Are we there yet?
It's hard to see a bottom except in retrospect.
I prefer to call tops because you can cash out of a top with a profit (one would hope) but a bottom requires you to make a commitment, to put your precious cash back in play, putting a large leap of faith in a market that has been handing out naught but suffering to it's followers.
We started the last week with my comment to members Sunday night: "Cash, cash, cash and, when in doubt, buy some cash. I just put up a post re the value of waiting the storm out and I did mention my virtual portfolios are up but they are still 80% cash. I do not regret any money I didn’t make last week as the correct course of action is still to wait in cash in look for bargains. It’s really hard to be a bear when the Federal government is bailing out the bulls but we have to watch the data and see what kind of mood the market is really in. It would take very little to push this boat over the edge!" Happy echoed my sentiments Monday morning saying: "As always, please pay attention to the overall market conditions and keep cash! I think we should still be patient and wait for the market to confirm a double-bottom!"
Our long standing target for this correction had been 12,500 and we kind of/sort of got there on Thursday but a little too briefly to make us feel really good about it as the Fed screwed up what was shaping up to be a nice consolidation around 12,600, which would have been a perfect 10% correction off the top. While I can understand the terror of letting the market slip below the 10% rule, I think forcing a bounce destroys a healthy, natural venting process that gives us a healthy base for the next leg up.
The ECB and BOJ continued to inject cash into their systems and Happy wisely wasn't buying the "rally" on Monday and Tuesday caused Sage to state: "Today the Fed abstained from injecting liquidity and we saw the result. Personally, I hope for some panic selling so we can shake out the last of the nervous investors clinging by fingertips to existing positions. Time will tell and I am sure Happy will lead the way with some valuable technical analysis. For now, I am still heavily hedged, Phil is still heavily in cash and the markets are still moving down as expected!"
I found it very amusing that I subscribe to dozens of market letters and read all the major publications yet I am the only person who blamed China for Tuesday's drop. My comment to members at 1:40 am would have been a full artticle had I been home and still bears consideration here:
"China inflation is the big story in this part of the World, the CPI over there jumped 5.6% led by a whopping 45% rise in meat and poultry and their GDP slowed to .5% from 3.2% in Q1. If there were any Chinese businessmen on the boat they would not want to be quoted or even mentioned because its very uncool to say anything negative about the economy over there but it’s my personal opinion that they would be very concerned about an overheated economy already bursting at the seems and facing a potential melt-down if the government doesn’t get a handle on the situation soon.
"It looks like the current Gang of Four has been distracted by preparing for the olympics and have been playing it full speed ahead and damn the torpedoes as they have prioritized massive building projects at any cost in order to get things “modernized” for the olympics. Chinese inflation is terrible for us as they had been exporting lower prices to us yet in the past few months, our import prices have been climbing which can leave us with a bad core CPI, a terrible non-core CPI AND rising import costs. Don’t forget Fed job one is to control inflation and they cannot ignore an inflation spiral for long.
"No matter how much BS they try to spin, other countries will force our hand anyway as EU CBs generally have firm inflation targets that they take very seriously (remember the letter of apology that the BOE had to write when they missed the mark?). This will force the People’s Bank to raise rates which will have a huge effect on us as all of Asia will likely follow suit, more unwinding of the carry trade and more pressure on our Fed to keep up before the dollar drops off the face of the earth."
Perhaps our MSM doesn't want to talk about this because it is not some neat little problem that can be solved with the stroke of a pen or put safely behind us by quick-fix economic voodoo. By 10:39 on the 14th my worries were confirmed but there was no change in my strategy: "Holy cow the financials are a minefield on both sides of the Atlantic! Now UBS has more bad news, Goldman with another fund in trouble, Coventry… Cash, cash, cash." At 11:49 I ran down the upcoming data for the week and concluded there was nothing there likely to save us: "I would say that below 13,000 will take us down to 12,500 in short order as there’s pretty much not a thing this week that is likely to save us from a data standpoint."
On Wednesday we dropped 300 points (a move Optrader hit almost to the minute at 1:26) into the close which caused me to say: "Very ugly day! A/D was almost unanimous, HD finished at 5% rule, UBS at 5% rule, probably tons of others… Financials ugly, ugly and ugly. Sentinal fund a catastrophe… Ouch and ouch. Looks like program trading gone wild as the quant funds hit the “Bail” button and oil holds up of all things. It’s very important in this kind of market to remember you are trading against machines – so things that you are used to seeing, ie. tops and bottoms, may not apply, even on stocks you know well.
Very bad that the S&P is down more than the Dow but the Russell is most disturbing. I said quite a while ago we need to watch them as those size companies are very affected by lowered capital availability."
Happy was looking for that bottom on Wednesday and he hit it on the head with "Do Not Panic Thursday" where he nailed the support lines for the Nasdaq and the S&P for that day. We had been piling up the index puts all week and I decided to call it a bottom at 2:47 on Thursday by setting tight stops on the puts on our expected test of 12,500 with a goal of getting to 90% cash. This turned out to be a very good plan!
On Friday morning, with my puts gone, I said "I AM NOT VERY BULLISH – my stops just made me that way!" and, as Sage said, it was "better than pig wrestling." None of us are taking the 25 hours ahead of options expiration all that seriously, despite the 500-point recovery brought on by a meaningless change in Fed policy that gave us a 600-point jump in 60 trading minutes. At least we held 13,000 on Friday but I find the fundamentals to still be very disturbing and the market internals on Friday pretty much sucked:
1,045 new lows vs. 10 new highs on the AMEX and 66% down volume on the Nasdaq – these are the kind of number that keep us in cash!
I'll have to do the virtual portfolio review tomorrow night as I'm still jet-lagged and want to be fresh in the morning but the STP did ridiculously well as we poured on the DIA puts early in the week and got out at what we hope was a nice bottom on Thursday.
Let's hope we are there (at the bottom) already but cash is certainly king in this crazy market!
