Thanks so much to Tom2oc for providing his most excellent analysis of the market.
Tom often says to me "Don't confuse me with fundamentals" and he's totally right, charts need to be analyzed with a scientific purity without being prejudiced by the day to day shenanigans of the markets. I find that love of a stock or the market is the undoing of many otherwise good chartists as you need to be very objective when analyzing direction.
Fundamentalists, on the other hand, for the most part ignore the charts and focus on the "value" of a company and the undoing of many fundamental analysts is thinking a stock is a great deal just because they "look" like they are bottoming on a chart. I myself am a bit of a hybrid but, as my readers well know, I don't purport to know TA well enough to draw my own charts – a trader must know their shortcomings and develop the right tools and relationships to build a better balanced view of the markets.
That's why I have great respect for Tom and his work. I've known Tom for 2 years and his reads on the markets are uncanny and many of our members cite Tom's "GOAX" warnings as we try to make sense of market moves. Tom and I spent a long weekend going back and forth discussing the market and, while I promised Tom I would stop trying to influence him with my fundamental take, I made no such promise to you so here is a companion piece to Tom's 6-part quarterly market review:
I see 2,500 acting as psychological support. As we are down 325 points (11.5%) from the median high of 2,825, I'll be looking for at least a move back to 2,565 (20% bounce) but failing that should put us right back Tom's long-term trend. 2,450 would be, as Tom indicates, a confirmed failure on the technical end and we would be a good 300 points away from further support if we break it.
I see many oversold 4-letter stocks with Apple being the king of the bargains but we'll get to that in the Apple section. We absolutely need Nasdaq leadership to pull us out of this funk and there is little in the way of tech earnings this week. BLUD missed by a penny (out of .24) last night and was hammered in after-hours trading even though they reaffirmed '08 guidance so good enough is unlikely to be good enough this earnings season.
Even if we do make it higher, We have very tough resistance lines at 2,575 and 2,750 and, while these may seem like high targets to you – how can we imagine retaking new market highs if the Nasdaq can't recover it's own mid-year levels, when the Dow first touched 14,000? We cannot afford a rally that is driven by energy or materials and a housing recovery is unlikely. The financial need something new to latch onto so they can get some deals moving again and the transports aren't going anywhere unless there is something to sell and neither is retail so it's up to the Tech sector to lead the way. My only other horse is the Russell and they are indeed a dark horse in this economy!
AAPL/GOOG/BKX (GOAX) and the VIX:
I said to members about Apple in yesterday's chat:
- "I really don’t care how low it goes, I will just go longer on them. This is one of the best companies in the history of the world in the midst of a huge winning product cycle. Those Apple stores are the most amazing things I’ve ever seen and the throngs of people who are there 24 hours a day in NY are not buying IPhones. Last year Apple did $7.1Bn in sales in Q4 (Q2 for them) and this year they are going to be well over $9Bn and there’s no reason to think they won’t add $2Bn per quarter this year – that’s +$8Bn at a 15% net profit or $1.2Bn of pure additional profit.
- "RIMM makes $700M the whole year and has a value of $56Bn, SNE made just $1Bn all year on $70Bn in sales and has a market cap of $54Bn… Apples total market cap is $155Bn with 3.5Bn in current profits and they will be adding another $1.2Bn over the next 12 months. GOOG only makes $4Bn a year and is valued, even after this dump, at $203Bn."
- "If Apple isn’t worth $150Bn then pretty much nothing else you have is worth crap!"
Apple formed similar bearish patterns last year ahead of Mac World but that was clearly forced as the media ran with the nonsense that was being fed about Steve Jobs "pending indictment" over options backdating. This is what Jim Cramer admits to having done on a regular basis, calling it "a fun game." As Cramer says, Apple is the fulcrum of the market so, in order to knock down the entire market, fundies "foment" the impression that Apple is going down to "beleaguer all the moron longs" and "get the Pisani's of the world" to start telling people there is something wrong with the stock and "you call the Journal and get the bozo reporter" to run negative articles. As Cramer says "These are things you MUST do (in order to run a successful fund) and if you're not doing it, maybe you just shouldn't be in the game."
We are maintaining the fundamental outlook that Apple is a buy at any price and it's Apple that needs to lead the Nasdaq higher right through earnings or we may be sorely lacking of catalysts to turn this dip into a healthy correction. Holding the $175 mark is going to be critical short-term but I think this is a brief dip on the way back to and, ultimately, through $200 for Apple.
Google is a little trickier because it's hard to figure out where their money comes from. I think a recession or recessionary pressures work in their favor as matrix indicate they are indeed the most cost-effective form of advertising. That won't stop a knee-jerk sell-off but it does make them very solid at the 200 dma ($560) but I think $650 will hold (again, assuming we don't have a total market meltdown). Seeing Apple, Google and RIMM being knocked down as they have been the past week for no apparent reason only leads me to conclude that this is nothing more than Cramer's pals running wild, screwing over the retail shareholders while they "position" their virtual portfolios for the new year. Remember, it's much easier to make 12% when you start the year off by knocking the market down 5% isn't it?
How low can the BKX go? This is the thing that can take us down completely but I expect this index to grind to a halt in the 60s and maybe hang out there for quite some time. I called this in the spring when I said there were at least $200Bn in write offs, probably closer to $400Bn and possibly as high as $650Bn while the pundits were saying the damage was minimal. We're up to about $250Bn now but that brings us into the law of large numbers so, IF this is the last $150Bn, it won't seem like such a big deal. Even if the total ends up being $600Bn, as long as the banks can paint a convincing picture that the upcoming confessionals will be the last round (as were the previous 2 Qs supposed to be but people believe any kind of BS), then the dribs and drabs that come in once we're over $400Bn will not seem so bad (it's amazing what you can get used to).
The Fed sees what we see on that chart so we can expect them to act within 10 days to get us back over 90. If they don't, it's because the situation is hopeless and they have decided to let it die. Bad would not be an adequate word to cover that possiblility, nor would dire or catastrophic so let's hope we get some action soon!
VIX – We have a PSW theory that the VIX no longer does what you think it does. We see the VIX as more of a contra-indicator that indicates effectively a rubber-band measure of tightness against a market move in either direction. Note the peaks in the VIX coincide with Dow bottoms, not tops. My general theory is that the rate of VIX change vs. the rate of Dow/S&P change can give us some sort of value that indicates a turn in the market which we are calling the VixDex ™.
There are companies like Apple, Google, GS, ISRG… that are making phenomenal amounts of money with no end in site so, to some extent, I think the market may just be going through a rotational adjustment and not an all-out collapse.
I have, for the whole of last year, been predicting a collapse of commodities (homes, oil, metals) which will lead to a slow rotation into tech and biotech and I think this is stage one of oil capitulation. The problem is oil is 15% of the S&P and financials are 20% so if we assume a 50% retrace there, that's 17% down in the S&P off of 1,550 to 1,348 (call it 1,350). If we get a drop in the S&P led by those groups that arrests at that level, I will be very bullish about a recovery and AAPL will be getting a boatload of my cash.
Stocks above the 200 DMA and China:
Tom's take on stocks above the 200 dma is brilliant. This is another reason I think we are rotating, not crashing but the money flow will tell the tale the next few weeks.
China may not burst – that is the big wildcard. They could crash at any moment as it's obviously ahead of itself but if they consolidate up here, with 11% GDP growth, they will grow enough into the current value in 6 months as to make a correction a buying opportunity. Only a global depression, not recession, can stop what's been started in China and India. It's like trying to pick a top on the post WWII Dow, it was 20 years and 400% before they even had a serious consolidation (thank Nixon for that, the first modern President to rob the country to make big business richer). After that 20-year pause (and still no real pullback) we rocked up another 1,000% with just the 87 crash of serious note (and that was on the heels of a 300% gain from 82.
The trick about China is that it's a $6Tn market vs our $30Tn market and Europe's $20Tn market so just some simple 10% diversification into Asia is enough to keep them afloat. The Olympics are a great catalyst to keep the money flowing in and their Sov. Fund has $200Bn to throw around AND they have virtually no sub-prime exposure. The rapid expansion of China means that a large amount of investors missed the boat. This is why 50% lines hold up, it's the point at which a substantial number of people begin to feel something is a relative bargain, despite the fact that it's still up 50% from where it really was a bargain.
Well, that's my review of parts 1-3 of Tom's report. Tune in tomorrow for the rest!
