Daily Investment Interpretations

April 20, 2009

2009-4-20:   The market indices fell between 3% and 4% 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 belli, but it would seem that normal market dynamics are really behind this sell-off. The NASDAQ discarded 64.86 points (-3.88%) to end the day at 1,608; the Dow doffed 289.6 points (-3.56%) 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?") 

4-20 (Technical Talk):   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 "Turnaround Tuesday".
    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.
What 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.