May

07

Stock Market Summary - May 7th 2008

By Chuck

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Larry Kudlow of CNBC said tonight that today’s market sell off was the result of Barrack Obama winning the primary in North Carolina last night. Huh? I had to actually play back the tape to make sure I heard him right. Yep, he blames the market sell off on the idea that Mr. Obama might end up in the White House. Now, I need to say that the following discussion is in no way a political statement, I am just conveying the facts, and Lisa and I will never mix our own political beliefs in the market. I am only pointing out the nonsense information that main stream media try’s to make people believe.

Mr. Kudlow’s statement tonight goes far beyond ridiculous, it is down right stupid. For as long as there has been a stock market, the claim has always been that a Democrat in the White House will be bad for stocks. But, that is more of a scare tactic then reality. I’m not going into how one political party differs from another with regard to taxes or anything like that. I’m just talking about the equities market, and history shows us that there are just as many good years in the stock market under Democrat rule as their were when Republicans were in office. And when it comes down to the hard numbers, Democrats have actually been better for the stock market when viewed over many years. View the image shown here for a comparison of market performance since 1901 to which party held the White House. Kind of debunks the whole claim he made. Mr. Kudlow is just trying to build a case for what he will say if the market does not go to 16,000 this year, like he said it would in a recent show.

The real reason for the sell off today was as follows:

1. Over bought market.

2. Major resistance levels across many indices were reached.

3. Housing market continues to decline.

4. The corporate earnings trend for this quarter continues to decline.

5. And last, late in the day, the Governments statistics of consumer credit was a potential sign desperation by the average consumer.

We have been showing you index charts with prices advancing on low volume. Always a danger sign that a rally is likely to fail. And as the prices were advancing on that low volume, the market was at an over bought level. And this could be seen in numerous stocks as well.

Major resistance levels were all being reached simultaneously, as we showed you in last nights charts. That kind of resistance is formidable and should be respected. The market was showing her hand and today she folded.

The housing market data this morning was a blow to those who kept saying the housing market had stabilized, or even improving. Lisa and I have been sticking to the trends, and the trends have said ‘no improvement’. So today’s data was just a catalyst for starting the sell off.

Corporate earnings, regardless of what you have been hearing in the media, are deteriorating. What we see is that the earnings for this quarter have an undertone to them which is ’squeeze’ every penny to report as high of an EPS as possible. Margins are not looking good and we see it likely that that earnings will worsen as the year goes on.

And last, consumer credit today was indeed a big shocker. The data for the month of March showed that credit card debt increased a shocking 8.2%. Some would say this means that consumers are spending money so all should be well. We disagree with this thesis. The rapid rise in credit card debt is a big warning sign of a consumer crash coming. The problem is that the ATM machine that homes had been turned into by cashing out the rapidly rising house prices has ended. The home ATM machine has run dry. And credit cards being used for cash is increasing at an alarming level now. This revels some very deep problems within the US economy, which is that the average American can not get by without the cash being extracted from the homes.

This means that the US economy is so bad, that the average middle class American citizens can not live by conventional means of job income. In good economic times, an average family could get by comfortably with a single income. As time went on that same average family needed a second income. And as we know a two income household is the norm now. And now that is not enough, the rapid rise in home prices which started in the late late 90’s became a third income.

Now that the third income has evaporated they are turning to what ever they can use to get their hands on some cash, their credit cards. This is all leading to a melt down of the consumer. We already know that personal bankruptcies have been rising rapidly over the past 6 months. And this trend will continue, even go parabolic perhaps. Banks and financial institutions will continue to lose money as more and more loans go into default. Banks are cutting back on lending even further now, so that much needed cash is even harder to get, and jobs in the United States are declining. A domino effect that could pick up momentum and push the country into a very deep recession.

And what about all of the efforts by the Government to ‘fix’ the problems? All actions to date by the Government have been to keep corporate America well taken care of in the short term, nothing else. Everything has been temporary fixes, a crutch if you will. Nothing has been done to address the problems for the long haul. So as the economy heads down the rabbit hole, the Government just keeps throwing down thin ropes which are going to keep breaking and slip the economy down further and further.

Some rather significant technical levels were breached today on today’s decline. We want to see some additional confirmation, but today’s decline did signal the beginning of a new down trend could be in the making.

A question was asked today, ‘what is distribution’? Distribution is what happens when you observe a stock trading on high volume but no price advance. Think of it as a relay race. The runners go around in a circle and just keep handing off the baton to the next runner. And this just keeps going around and around. In the stock market when you see a stock where shares are being exchanged over and over to new runners, but the price does not move up that is a distribution event. It is usually viewed as a turning point. 

Another question was why the financial sector sold down today. The answer is that the financial stocks have been over hyped as "all is well" and too many analysts claiming the ‘bottom was in’. This led to an over abundance of retail buyers piling into the financial stocks. Remember, the stocks to get hit the hardest first are always the ones that are trading at over priced levels. And many still view the financial sector as a bad investment and over priced.