Rebel Traders – Analysis Without The Hype

Well now… wasn’t this an interesting day!

We have a LOT to cover tonight so be sure to come back tonight for the full wrap up, you won’t want to miss it.

Want to know what got the market so excited today? Some people think that it is OK for financial institutions to keep losing money, as long as they keep getting additional money injections. It is akin to having diarrhea and eating at the same time. In one end and right out the other.

So Lehman (LEH) and UBS (UBS) can keep losing vast amounts of money out the bottom, and just as long as they keep new money coming in the top end all is well. Do you see any logic in that? I hope you don’t.

Check back tonight for the entire story, and all the charts.

P.S. – Your tax dollars… we now know that they will be used to "cushion and comfort" JP Morgan (and Bear Stearns) in the Government bail out. Yes, your money will be used to pay off the debts and failures of the companies that took your money in the first place (i.e. mortgages). Treasury Secretary Henry Paulson has picked your wallet.

"What’s in your wallet"?

Watch out… he is reaching for another wallet now !

This is a market that is out of control.  The Dow up almost 400 points, because Citigroup (C) is up 10%, AIG up over 8%, American Express (AXP) and Bank of (not my) America both up over 7%.  There’s been a shift in the continuum here for me, and it’s not because I don’t believe the market should be going up.  I’m glad it is, as it should be providing many the opportunity to get out of bad long positions.  This article was the last straw for me.  I’ve been thinking about writing an article on this Bear Stearns subject, but I didn’t want to seem an alarmist.  Well, I no longer feel that way, thanks to this article and I will now write on the subject.  But, later.  I’m honestly quite angry at the moment.  Stay tuned!

All the bad financial news out today is being seen as…..are you ready?…….a floor for the equities market!  That’s right, another floor (let’s not call it a bottom, just a floor).  Where are the good contractor’s?  We sure need one, because we have WAY too many floors, sub-floors, sub-sub-floors, etc.  Bids continue to be pushed up on diminishing volume today.  Personally,  I wouldn’t go long this market if Hank and Bennie Boy paid me to do it.  I really don’t know how many of our readers are traders and how many are investors, but do not get sucked into this vortex, as it will suck the money right out of your account!  Be careful out there!

For now.. the rally has run into a wall of resistance. Last night I showed you the volatility index with the trend lines. With the gap up buying this morning the volatility has come down to support.

this would signal that we have reached the extent of the buying ‘frenzy’ and will probably hold here or start to sell down into the close. At least from a technical perspective that is how it looks here.

The Dow is up around 272 points, with the financial components leading the way.  Pardon me if I don’t get excited by that.  Gold and Oil stocks are holding their own.  The wire service reports that, in a letter response,  the US Treasury says Bear Stearn’s (BSC) assets are mostly mortgage-backed securities that include some "related hedge investments".  S&P has placed Republic of Iceland long-term foreign currency and AA long-term local currency sovereign credit ratings on credit watch: 

‘A-1′ short-term foreign currency and ‘A-1+’ short-term local currency ratings on Iceland, along with the ‘AA+’ transfer and convertibility assessment on the sovereign, were affirmed.

Construction spending for February and the March manufacturing numbers are not as bad as expected.  Check out those "Prices Paid" numbers:

*MAR ISM MANUFACTURING: 48.6 V 47.5E; PRICES PAID: 83.5 V 75.0E

*FEB CONSTRUCTION SPENDING M/M: -0.3% V -1.0%E
- prior revised to  % from -1.7%
- No Revisions

The first day of a new quarter, it’s April Fools day, the futures are up on heavy losses, and they have a chicken on CNBC this morning. Oh what is this world coming to?

The way I see this current situation is that the bad news released by UBS and Deutsche Bank overnight is a sense of "the kitchen sink" has been thrown out the window so all is up from here. Sounds like a perfect trap being placed to castrate the bulls to me.

Remember that rallies in a bear market are historically always violent and large, to only end in disappointment for those that are bullish. We have a lot of resistance at multiple levels overhead so any rally is likely to be a gap up and then flatten out. We still have ISM data to come out at 10:00 am and it is still a very long week of significant economic data to come. Don’t get excited about bear market rallies.

See the hourly chart of the S&P 500 below:

(S&P 500 Hourly Chart)

Ascending triangles resolve to the direction that preceded them, so in this case we will look to see a resolve to the downside in the near future.

Don’t forget about the recession, which is showing signs of still getting worse…

ICSC/UBS WEEKLY CHAIN STORE SALES W/E MAR 29TH: -0.2% W/W,  +0.5% Y/Y
- Lowest Year over Year reading in eight years

UBS: GUIDES Q1 NET LOSS CHF12B; PROPOSES CHF15B RIGHTS ISSUE; SEES $19B WRITEDOWN; CHAIRMAN STEPS DOWN
- Sees Q1 write downs of $19B on US real-estate and structured credit.
- Notes that sub prime exposure fell to $15B in Q1; Exposure to alt-A fell to $16B
- To create a separate unit to manage its US real estate positions
- Environment remains difficult
- Says that the number of new shares will not exceed 1.25B
- Earlier today the Financial Times reported UBS is poised to reveal further write downs of up to $18B and seek a capital increase of about $13.1B. 
*** Note that this is a Q1 pre-announcement; The company is due to report Q1 results on May 5th.

To use an expression my Mother says when she is angry…

I’m so mad I can’t see straight!

This is how I feel with regard to the latest proposals that Secretary Paulson put forth today in his speech. It is my view that all the Government wants to do is find ways to ‘hide’ the problems from the public and create additional layers of crap, which the investing public, would have to wade through in order to get the facts from financial institutions.

I am for a ‘free market’. Transparency and full disclosure of assets is absolutely mandatory for all public companies. If they don’t want to be transparent, and truthful, with their stakeholders then they need to go private… period.

Please read Karl Denninger tonight, while his way of ‘talking’ may be a bit harsh, he speaks the way it is and you should read his view on this matter tonight.

As we have now closed out the month. I thought I would show you the monthly chart of the S&P 500. There are a slew of technical indicators, computer programs, and even some fancy trading methods that have sprang up overnight. But tried and true technical analysis is still the choice of the professionals. One of the most widely used technical analysis indicators on long term charts remains the MACD. 

Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply. (from stockcharts.com)

Some modern day technical analysts think the MACD is no longer as useful of a tool as it once was. Nonsense, most of the critics of standard technical indicators I feel comes from those trying to sell new systems. Don’t get caught up in some web site or software company trying to sell you some "new and improved" technical analysis method. Just as there is corruption in corporate America, there is even more crooked people on the Internet trying to lure investors and traders with fancy sounding systems and names. And beware of any company that says they use a "proprietary" system. If  you hear the word proprietary used to describe something your being asked to pay for… run away…  Anything in a "black box" that they can’t show you is your clue to keep moving along.

There are numerous technical analysis indicators that we use here, Nothing proprietary about our analysis. Just old fashioned hard work and applying the tools of the trade. Some of the tools work very well in a healthy market, and some don’t work at all in a bad market. So we use the right tolls for the right time. Point I’m trying to make here is this, don’t get suckered into spam emails and advertisements touting some new system or the next "make big money now" thing. The ones making the big money are often those selling it, not the ones buying it.

Back to the MACD… it is very useful for identifying major shifts on long term charts. Observe on the chart below how the MACD has not printed a ’sell’ signal since the last bear market which began in 2000. And it has once again printed another signal here in 2008.

(S&P 500 monthly chart)

The Financial Sector (XLF) is still in a down ward channel…

(Financial Sector – Weekly Chart)

And the last chart for tonight is the volatility index (VIX). This chart is the VIX is with the S&P 500 combined. As long as the volatility remains in the ascending triangle then the markets are at risk of increasing sell offs. We are sill maintaining a "sell the rallies" here. There is nothing yet to tell us that a bull market is going to return any time soon.

(VIX vs S&P 500)

I just want to say that events are unfolding at a pace not seen in the markets for many decades. The amount of money that has been pulled out from the market is substantial, and all it will take it a failure of the recent lows to trigger the next substantial leg down in all of the major indices. The way I see the technical’s on the charts is a consolidation over the past couple of weeks with weakening support. All rallies should be considered "bear market rallies" until further notice.

News tonight:

Merril Lynch (MER)    Q1 EPS EST REVISED TO -$1.38 FROM -$1.20 AT DEUTSCHE

A FINANCIAL TIMES EDITORIAL LOOKS AT THE LOOMING DANGERS FOR THE US DOLLAR
- Article notes that in just a few months, sovereign wealth funds have lost billions of dollars by re-capitalizing western banks.
- The article adds that such losses and the rapid fall in the USD increase the risk that foreign investors will lose their appetite for dollar assets.
- The article adds that Abu Dhabi’s implied capital loss on its investment in Citigroup is about $2.5B since last Nov and Temasek lost about $600M on its Merrill Lynch investment
- Article comments on last week’s comments from the South Korea National Pension Service ($220B of assets) suggesting that it may sell US Treasuries and buy higher yielding European government debt.

CitiGroup (C) – THE 6 MUNI-BOND FUNDS OF CITIGROUP HAVE FALLEN TO VALUES RANGING FROM 10 CENTS TO 60 CENTS ON THE DOLLAR – WIRE CITING A SOURCE
- Citigroup bailed out these funds with $600M earlier in March.
- According to the report, the funds had $15B in assets and about $2B in capital earlier in March.

NIKKEI REPORTS THAT MANY JAPANESE COMPANIES MAY ASSUME A RATE OF ¥100 IN COMPUTING FY09  EARNINGS – NIKKEI
- Nikkei notes that at the ¥100 level, industry wide corporate profits could fall by double-digit percentages

Remember that tomorrow we get the first of two ISM data releases. The one tomorrow will be the manufacturing ISM.

The full report later tonight…

This was a day for traders to eke out a few bucks, if they cared to ride the waves.  Otherwise, stocks traded mixed on low volume.  There was no news fit to print, but we’ll still go over the "unprintable news" later tonight.  ISM numbers come out at 10AM ET tomorrow.  They could be market moving numbers, so traders are, and will be, placing their bets ahead of that news.  Selling is pretty heavy into the close, though.  (Hm, still selling those rallies, are we?) I’m in a place where I don’t have a TV in my room (no, I haven’t been locked up and I’m not in rehab!) and I hear now that I missed a great Jim Cramer segment this morning.  I sure hope someone puts it on You Tube.

Check back with us later!

S&P withdraws Thornburg Mortgage’s (TMA) A-1 ABCP rating.  The stock is tanking.  OK, it’s was at 1.47, and right now it’s trading at 1.17.  It’s still down 28% for today, so I’ll call that tanking.

And this note from the wires:

US ASSET BACKED ISSUANCE SLUMPS TO $54.6B IN Q108 V $323.3B IN Q107 – WIRE HEADLINE
- US High-yield debt sales plunge to $5.9B in Q108 v $38.4B y/y