Dow +368.75 at 11388.44, Nasdaq +74.80 at 2273.90, S&P
+48.57 at 1255.08 
Big
Reversal
This year especially since March we have become rather accustomed to the
reversals that either wipe out the gains or losses from the previous day or two.
This week we saw the same but on a grander scale. The first three days of the
week dropped the Dow about 800 points and on Thursday the Dow hit new multi-year
lows but from that point rallied 1024 points to the Friday high.
Fed chairman Ben
Bernanke
in the last 9 months has often stated that we have no big problems. Even in
March he said that problems in the subprime market seem likely to be
contained.
Of course just about every independent financial blog and newsletter have been
saying right along that this is a huge problem and will take perhaps years to
work through. Seems finally there was a change of heart and on Thursday night
there was an emergency meeting of the leaders of congress where they were told
that the financial system was facing eminent collapse. Nice that after al of
these months someone woke up. Recently the Government, meaning all of the USA
taxpayers bought the majority of Fannie May and Freddie Mac and then
Lehman Brothers and this past week they announced they would spend at least $85
billion to buy about 80% of AIG. This is such a mountain of bad debt that
it may run as high as $1 Trillion (1 thousand billion) - that is about the cost
of two Irag wars or roughly $3,333 for every adult and child now in the USA or
$13,200 for a family of four.
The government also said it would set up a plan (perhaps similar to the Resolution Trust
Corp)
that would give them broad power to buy the bad
debt of any U.S. financial institution for the next two years.
The hope is that when they buy up toxic mortgages that no one wants they can
hold them long enough until they may become profitable. Guess who is going to be in
charge of all of this? Treasury Secretary Henry
Paulson and Federal Reserve Chairman Ben Bernanke if you can believe it.
The national debt ceiling is the limit this nation can spend itself into the red
and it was $6.4 trillion in 2003. By 2006 it was raised to
$8.9 trillion and in July congress raised it to $10.6 trillion. Now it seems it
will have to be raised at a minimum to $11.3 trillion. Of course this is only
the preliminary figure so this new raise could double of so in time.
I was thinking, as long s the government has decided that it
is ok for it to buy private companies and nationalize them so to speak, hope
they don't just buy the losers - why not pick up some good solar companies then
pass some laws that homeowners have to use at least partial solar. I am sure
there are a lot of companies the taxpayer would prefer to own. (tongue-in-cheek)
The current administration, who has the highest
disapproval rating of any presidency in the 70-year
history of the Gallup Poll, had a plan years ago that every
one should own a house whether it was a good idea or not and it seemed not so
important that the buyers had the income to buy or if they bought at any
reasonable price. In the past banks cared about who they gave mortgages to and
they required sizable down payments and thorough credit and income reviews.
However, with presidential backing
Fannie May and Freddie Mac could basically buy the mortgages from banks so the
banks need not care so much about checking to see if the buyer could
afford the house or in getting large down payments. Since the Govern
ment's
Treasury Secretary
and the private sector's Federal Reserve are suppose to provide for a
smooth
working financial system
they were absolutely to blame for this mess. Technically I suppose it was
congress who is to blame for doing nothing years ago but Bernanke and Greenspan
before him were either asleep at the switch or just
doing what the president wanted instead of doing what their real job is
supposed to be. Regardless they failed miserably and now are being given more
power - great, and on this news the market rallied. So our man here in the
picture who was in dismay over the falling chart is just as much so at the
rising one.
(If you would like to learn more about how money is
simply created by banks and this whole system of "smoke and mirrors" Watch
Paul Grignon's excellent "Money
as Debt" we put up on the site)
Of course something had to be done to prevent a run on the
banks and maybe they did the right thing as they had less choices because they waited
a year before acting. What many people though do not like at all is that in this
current scenario all Americans (USA) are having to pay the bill for mismanaged
and greedy companies who in the proper course of things should be allowed to
fail and go out of business. That is how a normal market works. It used to be
that the forestry service would try to put out all forest fires. They learned
though that this is not a good idea as it allows forests to grow
artificially too much and they then get out of hand. When fires are allowed to
burn the soil is nourished and the ground is opened up to allow much sunlight
and when new growth begins it is rapid and strong. The natural state of
economies are to go up and down and if they get out of balance way too much on
one side they often correct to the opposite side as well but then build a
solid foundation. To try and control this natural process can lead to even more
problems later.
Another contributor it seems to the rally was that England
placed a ban on shorting financial stocks and the USA reinstituted their ban
also on short selling shares of 799 financial stocks until October 2, though
they can extend it later. (Look at the chart of the Japanese Nikkei Index
$NIKK and you will see a high in January 1990 at close to 40,000 as that is
when short selling became legal. It dropped to 7303 during the next 13 years.)
Normal short selling is not the cause of the financial stocks fall and this
banning of short selling is in actuality a form of market manipulation. The SEC also has new rules about naked short selling and now when you sell a
stock you must deliver the stock in 3 days instead of the 13 (I think it is)
now. This is great but we do not know yet if it will be enforced as the current
law sure isn't. Look at a naked short list and you will find some stocks on the
list for over 500 days - not the 13 limit as there is no enforcement now.
Christopher Cox is the chairman of the SEC and he long ago talked about doing
something about this. Maybe they actually will. You can see the short video of
his opening remarks on the SEC's
naked
short selling anti-fraud rule in April 2008 as we put it on the
site. It
seems that even though this latest rule change may be good it seems obvious that
it is to try and place the blame for lower stock prices on short sellers instead
of the failing banks. Also no one seems to know how can our Ultra Shorts still
work as some of the stocks in the Dow and S&P 500 are financial stocks and
cannot be shorted? Well guess it is not our problem if we just trade the charts.
On the NYSE this Tuesday 1,292 stocks hit new lows or about
39% of all NYSE stocks. On the July low there we 1304 stocks that made new lows. The high number
again on this successful test of the July lows probably means a retest is needed but it does not have to come this week or month
or actually even this year. With the commitment of the US and foreign banks to
provide massive liquidity we may just see a rally last some time. We had though
that a rally may come then a pullback again until say mid to late October then a
rally to the end of the year but this latest news may have changed that.
Just an interesting graph.
The past week's major indices shows gold the largest
gainer as gold had its single largest one day gain in
history.
The top sector of the week was
mortgage finance.
A Commerce Department report showed
that housing starts fell 6.2% in August to a seasonally adjusted annual rate of
895,000 from a revised rate of 954,000 for July. On a year-over-year
basis, housing starts declined 33.1%. Building permits, a leading indicator to
housing starts, fell at a monthly rate of 8.9%, and were down at a
year-over-year rate of 36.4% to 854,000. We are seeing housing stocks rise
however.
The Labor Department report showed that jobless claims rose to
455,000 from the previous week's unrevised figure or 445,000. With the increase, weekly jobless claims came in just below the
six-year high of 457,000 set in the week ended August 2nd.
The best and worst industries for the week.
This is a 15-minute chart of the Dow and when ever we see
such a long candle we see short term caution. It is a lot of weight to hold up on such a
thin tall stick. If it does go up for here it will add even more weight which would
cause it to fall over at some point. If it went down to the moving averages as
an example and built a base there it would relieve the weight. There is some
support to the left also at 11092 if the EMAs did not hold.
The Russell 2000 chart also 15-minutes and it only shows a gap and that also means no support. 715
then IMO will have to be filled.
If you are interested in futures trading you can try it for
free.
Here is our multi index overview and the Dow is at the 50-day EMA, the
Nasdaq has crossed the center Bollinger band, the Nasdaq 100 has
not made it to the center band yet while the S&P 500 is right there
while the Midcaps are above and only the Russell 200 is already at the top
Bollinger bands. The midcaps are almost to their broken trend line from
underneath where shorts often look to enter but a lot of buying in them
has been seen in the last couple of months and they may lead if this
rally does continue this year.
Yes all the news did spark the market it seems but it just so happens that it
came out when the VIX spiked? I often have thought that perhaps charts spark the
news rather than the other way around. I imagine that timing was important and
it was not a coincidence that news came out when it did. At the January and March market lows the VIX spiked up over 30 as seen in red on the graph under the prices. In July
it did not get so high but spiked just the same. This time it spiked to 42. We
had said on the home page on Wednesday that it would not be long until a market
turn and said to take profit on the Ultra ETS or at least set tight stops. As
the chart did in the past three market turns, the stochastics went from under 20
to over 20 and the buy signal. What we would have profered seeing and what we
may see in the futures, is a drop on the RSI under 30 as that often proceeds a
longer term move up. The Dow closed just under the 50-day EMA and the trend
line. Either it consolidates or pulls back here or breaks out. Preferably
it pulls back here and we can judge from the buying the future state. For quite
some time the rallies have been been weak in volume and have been shorted. If
there really is a change in market mood we could see aggressive buying on
bounces and weaker volume on retraces. So maybe now it will be best to buy the
dips instead of selling the rallies. As we look at hundreds of charts a day we
will begin to see if a real change has taken place.
This weekly Dow chart shows the Fibonacci from the 2002 low and
that the Wednesday low broke below the 50% retrace. The downtrend
channel basically contained the move. The weekly also has the
stochastics over 20.
And the monthly chart has a hammer so far though there is 7 more day s
of trading this month.
The Ultra long for the Dow DDM also now is at the 50-day and
trend line above. I know many either shorted the DXD or sold it
and bought this on Thursday as support for DXD was breached. For longer
term holds of this we need to see how the follow through goes and the
reaction to a pullback.
The tranports ran back over the trend line but with oil staring to move
up there may be pressure on them.
The Nasdaq closed back just under the 50-day EMA and back to the 38%
retrace of the move from the August high to September low.
On the weekly Nasdaq we see that from the 2002 low this pullback
is only at the 38% level overall which is actually still bullish.
The Nasdaq 100 weekly pulled back to the trend line and was
totally below the bottom Bollinger band so the bounce was appropriate.
For a longer term move it would be better as stated before, if the RSI
had gone under 30 and stochastics a bit lower. At the moment this is
rather a head and shoulders type pattern but only unpleasant to see at
the moment as it may change. It is still below the 200-week EMA.
On the daily Nasdaq 100 chart we see that it has resistance
overhead at the broken trend line near 1800 and the 1828 50-day EMA.
The Nasdaq 100 proxy QQQQ weekly longer view shows the bounce at
the longer term trend line.
The S&P 500 weekly is just under the 38% retrace from the 2002
lows. If this continued down the EMAs would cross and that would be very
bearish.
The daily S&P 500 shows the resistance just overhead. The
volume on these charts is impressive.
And the 60-minute S&P with resistance right here and note the
long tall candles like on the Dow and Russell 2000. A pullback to the
dotted line could be beneficial for building a stronger chart.
Elliot wave can be fun as one can change it so often and use many
different labels and if ABC does not work you can change it to abc or i
ii etc. Anyway, if this week's low does turn out to be the low of the
year the decline from the high 11 months ago could be labeled as
an A down as part of an A-B-C correction which contained minor
a-b-c inside. (some could label the same decline as 5 waves 1-5) If this is the case we would now be in the B wave up. In
our more usual Fibonacci terms a move back to the 62% line would be quite
common for a rebound in a downtrend so the end of a B could be near
1400. It would be followed with a much more extended and deeper C wave
to finish off the bear market when the housing market starts its
recovery maybe in 2011 or so. If last week's low is not the low for the
year than this chart is mostly void.
We have been showing this chart of the number of new 52-week highs on
the NYSE and it has gone historically low. This week it has moved up
to 37 out of over 2700 listed companies on eh NYSE.
At the January, March and July lows we saw the percentage of stocks on the
NYSE trading under their 50-day EMA go under 20% but this week it stayed
above. This does not mean that we can't just continue higher from here the
rest of the year but to have a more thorough wash out would have been
more encouraging. Guess it may be a small matter.
The Russell 2000 has that gap up and it really needs to be filled
at some point. that is a 30 point drop from here. I wonder how many
people have open short futures contacts to cover when that happens and
how much pain they are willing to take on the upside until it does. If
you look back at the last several years you will not see such an open
gap so it seems like a sure thing. We will soon see.
Until this closes over the monthly 765 this could still be a bear flag
formation. The MACD histogram is still negative and MACD has not yet
crossed over.
The UWM is the Ultra long for the Russell 2000 and closed just
under the trend line. A pullback and then a good volume reversal may be
entry points a bit safer than a break out.
The monthly bank index BKX gained 25% this week as the RSI and
stochastics move up. This is not far from a double off its low. Pullback
will come.
The 30-year bond yield had fallen to 3.89% and then jumped in 4
days to close at 4.36 percent. The USA is going to have to raise a lot
of money to pay for all so one would think the rates would have to stay
high enough to attract buyers. This should put pressure on the dollar
and in doing that help the commodities.
The
Autumnal equinox (Sept 22, 2008; 11:44:18 A.M. EDT)
Happy autumn. It's one of two days each year when the length of
day equals that of night (the other is the Spring or Vernal
Equinox). 
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