Fed Flow of Funds Report

I got curious enough to look at the Fed Flow of Funds Report (Z.1). You can find it at http://www.federalreserve.gov/releases/z1/

The first thing that stood out was how severe the credit contraction was. This chart is total net borrowing for years 2004-2007 and September 2008.

Here is the same chart with quarterly info from beginning of 2007 to Q3 2008:

Frankly, based on these charts, I can't believe they weren't acting earlier in the year in more significant ways. It does explain why they took over Fannie & Freddie, right or wrong. Fannie and Freddie were a little bit like Ponzi schemes - they were solvent as long as they were growing. Once they started shrinking, they were wildly overexposed on their collateral base.

The Fed was pretty busy in Q3. $2 trillion and they won't say where it went. Some say that number could rise to $5 trillion as they attempt to fill the gaps as household net worth shrinks at the fastest pace in the last 20 years by a very wide margin.

With the stock market losing another 25% in the 4th quarter, and real estate on a continual decline, we could be looking at household net worth reductions from the Q3 '07 peak on the order of 15-20% in Q4, more likely the high side. From 2004-2007, personal consumption represented 14.9%-15.7% of household net worth. In the first quarter of 2008, household net worth had declined 6.1% from the peak, yet personal consumption continued to climb, albeit at decreasing rates, such that personal consumption as a percent of household net worth had increased to 18% in the third quarter of 2008. If the consumer is able to contract personal consumption to stay simply within 18% of household net worth, after considering a likely significant drop in Q4, Q4 GDP could shrink as much as 5% over the prior year same quarter.

What seems more likely is that the consumer will not be able to cut spending as fast as his net worth had declined, and consumption could exceed 20% of household net worth. In this case, Q4 GDP would grow by about 2.1%. The Fed is rooting for the very thing that we've learned to despise - overextended consumers.

Disposable income declined in the third quarter as compared to Q2, but over the prior year grew by 4.4%, within the range (although near the low end) of recent historical measures. As unemployment increases, this has to get worse. The 4th quarter data may be difficult to interpret; there could be a large portion of severance included in the disposable income figure, which could make the situation appear less ugly than it really is. On the other hand, going into the 1st quarter of 2009, all those fat CEO bonuses that the public has decried won't be in the numbers, and that will move the needle. But we won't get the Q1 figures until June, and by then we ought to know a lot more about the timing and probability of a recovery.

The only good news on the household balance sheet is that foreclosures help the balance sheets by removing mortgage debt that is greater than the value of the property listed as an asset. (If the property weren't over-mortgaged, then they could sell the house for a profit rather than submit to foreclosure). I find it a little ironic that the Fed and Congress want to see foreclosures stopped when they seem to provide a potential way out of this mess for the overleveraged consumer. Sure, permitting continuing real estate valuation declines is bad for everyone. However, the premise implies that you believe that the Fed can "permit" or "disallow" it in the first place. There is little evidence that any program targeting home price stabilization is going to work. Lower rates seem to only benefit those that are not over-leveraged, since underwriting standards are coming back to reasonable levels and no one that needs to refinance to avoid foreclosure can qualify for one. Further, there really isn't the inventory in the mortgage secondary markets to support a refinance boom if one were to occur. So, the best case scenario is that the Fed & Treasury funnel mortgage subsidies (in effect) through Fannie & Freddie, which just leaves everyone with higher tax bills in the future to pay for all these subsidies.

I read that more companies are moving to 4-day workweeks to save some employees and maintain their access to skilled labor. I don't know how this will play out in the unemployment statistics, but I'd be watching for the impact on personal disposable income in the coming reports.

The situation is simply this: If the Fed does not manage to prop up asset values to make up for a substantial portion of the household net worth that has been lost, the consumer will have no choice but to reduce personal consumption to pay down debt and increase savings. Personal consumption has represented 70% of US GDP fairly consistently since 2004, yet GDP growth has shrunk every year since then. One of the reasons that it is so consistently 70% is that any move by the consumer is matched with moves in industry, so a dollar of reduction in consumer spending has the impact of taking $1.40 out of the economy. Therefore, any serious contraction in personal consumption will set off a nasty spiral of lower GDP, which requires the consumer to reduce debt, which requires reduced personal consumption and the cycle continues. This seems to be a reasonably probable scenario at this point. By the time the Fed, Treasury and Congress' stabilization and stimulus initiatives show any impact, we may be starting from such a low point that it only has the effect of slowing the contraction of the economy, rather than reversing the contraction.

I also recall the commitment of the G-20 to avoid protectionist practices, as protectionism has been identified as the great mistake of the great depression. Since then, just about every country with an auto industry has provided support to its own manufacturers. Recently, the same is happening in the chip sector. "Buy American" will eventually be what returns us to a nation that produces enough products to support a growing economy, and if that isn't protectionist, I don't know what is.

Some really funky changes are likely to happen in the Z-1 report in the next two quarters as commercial enterprises like GMAC get reclassified as bank holding companies. I have no idea how this will manifest itself except for two things: If it results in a "bad" economic datapoint, the press will be given the explanation that the figure is not comparable due to the change, and if it results in a "good" economic datapoint, no one will pick it up and report on it and some false optimism will result.

Monday is too far away to make any predictions about the market movement this week. The typical tax selling might have been done a while back - folks will have more than enough realized losses to offset gains. Volume is supposed to pick up this week, I bet it doesn't. I think everyone is sitting on their hands until 2009. Best case, we "fall up" like we did 12/24 and 12/26. It's hard to imagine a big move in either direction this week. Enthusiasm for the inauguration will be what drives the markets higher, which will set up a harder fall when we deal with the realities of the economy, particularly as predictions of a recovery "in the second half of 2009" become "early 2010."

Joe

Today's inspiration

The man who laughs has not yet been told the terrible news.
-- Bertolt Brecht

Keep smiling, happy holidays!

Joe

The week ahead

I'll be on vacation the next couple of weeks, so I probably won't update nightly.

Friday was pretty much as expected. I thought maybe if we broke below 884 that we'd see a leg down, but overall it was a bullish day. Up volume was larger than down volume and advancers were ahead of decliners. Considering it was quadruple witching, it was a lot more bullish than it may have felt. We didn't get any momemtum on the upside, but the downside had no strength either.

I've been doing a lot of reading about recessions, depressions and economic history lately. A quick observation is that the Fed is doing everything it ought to be doing if it is concerned about the risk of a deflation. Another way to say that is that the Fed is (a) very concerned that a real risk of a deflationary depressions exists and (b) doing everything they can to avoid it, regardless of the impact on the future. That's the fundamental flaw and the reason why it will ultimately fail - if they somehow manage to increase borrowing in light of declining economic conditions, then the borrowing will be at lower and lower quality, creating an ever-greater problem to deal with at the next downturn. They know this, too, which tells me that we have already started a deflationary cycle and they are doing the best they can to reverse it before it becomes obvious to everyone.

I raise these points simply to provide a backdrop for trading over the next weeks and months. Optimism has not be completely sucked out of the system. Quite the contrary, in fact. So, over the coming weeks, I would expect to see a steady run in the S&P to the 950 range. The inauguration seems the perfect event to create a peak in optimism.

Businesses, however, have already made up their mind. These days, they make their decisions on fear and survival, and no interference from the Fed is going to stop the layoffs, cost cuts and factory closures. So, by the time we get to March, when the inauguration is a distant memory, we'll be mired in bad news and more and more signs of deflation. Once optimisim takes a breather, we'll have to go down to new lows.

Think about it this way: when the rally was about to end in the late '90's, the Treasury removed capital requirements from banks (this is the regulation that we've heard about on TV that became lax). This temporarily encouraged more lending (to riskier debtors, since all the lower-risk debtors already had their loans). And the banks loaned until they were up to whatever max they could muster. Any dent in credit quality would set off a spiral for them, which we have seen. It really wouldn't have mattered if it was mortgages, or corporate debt, or margin accounts. The banks were on the razor's edge and slipped. So, now the Fed has lowered rates to effectively zero (can't be more pro-lending than that) and also given them capital to do it with. These capital infusions are actually, effectively, negative capital requirements for the banks. That is, the banks are now encouraged to lend money that isn't theirs to start with. If the banks continue to be unwilling to extend credit, or unable given the probability for payback, what can the Fed do next? They can start mopping up the bad assets, but that is with our tax dollars, so we'll pay for that. We might soften the bottom of this credit bust, but it will just make another one necessary.

When you see mandates that require the banks to lend money, put all your cash in a pillowcase. We've all figured out what went wrong (lending money to people who couldn't afford to pay it back). Once the government starts mandating lending at minimum levels for banks, that's your sign that there is nothing left for them to do, and, even if it "works," it won't take long for it to backfire just like it did with mortgages. Only next time, we'll see the Fed and Treasury not as our saviors, but as the problem itself. And everyone will catch on and attempt to get ahead of the credit contraction cycle. It'll happen so fast if we get to that point that the markets will go down to levels that no one has dared utter up to this point.

Best case, the Fed creates a soft landing, a regular recession, and then has to reckon with it's actions, which will be a governor on growth for the next 10 or 20 years, which will be a period of successive recessions set off every time the Fed attempts to recoup some of it's "investment." And this will likely be the subject of the vilification of the Fed and Treasury as things unwind next year. If they knew the best they could offer was serial recessions for the next 10-20 years, why didn't they just allow the deflation to run it's course, and then start to dabble two years into the cycle to facilitate the recovery?

Joe

Today's update

I need to develop some confidence - twice this week I've made a good call only to question myself and then see it come to fruition anyway. DIG hit a low of $26.50 today, that's about a 10% gain. It was hairy betting on new 52-week lows for oil, but it happened. The charts contradicted logic and they were right. Don't be fooled by the move up in oil tomorrow, that is just the December futures contracts rolling over to March. I suppose that could create a sucker's rally. Remember when "oil up" was a bad thing? Now we feel like it's too low. We've painted ourselves into a corner of irrationality.

It's important to keep perspective - the entire Santa Claus rally has been a series of often-irrational moves (both up and down) on light volume. You may have heard people say that the fact that the market did not go down in the face of some bad news must be a good sign. But if you look at the charts a few days later, they are down. For example, we're down 3% from the rate-cut rally. Hope is really the only thing keeping this market up right now. I'll take my chances making my decisions on the side of reason, and the dire economic situation tells us we have to go lower, sooner or later, no matter what the Fed does. In fact, the more the Fed does, the worse it gets at this point. The fall will be harder whenever it comes. They may forestall it, but we have to pay the piper for the excess in the system at some point.

On the S&P futures, we broke through some major support today and that should raise caution. 884 had shown some real strength late last week, and when we dipped below it last Thursday, we dove to 829. Then we retraced back over 884 in the overnight trading Sunday night, but by Monday's open, we were back below it again. Then there was a slow grind down until the Fed's announcement, and then the euphoric rise. Failure to break through that 918-920 area on Wednesday, and then failure to make a new high on Thursday, combined with a new test (and puncture) of 884 are quite bearish. Fact is, we smacked through 884 and dipped quickly to 874, which makes me think 884 doesn't have the support it used to. However, advances/declines yesterday and selling pressure weren't all that bearish.

Some testing of the 884 is in order to give the bulls some confidence. I do not think it will hold, as people continue to question the impact of the Fed moves on the future once they got over the buzz from rate cut. By the way, rate cuts have never had an impact on the stock market - the overriding trend continues in the face of rate cut after rate cut after rate cut. They can stimulate a short-term rally, but the trend continues. See article below.

Tomorrow will either be very boring (trading in the 884-902 range, 892 close), or a real whipper down to 830 or lower. Quadruple witching could make it really interesting.

Joe

http://www.elliottwave.com/freeupdates/archives/2008/12/17/U.S.-Stocks-A-Chicken-With-Its-Fed-Cut-Off.aspx?code=cg

Nightly update

After that DIG short idea, I'm surprised you are back. Shoot, I'm surprised I have the will to write. Helps me think though.

The S&P Futures is running along the path I talked about Sunday night. We're pretty committed to 948 or so as a target. Tomorrow, there should be a pull-back to test 895, and that would be a good time to go long. If we get below 895 and bounce off the 882 range, then go long on the way back up past 895. 882 is Support 1. Could be interesting, since there is a lot of room between 950 and 1005 with little resistance.

If we backtest for several days, adjust that 895 number down by 3 each day. But I'm pretty confident now that we've broken out of the triangle it's only a matter of time before we break to the upside, and the chart says that that should happen on Wednesday or Thursday.

If you want to trade this on the SSO, the short-term target is $29 (one to several days from Tuesday's open). Entry on a pull-back to $25.80 is good. Stop at $25. Upside $3.20, downside $0.80, that's 4 to 1. If we break through the resistance at $27.58, $34 is the next target. Do not enter the trade if the 20EMA on the 60-min chart falls below the 50EMA. Exit the trade if they cross as well.

Joe

Daily update

Here is a short for you on DIG (or you can go long DUG, the inverse ETF of DIG).

I'm a little more bearish after today's action than I was last night. A late-day rally is a great way to keep the news reports from reporting how bearish the day really was. We battled to get above 865 a good bit of the day and most of the day we were in a downtrend that looked like we were going to break down. I don't know where these buyers are coming from, but from 9:30 a.m. to 3:30 p.m., we were in an obvious downtrend channel. The volume was light today, down volume was 72% and decliners outpaced advancers by 2.8 to 1.

The VIX had a nice healthy comeback today, much in line with the day's action. We closed below the 20-day EMA and I'd call that bearish, but it was an inside day so we're not supposed to read much into it. We're getting pretty tightly wound in a triangle on the daily chart. On the way up, there should be some fun chop at 890 and 898. Breaking 900 would create some buying, and breaking 919 would bring out all the bulls in a buying spree.

With the Fed announcing interest rates at 2:15 Tuesday, the mood is more likely set by the tone than the rate, as the rate won't matter to the markets. We have three choices: (1) no rate cut (zero chance of this happening, the Fed would prefer that Congress' stupidity tanks the markets, not their own), (2) a Japan-like rate cut to 0% (also not likely, because the Fed would have to stop saying that we don't have the problems that Japan had [we do]), or (3) something in between, which the markets are expecting.

I heard something interesting lately that had me thinking. All hedge funds carried shorts and longs. What if they spend the whole months of October and most of November dumping their longs to get out of the momentum, but kept their short positions since they were working? And then, in late November, volume dried up and their short positions got a little bit squeezed every day for like two weeks. Could they fuel a rally, or are they simply providing a superficial bottom as they cover their shorts on each dip, which would cause all our highs to be lower (like they've been for six straight trading days)? Today we didn't make a lower low. If we take out Friday's bottom, adios muchachos.

Key datapoints for tomorrow: Pivot is 874, R1 is 891.5, S1 is 855. 20-EMA is 876. I think the ceiling is 895 and 855 is going to be tempting to test.

I'm thinking about quitting the blog business, it takes a lot of time and feels like I'm talking to myself. Leave a comment so I know you're out there.

Thanks!

Joe

Outlook for the week

Friday's action confirmed that the bias is to the upside for the next few days. There is a lot of congestion around the 885 area on the S&P futures (ES). The downtrend line from last week crossed Monday at about 895, Friday's close was 885.5 and the 20 day EMA is 877. The bulls have to push through 908, and then 919. If that happens, the race will be on to 948, and the rally is over and we'll start a downturn. Get your puts in the 930's/940's after a double-top in the high 940's and you'll have a nice return within a few weeks.

FYI, the 50-day EMA is 933. The last time we exceeded the 50-day EMA intraday was 9/19. The last time we closed above it was 8/28. We've lost 32% since that date as of Friday. The above short-term bullish expectation also assumes the inability to hold the 50 day EMA, which would bring a lot of bears out of hibernation. If that happens, it really should be a whipper of a drop.

On the downside risk, if we break below 850 before we get up to 945, run for cover. We'll be testing all the way down to 740.

Either way, whether we first run up to 948 or simply break down below 850 this week, the shorts that you are holding from last week are fine. In both cases the next leg down takes us to at least 800/805.

Joe

The "VIX" is in

Ever seen something like that before? That's the VIX 5 minute chart. The super-stick down is 11:45 a.m. today and the super-stick up is 12:30 p.m. today. If I were a conspiracy theorist, I'd have something to say about that.

The VIX broke support today and made a new low. The last time we closed lower than this was November 5th. I'm almost bullish short to intermediate term. The S&P futures had another inside day, albeit by the thinnist of margins - we tied yesterday's low and came up short of yesterday's high by 7.5 points. We did close 7.75 above yesterday's close. Smaller trading range means narrowing pivots: R2 919.75, R1 907, P 895.75, S1 883, S2 871.75. Perhaps third time is a charm if we get to the low of the last two days - 884.50. Volume has been on the decline the last several sessions. If we don't get up to 912, then we've got to retest the low of 884.50. I still think it is more likely that we break down to the 860 range this week than that we break up above 920. Oil has had a nice two-day run and it has to peter out at some point.

The spring is really coiling in this week's range.

Joe

Evening Update - December 9, 2008

No rants today, just the facts. Today's S&P futures made a lower low and a lower high, which is bearish for tomorrow.

For the bulls, key resistance to break is 918; this is the descending triangle downward trendline. I'll be "shocked" if this doesn't hold, which is to say I'll be buying some puts at this level.

For the bears, it's a far less challenging day. With momentum on their side for the first time, they will test the prior day low (884.5), and after snapping that support, they will attempt to take out the 20 day EMA (875). 850 is definitely in play for tomorrow if we break the 20EMA, followed by 828.

Here are the stats for each of the last few times we broke below the 20EMA:

Date........Peak to Trough Loss..Peak to Trough Days..Avg Loss/Day
12/??/08................??.......................??....................??
...10 days ago...
12/1/08..............-8.8%......................1.................-8.8%
...26 days earlier...
11/5/08.............-25.7%...................16.................-1.6%
...46 days earlier...
9/19/08.............-28.7%...................21.................-1.4%

See how the time between the moves is accelerating? It took 46 days from 9/19 to test (unsuccessfully) the 20EMA, and then it took only 26 days to test it again. Here we are again roughly 10 days later testing it again. That's good news, we are assaulting the 20EMA more frequently. However, each time we fail, we have a significant downturn and put in new lows, and the velocity of that downturn is getting more severe in percentage terms. Holding the 20EMA this week is not trivial. [The December 10th downturn was a minor downturn, so I wouldn't really put it in the class of the other day since it only lasted one day, but it was a doozy.]

If a bottom is indeed forming, we should have some evidence of it by the end of the week. Hold the 20EMA and that creates, at a minimum, an inside week coming off of an up week. We'd also have a situation where the 20EMA is in an uptrend slope, and it is closing in on the 50EMA at a distance that hasn't been this small since October 7. I do not think it a coincidence that about that same time, the VIX was below 44 and it hasn't been that low since, testing and failing on November 3rd. The VIX has to break below 54.50 to confirm we are bottoming in my mind.

If, however, we break and can't hold the 20EMA, it is time to retest the lows. Certainly, the 835/840 range will get challenged, then the 805 range, then the 750 range.

I picked up two new shorts today:

GDP - SHORT - entry $31.00, intermediate target $15
EOG - SHORT - entry $73.00, intermediate target $40

Joe

Evening Update - December 8, 2008

Remember, oh so long ago, when everyone was looking for market capitulation to signal the bottom? I haven't heard the word in over two weeks, and yet I didn't hear a single person state that they'd witnessed a capitulation of any type. We're up 20% since the 11/21/08 low; it's so much to handle that even I'm a little drunk with the thought of it. I have to keep reminding myself of the bigger picture - the major trend is bearish and bear market rallies happen. I'd love to believe that this is the start of a significant, once in a lifetime run out of the abyss. But when the buzz wears off, the old guy with the bags under his eyes in the mirror is still "you" (or me in this case).

No matter your perspective, list the facts as you understand them, favorable on one side of the page and unfavorable on the other.

Reasons things are gonna be just fine: Market's up 20% the last couple of weeks. Um, my brain dump is slowing down a little after that one. Give me a minute, I must have another reason to be bullish.

Will earnings be better next quarter? Do you think GDP will "shrink less? (Is that a good thing, by the way?)

If you were a bank, would you start helping homeowners now that you've gotten wind that the federal government is going to take care of it without you (with 4.5% mortgages)? If you jump to open up the credit markets, wouldn't you look stupid if the feds trumped your idea a week later and made your venture worthless? Corporate debt is pegged to LIBOR - does any bank know if they'll get a decent return on any of that money (since they don't control LIBOR), even if the debtor is a great credit, when a much-lower refinancing from the government might supplant your efforts as a banker?

If you couldn't afford the house you are in, and you are deciding between giving up eating out or skipping a mortgage payment for the first time, which one sounds like it will create greater personal sacrifice for you?

If you were the CEO of a public company, would you take any risk at all? You already do not have a single shareholder to support you, since virtually all companies have lost half their market value over the last year. Do you look smart if you do not lay people off? What if you really don't need to lay people off? Is that what it takes to keep the wolves at bay? I'm not so old to "remember" the era when people were loyal to their employers, but I understand it was really a function of the loyalty of the employers, not the gullibility of the employees. If a single CEO stood up and said, "our people are important, we are not laying any of them off, and that shouldn't be a problem since our stock is already valued so low as to correct for the 'extra' cost of keeping our employees on the payroll." Nope, layoffs are en vogue. How far can the pendulum swing if we decide it is cool to lay off more and more people?

If you were an entrepreneur looking to capitalize on the dislocation in the real estate and mortgage industry, how could you possibly act with all the changes that happen between bedtime and morning coffee?

The Fed, Treasury and Congress are now victims of their own actions - they've made a globe of entitlement. Why should anyone act until (a) the freebies stop and (b) we know the new rules of engagement? They are afraid to stop because the fall will be so very hard, and yet, as long as they do not stop, no one will know where the floor will be. They seek a soft landing but have convinced everyone that we're falling from 10,000 feet without a parachute, and they alone are the last resort for salvation. Entrepreneurship has no place in this calamity, they have been picked out of the play. They have not embraced socialist ideologue so much as they have made risk-taking outright foolish. It isn't investor capitulation that we need to mark the bottom; we need government capitulation to mark the beginning of the bottoming process. As long as they keep trying, then we know that they think it is worse than they say it is. Actions speak louder than words.

And today's version of "the answer?" Quality jobs building roads and bridges. Puleez. I think the some of the reasons the 50's were a great time to live was because (a) homes were extremely affordable, in spite of mortgage rates being higher than they've been the last 10 years, (b) frugality was as cherished as "honor" and "integrity," and (c) hard work really could get you higher than whatever you were born into. A guy building roads could earn a decent wage, support his family and probably save some dough. (And he would pack a lunch with leftovers from dinner the night before, which was almost always not eaten from a take-out container or the grocery store deli.) What sons and daughters of ours will have any of these dynamics in their lives while they are holding a walkie-talkie and a stop sign with their college degrees?

A lot of good will come of the economic decline for sure. Portions will get smaller at restaurants and Type II diabetes will fade. Immigration won't even be talked about, what with all the unemployed civilians eating humble pie and realizing that "flipping burgers" and mowing lawns is in fact an honest day's pay. I even hear that sex in marriage is up as a recreation activity, since you don't have to drive to go there and it doesn't cost anything.

I'd love to hear if anyone has more than one reason why it's all going to turn around from here. Especially since the "one reason," the market run-up, is going to have it's test and leave everyone wondering again, sooner or later. It would be nice to know if people have more than a wing, prayer and a bear market rally to hang their hopes upon.

In the meantime, let's talk about the S&P. Another interesting day today. 919 proved to be the top, as predicted (sorry, couldn't help myself). It really was a day for the bulls - a gap up open that never closed, and an intraday high not seen since November 10th. Today, we gapped up, didn't close the gap, opened and closed above the 20 period moving average and touched the downward trendline. All this two days after the upper bollinger band crossed below the 50 day moving average, spectacular. And we've gained over 20% since the last low.

I could have written the same comments about November 4th. Well, the bollinger cross thing happened one day, not two days, before the last time all these things happened. But on November 4th, we finished a 20% run up since the last low, gapped up, touched the trendline, and opened and closed above the 20 day moving average. We lost 36% in the next 12 sessions. If we repeat that, we see 680 on the S&P before Christmas.

We're as close as we've been to the 50 day moving average since late September, take that out and this bear market rally gets interesting. Still, shorting the rallies hasn't failed as a strategy yet, and until your list of reasons why it's all gonna be ok is longer than your list of what is left to go wrong, it's still the smart bet.

Tomorrow's action - key for the bulls it's all about taking out 919. The pivot points once again tell the whole story - the pivot is 896, pretty much where we closed today (and where the futures are as of this rambling). R1 is 922, the bull threshold that needs to get broken for the rally to legitimize itself, and S1 is 874, right around where we closed last Friday. Worth mentioning is S2, 848, a level that has to be tested before an honest broker can say we've bottomed. 944 is R2 and if we get there by some off-chance, we might as well test the November 10 high of 952. That's way too bullish for me as it would have us breaking above the 50 day moving average and I just don't see the fire in the belly. Today, I bought March puts when the S&P hit 919 and tomorrow I'll be doing the same if we get to that level. While it is possible that we'll see 950 in the next few days, it is extremely probable that we'll see 800 or lower again before February. I like the risk/reward on that one.

Night,

Joe

Monday, December 8 Preview

The S&P futures are already trading above Friday's close, which was the high of the week, bullish on both fronts. Last week was an inside week, so we have to look to the prior week for resistance and support of interest. Breaking above 897, the high two weeks ago, would be very bullish and the next stop would be 919. Above 922, it gets very interesting, possibly as high as 958. That would be a 9% up day, rare but not unfathomable.

More likely, the 897 will hold and then we'll test some points on the way down - around 880 and then 856 or so. I think 856 will hold, but if it doesn't, 833 should provide enough support.

Today, I set up HPT's automated trading solution and I've been playing with it off and on all day. I'm not going to make any stock picks this week, as I'll probably just stick with several double ETF's this week so I can play with automated transactions and Bracket Trader.

Thanks,
Joe

Friday, December 5 Preview

After what was mostly a boring day, from about 2:30 until 3:30 the S&P dropped about 4%, then in the last 30 minutes recovered about 1.5%. We barely broke yesterday's high (873.75), and we got within about 0.75% of hitting yesterday's low (826.25). Since the market close, the futures have been as high as 853 and have been gliding down for the last two hours, at about 847 now. Today stayed pretty much in the range of 835/840-865/870, which was not a big surprise - the high was resisted by the 20 EMA and the prior day's high, and the low was supported by S1 and several support tests over the last several weeks.

I have a couple of observations on the daily chart. First, even though this week has felt volatile, there have been big daily swings in the same basic range - 820-880 or so. As a result, the bollinger bands have narrowed and the upper band has crossed below the 50EMA. The exact same thing happened on November 3rd, just before we went on that dreadful drip of losing 2-3% per day for two straight weeks, culminating with the drop to 750. However, the last time it happened (on Nov 4), we managed to spend a whole day trading above the 20EMA - the last time we did that was August 29th. The pressure is really building for a run one way or another, and down is much more likely than up.

For Friday, the S&P futures 20EMA is 867 and the pivots are: R2 - 895; R1 - 872; P - 852; S1 - 828; S2 - 808. Prior day high and low are 875.50 and 832 respectively. 872 is an absolute top end for tomorrow unless the employment report has a major upside surprise. On the downside, we'll assault the 828-832 area, and there is a pretty good chance it will snap. The ES (S&P futures) and VIX comparison I talked about earlier in the week has been very consistent; they even tended to land on their own pivot points at the same time throughout the day. Daily stochastics are overbought on relatively light volume over the past week. We could still go another week before we get a major move, but we're in the territory of a snowball effect if things start to run.

The portfolio this week is a joke. I wasn't here to manage anything and do any homework. I've fumbled around with some limited trading time and when I got back to it today I had no discipline - most of my entries were good, and most of my exits were bad. Tomorrow's another day.

Joe

Wednesday, December 3 Preview

If you like numbers, you'll love this. Tomorrow's Pivot point is 837 - call it 835 to 840 and we already know that there is a lot of support/resistance in that range. Tomorrow's first Resistance pivot point is 861 - call it 865 and that also was a solid resistance line over the last several weeks of trading. In addition, the 865 range is about the 20-day EMA as well as the downward trendline for the descending triangle (or descending channel, you pick). I'll be shocked if you give up 865/870 tomorrow, doubly so if we hold/close over that line.

Tomorrow's first Support pivot point is 824. Not all that noteworthy, but getting close enough to that 820 line I mentioned last night.

The bottom line is that there is a lot of containment within the 815-870 range tomorrow, and I think if we test either one and it holds, we go on to test the other.

Tuesday was an inside day. Since an inside day tells you nothing about trends, I like to combine it with the prior candle and see what you get. In this case (combining Monday with Tuesday), we wind up with a "hanging man" - a red candle with a long bottom shadow (or wick). Here's a description of the hanging man: "The hanging man has a red body and a long lower shadow after a series of green uptrending bars. The long lower shadow marks the bulls' failure to prevent the bears making a new low and also from keeping the close below the open. You may see this bar in other places within a series of bars, but when you see it at the top of an uptrending series [like we had last week], you should consider that the trend is probably over. The wise course is to take your profit and run."

If you are a bull looking for solace in today's action (beyond the misleading green candle), today was only the second time that an initial down day was met with an up day. In virtually all other cases lately, a down day coming after an up day was typically followed by another down day - even the severe ones - 10/14, 11/5, 11/19, and those were all ugly two-day runs, losing 14%, 9% and 12% respectively. The only other green/red/green candle set where the red candle closed below the prior day we've seen recently was Oct 24, 27 and 28. Notice that also was a Fri/Mon/Tues for what it's worth. However, on that run, the Tuesday closed higher than the highs of the two prior days, and that Tuesday gave us a spectacular 8% gain for the day. Today was about a 2.5% gain. I'd call that bearish.

If we've just started another bear market rally or bear flag, it's gonna hit the resistance and head down by Friday at the latest. It simply runs out of headroom. We break 870 tomorrow, and I have to erase all my trendlines and start over again.

Wednesday, watch CHK as a leading indicator - if it bounces from $14.35 and takes another trip to the resistance line of it's descending triangle, the markets probably will also. If if breaks below $14, it's going to $4 and the markets will soon follow to new lows as well.

Joe

December 2, 2008 update

I'm traveling today, but too much happened today to stay offline. I don't have portfolio statistics, but I'm sure it was horrible today. I think I was already stopped out on several before noon. Maybe I'll get lucky and the two shorts in the weekly portfolio will carry the day. One thing I'm certain of is that we're going down hard and fast from here, and I'll show you why.



I haven't figured out how to get multiple charts within a single post to work, sorry. The charts are in series after this post.



The first chart I want to show you is the VIX. Last Wednesday, the VIX was on a path to test a key support line. The August 28/November 4 support line held steady, and I think breaching that support was the last chance to get the S&P back into the 900's. As it stands, the VIX is winding its way through a symmetrical triangle, and it looks like it will blow out of the triangle within the next 3 to 7 trading sessions. The VIX and the S&P are inextricably intertwined - the only way to form a bottom is for volatility to settle down. Instead, it looks like we're about to break out the VIX to the upside, with 82 an easy target and probably getting to new all-time highs before we figure out what it all means.



Now look at the S&P futures chart, drawing the same trendline, connecting August 28th and November 4th. Notice the same test last week of that resistance line, and now it's old news that the resistance held. What it clarifies to me is that descending channel, and you have to go back more than 10 years to find any support below the 740-750 area. So, I think the VIX chart is providing us a better picture of what is about to happen in the S&P than the S&P chart itself, not because the conclusion isn't the same (it is), but rather because it is easier to see on the VIX chart.



As for action on ES for Tuesday, today's range was so huge that the pivot points are very wide. There are probably only 2 in play, 3 at the most. The pivot is 842. What has been really interesting over the last two weeks was to see how hard it was to finally break that 835-840 range to the downside, and then, heading back up from 750, we ripped through it like it wasn't there. And today, 840 didn't really put up a fight. So, maybe on Tuesday that 842 pivot provides resistance, but I don't think it has anything to do with the past volume in that range - it is washed out.



Frankly, I don't think we go up at all from here. Keep in mind that today we closed below 820 for only the 4th time in this downturn. The last time we closed below 820, we lost about 9% the next day and closed that day at 750. For Tuesday, 786 is Support 1 (S1), but 750 is a real possibility. If not Tuesday, then we look at the VIX chart for the clue and assume that we break the 740 low within 7 trading sessions. 680 is the next stop.



Joe

VIX Chart

S&P Futures Chart

Notice how low volume was last week and how progressively it declined. Dead cat bounce.

S&P futures - up close for Tuesday