Monday Market Movement

We're up about 10% on the S&P since Friday.

You've gott love the action – $1Tn of "value" was added to the 500 S&P companies in less than 48 hours.  I know I didn't give them a Trillion (there's that word again), did you give them a Trillion?  Did anyone?  In point of fact, there were "only" about 4.3Bn shares traded and let's say an average of $30 each (maybe high these days) is $130Bn of actual cash put into the S&P but the money coming in (advance volume) out paced money going out (decline volume) by about 8 to 1.  This is why low volume rallies are so dangerous – it takes very little to undo them.  Effectively, there is a $740Bn money gap to fill between the S&P's reaction to a 2 day's worth of very positive trading and the actual amount of money that was paid for the stock.

In other words, think of it as having a car lot full of 100 identical VW Beetles that have been selling at the rate of 6 a day for $20,000.  For the last two days, after weeks of sales at $16,000, a few people came in and were willing to pay $17,000 and yesterday, 4 people were willing to pay 18,000.  Can I now assume the rest of my cars will go out at $18,000 based on the sale of 4 cars?  Should I go on TV and tell viewers that my cars will be selling for $24,000 next week based on today's buying?  Well, that's how the markets work – whether up or down, you are being asked to pay whatever the last group of idiots paid regardless of the true value of the securities you're buying. 

Of course, the better the statistical sample, the more likely you are near fair value but we are coming off an October where 5.5Bn shares a day were bought and sold on the S&P and the market fell from 1,300 on Sept 1st to to 741 on Nov 24th (down 43%) so let's not get too excited by a bounce back to 909 (Down 30%).  As I pointed out to members yesterday, 1.5% of our gain came from the energy sector and 1% of the gain came at the expense of a declining dollar leaving almost the exact 1.25% gain we expected as follow-through from Friday's move. 

In the morning I said we wanted to see 9,000 on the Dow and we saw it but didn't hold it.  I said 900 on the S&P and we did make that one but I decided I wanted 912 as I bumped our expectations up to 4% gains in my 10:50 comment due to the stimulated nature of this "rally."  We wanted 1,550 on the Nasdaq and got that.  The NYSE held 5,600 and the Russell beat my 481 target by a whole 1 so I should be happier than I am but I'm still very concerned and bad news from TXN, who cut already low profit expectations by more than 1/2 as well as FDX, who reduced earnings outlook by 25% despite lower fuel prices, did nothing to cheer me up.

I often say, the investor psychology in a bad market is much like that of a girl trapped in an abusive relationship who considers it a sign of kindness if her boyfirend hits her with an open hand today.  We are reduced to begging for table scraps and clinging onto any sort of positive movement, looking for a ray of light.  Now I am by no means long-term bearish.  I do think we have bottomed but we're not going to come out of this sell-off by jumping the S&P back to 1,000 on low volume – we need to build a real base of buyers who WANT to OWN stocks for the LONG haul. 

The last time we looked at the Big Chart was way back on Nov 20th, which just happened to be the bottom of our latest selling cycle.  Keep in mind that that was a Thursday and we had started that week at 8,400 and we were led down by a drop in the OIH from 80 to 65 and the XLE from 46 to 40 (now 46 again) as oil tested the $50 mark.  Now, with oil at $43, suddenly the same groups have decided it's rally time – so you can see where I have a fundamental problem with that….

So we are looking for air pockets on the way up and we will keep a sharp eye out for any sign of turbulence on this very shakey market flight.  Just like a jet plane – we aren't going to stay up without a constant supply of fuel and this roller coaster economy needs over $100Bn a day just to hold its levels.  Yesterday we got at least $500Bn in the form of Obama's New New Deal speech over the weekend but I'm very concerned as that's the stimulus I was already counting on for Jan 20th –  have I mentioned I like gold lately?

Let's not kid ourselves – this is still a very ugly chart!  We are not even over our 40% off levels that gave us a major sell signal on the other side of this mess when we began seeing failures pop up in the US on Nov 10th.  It is critical that the FTSE hold the 40% line as Europe could easily drag us down right now but let's just keep in mind that 40% is nothing more than a 20% retrace of a 50% drop – not at all impressive. 

We'll be watching those 40% lines very closely this week and the Nasdaq and the SOX must get over their "must hold" levels or what's the point?  Asia has had a very nice run in the past two weeks and we'll see how much of that they give back and we'll keep a very close eye on the Hang Seng, who are racing to get back to 50% and rejection there could get nasty.  We also really need to see the Shanghai move past the -60% line as China has put as much stimulus in relation to their GDP to work as we have and, if that's not enough for them, then we haven't done enough either.

So it's all about the 40% line.  I had wanted to get more bullish but I think we'd better hold out for a real confirmation at that level.  If Transports can't close the deal with under $45 oil and all this stimulation then I don't think anyone can (we will ignore the 30 stocks of the Dow as a poor statistical sample).  FDX's warning will be a good test tomorrow – is it baked in or not?