April 20, 2009
The market indices fell between 3½%
today. There were no particular news developments that posed obvious
causes. Distrust of the meaningfulness of Friday's bank earnings
announcements is presented as a casus
but it would seem that normal market dynamics are really behind this
sell-off. The NASDAQ
to end the day at 1,608;
to close at 7,842;
and the S&P 500 tossed off 37.21
points (-4.28%) to 832.
Well, OK, it wasn't a royal flush, but it beats dropping 3%. Oil
fell to $45.63, while gold added $19.60
to finish at $887.50. The VIX vaulted from 33.94 to 39.18.
The Dow and the S&P 500 plummeted in the last few
minutes of trading. The real question is: how far down do we go? Todd
Harrison wrote this toward the end of today: Randoms: Set-Up for Turnaround
Tuesday? He's still looking for this rally to fade, and another
20%-or-so rally toward the end of 2009.
Kevin Depew argues that we're headed for deflation, Five
Things: Point of Recognition Edges Closer.
and that the government's efforts to re-inflate the economy aren't going
to work. Andrew Jeffrey notes that banks still aren't doing a lot of
lending: Consumers to
Banks: Give Us a Little Credit.
(I could imagine some economists saying, "Who
would have thought that present-day consumers would start saving when
threatened with hard times?")
Last Friday, I quoted the best technical advisory service to which I
subscribe, which described Friday's stock market action as an "upside
breakout". And now here we are on Monday morning with the S&P 500
down 3.75% even as I write. What gives here?
This morning, my technical advisory service hails this as "the
long-awaited pullback". How could this happen on the day following an
"upside breakout"? Is nothing sacred?
Could the answer lie in the fact that stock
trading is a game in which the world's sharpest traders, including
state-of-the-art artificial intelligence programs, play against one
another? The game might be expected to play itself in ways that outwit half of these
"sharpies" (the "losers").
What to do now? My technical advisory service supports
the thesis that this rally began as a result of "short covering",
in which professional investors such as hedge funds had bet heavily on the
stock market continuing to fall, and who then decided they had been
mistaken, and who bought back at a higher price (at a loss) the stocks
they had shorted. (This happened to me with the double inverse NASDAQ ETF,
QID, that I had bought as a hedge against further losses in my handful of
remaining mutual funds. As the market rose, QID acted as an anchor, with
losses offsetting the rising values of my residual funds. A couple of
weeks ago, I sold it.) Now, though, claims the technical newsletter, this
rally being fuelled by institutional
investors sitting on mountains of cash. So far, they've just begun to
nibble at the bait.
My technical advisory service expects this
pullback to last at least a few days, although there are no guarantees. It
suggests preparing a "back-up-the-truck-and load-up" list of stocks
and funds to buy when this pullback reaches bottom and starts back up. The
service points out that it will be informative to see how far down the
indices go before a "buy-in-on-the-dips" strategy takes over and
propels this market higher. (The service expects this rally to run above
S&P = 1100, and to last up to a year, but it doesn't see this upsurge
being the beginning of a multi-year bull market.)
Todd Harrison, Monday Morning
Quarterback: What's Shakin', Bacon?, still believes that this market
advance is a bear-market rally that will be followed by lower lows than
the March 6th low, and then by a second 25% rally later this year. Todd
Harrison would probably expect a counter-movement tomorrow on
Prieur de Plessis thinks that the world's economies
really are turning around, and that the U. S. stock market bottomed on
March 6, 2009: Prieur
Perspective: Springtime for Markets.
to do now?
The indices are still well above their 50-day moving averages (around 800
for the S&P 500), so this would seem to me to be a time to wait to see
how rapidly cash flows in from cash-laden institutional investors.