Stock Market Summary for March 7th 2008

The risks of a full blown recession increased greatly this morning with the release of the unemployment data. Most people were expecting a soft number to come in but the data was worse than many expected (no surprise to us however, as we have been predicting the decline for many months).

 

 

 

 

 

 

 

 

(United States Unemployment Data: Data source: Moody’s Economy.com)

Shortly before the unemployment data was released the Federal Reserve made a surprise announcement to which they were increasing the "Term Auction Facility", or otherwise known on the street as the ‘taffy’. Originally the ‘taffy’ was for $30 Billion to be made available on March 10th and again on March 24th. Today’s announcement was that they are raising the amount of those auction to $50 Billion dollars each for a total of $100 Billion. It is obvious to us that this is in response to the near complete breakdown in the credit markets yesterday.

The Federal Reserve definition:

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

The Term Auction Facility is a new process created by the Federal Reserve just months ago as the credit crisis was getting worse. It provide a means for financial institutions to essentially make bids on money they wish to borrow from the Federal Reserve. Normally this would have been accomplished through the Federal Reserve’s ‘discount window’, which has served the nation well for many years. But the crisis facing the financial institutions has reached proportions that are historic in nature as losses continue to mount. Recall my post on February 17th 2008 in which we highlighted the amount of ‘non borrowed’ reserves of financial institutions. The ‘TAF’ was introduced by the Federal Reserve as a means to allow the stigma of the financial institutions to be moved aside as the TAF allows banks and other financial institutions to remain anonymous. For if it was made public which banks were borrowing large sums of money it could create a run on the bank.

Today’s announcement that the Federal Reserve is increasing the amount of money that they will auction tells us that financial institutions are going even further in the hole. The fact that the Federal Reserve is increasing the amount of money being auctioned via the TAF should be viewed as a very bad indication on the health of the economy and of financial institutions in this country.

The trading in today’s market was downright bizarre. Some attempts to rally the market made for some wild swings, but in the end each attempt failed. The indices all ended in the red and added to the ‘bear market’ print on the charts. The chart below is the current S&P 500 which shows that we have now firmly closed below the previous closing price from January. This sets the stage for further declines in the future.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

Also of note is the volatility index (VIX). The volatility index can be analyzed with technical analysis just as any stock chart. The volatility index provides a clear view of the greed / fear levels in the markets. And just like on a stock chart certain patterns reflect trends in the psychology of the market, or stock. In the case of the volatility index we can see that a new upward trend has emerged (rising volatility equals declining market). The chart below was first shown to you on February 29th as we were predicting an increase in volatility would be near as it was about to bounce upwards from the trend line. Today we can see that upward momentum in volatility has been established (see the black circle on the chart).

 

 

 

 

 

(Daily Volatility vs S&P 500 chart)

Over the weekend we will have some additional charts and analysis. We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort symbol: DXD. As of the close today we are now up 13.2%.

Thornburg Mortgage (TMA) appears to be near complete failure now. Again, we predicted that there would be mortgage companies that were going to fail as a result of this credit implosion. Don’t be surprised to see CountryWide Financial to be facing margin calls soon.

[TMA] Thornburg Mortgage, Inc Provides warning as a going-concern; Receives notice of default from Natixis Securities - Filing

Also, bond insurer MBIA (MBI) has requested to cut their ties with the ratings agency ‘Fitch Ratings". MBIA claims that they don’t like the ratings they get from Fitch (Fitch has been the only ratings agency to not be pressured to maintain a AAA rating on Ambac or MBIA). So since MBIA does not like their rating they are going to stop paying them to provide their ratings. Instead of working to improve their companies health in order to earn the AAA from Fitch they decide to dump them. This is a joke, I give credit to ‘Fitch Ratings’ for having the courage to "say it like it is". And MBIA, your just a big cry baby who did not get what they wanted.

There will be more over the weekend. I will also discuss some aspects of different technical analysis methods. It will be a busy weekend here at RebelTraders as I have another work session with our web programmers. The work on the new site is continuing and we are very excited to soon be introducing our new site to the world once everything is wrapped up. We know you will enjoy the new site!

Stock Market Summary - February 26th 2008

In 1959 a television show began airing in the United States called the Twilight Zone, this very popular and highly acclaimed series was a combination of science fiction, fantasy, and horror all wrapped up in one 30 minute story, which most always concluded with an unexpected twist. Today whenever we think of something very strange we think of the Twilight Zone…

There is a fifth dimension beyond that which is known to man.
It is a dimension as vast as space and timeless as infinity.
It is the middle ground between light and shadow,
between science and superstition,
and it lies between the pit of man’s fears and the summit of his knowledge.
This is the dimension of imagination.
It is an area which we call . . . the Twilight Zone

I brought up the Twilight Zone analogy because with each passing day the markets and the economy just seem to be getting more and more surreal. Economic data received today continues to point to a worsening outlook and today the market took that as a sign that more rate cuts will be coming. The economic conditions are deteriorating so quickly and with inflation rising again the US Dollar today set another new low today. Many Wall Street professionals who were paraded on CNBC a month or two ago stated that they felt the bottom was in on the US Dollar. We never made any claims like that because we don’t call bottoms on speculation or conjecture. We work only with facts and the facts showed us that the dollar could still go lower. And lower it has gone. And with today’s gloomy economic data the markets are now pricing in yet another rate cut. With inflation growing substantially over the past few months, the US Dollar continuing to fall, and commodity prices still rising another rate cut will only exasperate this alreay volatile combination.

But today’s advances in the market stopped right at a significant resistance point. As we said previously, our short position on the Dow Jones Industrials would be covered at break even if the market advanced upwards towards the next resistance level. And that we would short at the next resistance level, and that is what we did. We are maintaining our short position on the market. In technical analysis you have to set emotions aside and use the charts as your guide, never mix emotions and investing/trading together… for that is a bad mix.

The chart below is that of the Dow as of today, observe that we are now at a significant resistance level and from the technical perspective this offers us another opportunity to take an entry on the market in a short position. We are at a point where the markets are likely going to become more volatile very soon, and typically when volatility goes up the markets go down.

 

 

 

 

 

 

 

 

 

(Dow Jones Industrials - Daily chart)

 

And speaking of volatility, applying technical analysis to the $VIX works just as well as with any stock. In this chart of the volatility (VIX) index I have identified the ascending triangle pattern and superimposed the S&P 500 on top. The volatility index is the blue line (observe the ascending triangle pattern highlighted with the blue trend lines). The S&P 500 is shown as the red line. Each time the volatility rises the markets decline, and currently we are very near a point in the volatility where we can expect to see a rise as it bounces off the trend line. Ascending triangles usually resolve to the upside, so this would tell us that we are likely to see much higher volatility in the future.

 

 

 

 

 

 

 

 

 

(Volatility VIX Index with S&P 500 - Daily chart)

 

On the economic front we received the Producer Price Index (PPI) data today. This measure of inflation had a top line gain of 1% over last month and a 1% jump is significant. The core PPI rose by 0.4%. Those who say the core is more important than the top line numbers live in an artificial world. Core data is what is left when you strip out food and energy. In the real world people live by food and energy, so those who slam their fist on the table and say "the core is more important" are somewhere in the Twilight Zone.

Inflation is continuing to grow, yet the markets are screaming for more rate cuts. More rate cuts will only add more fertilizer and water to the growing inflation seeds. Cutting the interest rates may help in the short term to un freeze the credit markets, but at what cost to the American people? The old saying is true "They are dammed if they do and dammed if they don’t" (with respect the the Federal Reserve). There is no easy fix to any of these problems, cutting rates only creates an illusion of a functioning market but underneath the fires are being stoked and will result in a pressure cooker explosion.

 

 

 

 

 

 

 

(PPI data - 10 year chart. Data source: Moody’s Economy.com)

 

Home prices continued to decline as measured by the very accurate S&P/Case-Shiller Index. We are now at a point where the year over year declines are the largest ever since the index began in 1988. The summary report issued stated that there are no signs of stabilization in the data. The renewed hopes of more rate cuts by the Federal Reserve coupled with the irrational buying on the announcement by IBM that they are going to buy  back $15 Billion dollars of their stock is what is responsible for most of our advance today. Recall that Lisa wrote about the significance of companies buying back shares of their stock. Companies that buy back their shares are essentially "hunkering down". It is used to artificially inflate their EPS by reducing float. The amount of stock buy back announcements has been very high during the past 6 months. And in the course of history we usually see large stock buy backs in times of economic turmoil and bear markets. We will begin our own index of tracking stock buy backs by companies on the S&P 500 and use this index in the future as one more measure of corporate sentiment of the economy.

How about this news item… The Federal Deposit Insurance Corporation (FDIC) is hiring people to get ready for bank failures. As reported by the Wall Street Journal:

(US) WSJ reports that the FDIC may be preparing for a rise in bank failures

- The FDIC is looking to rehire 25 retirees from its division of resolutions and receiverships.
- Many of these agency veterans worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed due to the savings and loan crisis.

For now, as we wait for the next bit of economic data, or the next announcement of losses by a bank, or as the FDIC is now hiring back employees to get ready for the onslaught of bank failures we can only wait and see, and use the charts for our guide. But one has to admit that the events over the past year could have been something right out of a Twilight Zone episode.

You unlock this door with the key of imagination.
Beyond it is another dimension- a dimension of sound, a dimension of sight, a dimension of mind.
You’re moving into a land of both shadow and substance, of things and ideas.
You’ve just crossed over into . . . the Twilight Zone

Volatility Index $VIX hits another new high

Price swings are all over the place so far. Volatility hits another new high. Just about all sectors are getting hit.

Volatility hits a new high

The VIX has achieved another new high.

Market Update

As I said this morning I expected the volatility index to set a new 52wk high. That has already happened and is now at the highest point in in 4 years.

Volatility Index $VIX

VIX on the way up again

VIX is soaring again

This is a wild day. As soon as we get close to the top of our trading ranges the big money keeps taking their chips and walking away. This is getting frustrating! The volatility (VIX) index is spiking once again now.

Intraday VIX chart

Market update

Market volatility (VIX) is increasing this morning and has us once again in a bearish stance. Up and down, up and down, and up and down we go within this trading range. This see saw action is getting tiring.

At 10 am US east coast time the E.I.A. energy statistics were released and they were bearish for the energy sector. Oil fell back some and some of the energy sector stocks are taking some punishment this morning.

AMX is doing super here and is soaring on good volume. Were up almost 5% from my original buy point just a few days ago.

AKS is consolidating around the original buy point. Still bullish on this metal sector play.

BIG has pulled back but still remains above the original buy point of $29.20. Some consolidation taking place but still seeing some large uptick trades going through so other people are also playing BIG for a move up soon.

WDC posting gains this morning and holding up well in the market volatility so far.

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