of all the media and many analysts claiming that the market had hit a ‘bottom’ , the markets continued to show ‘no confidence’ and sold down into the end of the week.

Lisa and I have been through this before. We remember all too clearly the same talk as the bear market began in 2000 with the tech bubble crash. It is amazing how some people, when put in front of a TV camera, will talk about things they have no knowledge of just to make themselves or their company look good by ‘razzle and dazzling" their way through an interview. Case in point: Dennis Neal, one of the worst journalists that has ever claimed to know anything about the stock market, said on Friday that the unemployment report last month was actually better than the month before, because it dropped from 5.0% to 4.8%. Any one watching that who did not know the facts, would believe what he said because he is on TV. Because he has to be right… right? But the facts are that the unemployment rate dropped last month, because of the increased numbers of people who exhausted their unemployment insurance. Yes, it is a strange calculation the government uses to figure unemployment rates, but the facts remain and it was even stated by the Government that the rate fell due to the increasing number of people who can’t find work and had fallen of the rolls.

So Dennis Neal of CNBC said to millions of viewers that the unemployment rate was better than the previous month. And people who do not understand the facts think he must be telling the truth and this hurts investors. There is so much bad information in the media, be it intentional or unintentional, the fact is that CNBC has turned into one of the worst financial broadcasters ever. You would think they learned their lesson from the tech bubble crash, but they appear to have ‘forgotten’ all the bad information they gave then, and are still doing it today.

But has a bottom really been established? If we use the charts and other market breadth indicators to answer that question the answer is "don’t bet on it". Saying a ‘bottom is in’ right now is purely conjecture, not factual. And for high risk gamblers the media’s talk of a bottom makes a perfect place for them to step in. But the wise investors and traders watch for confirmation signals on the charts.

Waiting for economic conditions and the charts to stabilize reduces risk on ones trading and investing. And reducing risk is what trading is all about, not gambling for that one ‘big trade’ which can just as easily wipe you out. It was asked by a reader what one of the biggest mistakes new traders and investors make. The answer to that question is that too many new traders are too easily influenced by the mainstream media. They feel that if they hear it on TV, they must be pro’s, and they must be right. And too often, they jump into trading stocks before they even understand how to read charts or economic indicators. The experienced trader will use a certain technical point on the chart to give them the best risk to reward profile. Before you enter a trade you must first know where you will exit the trade, if it does not work. That is what many new people never understand.

Before the buy button is pushed you must already know where the sell button (or stop loss) will be activated, when the trade goes against you. When we shorted the Dow Jones Industrials, we did so at a very key technical point, which was 12750. It presented us with the best possible risk to reward profile based on the trend of the chart. This gives us a clear exit point and yet allows the trade plenty of ‘working room’ in order for us to hang on through the brief rallies. Capital preservation is always priority one to a trader and investor. Many times I see traders who don’t learn that important concept and hang onto a trade or investment even when their losses continue to mount. Even long term investors have to know when the time is at hand to cut an investment loose and walk away from the table.

The old joke on Wall street is… "you know when a trade becomes a long term investment? … When it becomes a loss and they did not sell it".

Far too many long term investors lost entire life savings during the tech bubble crash in 2000, for they just kept holding on thinking they would come back one day. Unfortunately there is NEVER a guarantee that a stock, when it loses over 50% of its value, will ever come back to where it was before. More often than not, the stocks that lose the most never regain that share price ever again. And often they end up failing altogether,  just as what happened during the bear market that started in 2000.

Over the past week we saw volume levels that were horribly low. This tells us that confidence is just not there and the levels of people keeping their money out of the market remains extremely high. If the majority of investors truly felt the ‘bottom was in’ then we would see that reflected in the market breadth. But it is not there.

We stand by our view that the economy could be facing one of the deepest recessions in decades and the markets could be in for a substantial bear market. But as we have all witnessed, the Federal Reserve (and the White House) have been doing everything they can to ‘prop’ up the markets by throwing money at it left and right. These are NOT cures, they are band aids for the short term. They are intended to be a ‘triage’ for the problems and hope the wounds heal on their own over time. But gangrene may be setting in from our vantage point.

With the ‘near death’ experience of many financial institutions and banks lately (and many are still near death) do we think the markets will suddenly switch to a bull market and go to new highs in the near future? Answer is  no. The lack of trust in the markets is at an extreme. It will take a very long time for that money to return. Some months ago we wrote about the overall short interest, and that the last time the markets saw that level of short interest was before the Great Depression. On Friday we learned that the overall short interest has hit another record. Short interest is actually still growing and is at another all time record.

On the NYSE, the mid-month short interest report hit a level of 4.15%, which is a record high. On the S&P 500, short interest is even higher. As of mid-March, 5.4% of the float of S&P 500 listed companies were sold short. This represents an increase of 53% over the last year!”

While 4.15% and 5.4% sound like small numbers they are actually extremely high. They represent the amount of shares of all the companies and their available share float. Never has the total market short interest been this high.  A contrarian trader could look at this and say that when the shorts cover, it will send the markets rising to new highs. We don’t buy it. Just as people who buy on the long side, the short holders all work in different time frames. It will take a lot of good economic news in order to shake all those shorts loose. Trading as a contrarian may be highly profitable (if your lucky), but it is also the most dangerous, in that volatility can quickly erase a substantial part of your money.

Over the weekend we have learned that Secretary Hank Paulson will announce on Monday his ideas for sweeping changes to the banking and financial market regulations. This will certainly create much debate as the reach of the Government into the ‘free markets’ will be highly scrutinized. You want to know my opinion of the Government’s actions lately (Bear Stearns, et al)? Well to quote a line from a favorite movie of mine

"You Have Meddled With the Primal Forces of Nature" (from the movie ‘Network’ 1976).

 

Some more later tonight….