Stock Market Analysis

Sunday, November 30, 2008

Welcome Back!

Welcome back! Holidays sure end fast, huh? Hope you guys had an enjoyable Thanksgiving holiday and for those of you still on holiday, LUCKY CHAPS! :)

Those of you back with me today might be tempted to start going long on equities today thinking that the market has rebounded. Well, I am here to tell you... No. Last week's Thanksgiving rally is a simple technical rebound due to a deeply oversold bear market. In fact, futures are already pointing downwards, anticipating a lower open to stocks in a few hour's time. Indeed, I would expect the Dow to continue its way down starting Monday as it is now way off being short term oversold and once again at the top of its declining channel line, which is where it turned down from during last month's technical rebound. The only uncertainty to the sustainability of this primary bear trend is the fact that bond prices have rose and yields have fallen to levels which we have not seen even in the last crisis (see bond yield curve). In fact, it would be fair to say that the returns on bonds are now so minimal that some bond traders should at least be tempted to switch back to equities soon. If an exodus from bonds back into equities happen, it could give some upwards pressure to this bear market.

This week is the heavyweight ISM and Jobs report week again (see economic calendar). Could unemployment rate start to point to a recovery yet? My take is no. I expect unemployment rate to continue making new highs which could start another round of buying from investors expecting a market bottom to coincide with a peak in unemployment rate. That is also the view that I hold except that I am not sure where that "peak" in unemployment rate might be.

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Tuesday, November 25, 2008

On ThanksGiving Break...

See You Guys Back Next Week and Happy Holiday!

Monday, November 24, 2008

Was I Wrong?

Yes, I was wrong in predicting a red Monday. It seems like the well known Monday effect have been failing of late.

The Citigroup rescue plan seemed to be doing more good to the rest of the market than to Citigroup shares itself. In comparison with its decline last week, today's 58% gain looked like peanuts. In fact, it closed slightly lower than its opening price today, indicating a lack of follow through and signs of profit taking. This means that investors are not about to be all out optimistic about Citigroup yet. So why are they so optimistic about the rest of the market today? Well, I still don't see this "rally" changing anything. The Dow is in a short term deep oversold condition and needed a relief rally in order to go further down anyways so it might as well coincide with a bit of good news. Over 10% gain in 2 days is extremely impressive and definitely sets up for some real good profit taking or loss cutting. However, I must admit that there are definitely forces in the market that is limiting the effects of this final capitulation. Will whatever force that is be enough to stop the final capitulation and set in a bottom? For me, I see chances that profit takers are going to come in hard on tomorrow's GDP numbers (see economic calendar) and resume the intermediate downtrend.

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Sunday, November 23, 2008

Thanksgiving Week!

Yes, its thanksgiving week this week and can we give thanks to the GDP number that is due this week as well (see economic calendar)? Make no mistake, the GDP number is going to come in negative again this time round, in fact, it could come in worse than the last quarter, making this a recession even in the academic sense (2 consecutive quarters of negative GDP). In fact, I also expect next week's unemployment number to hit a new high. So what does last Friday's "rally" mean? Make no mistake, last Friday was NO rally. In technical analysis, that was merely a normal pullup within the frame work of an internediate downtrend. In fact, last Friday made yet another lower high and lower low, which again is a bearish sign, not a bullish sign. Mondays have an abnormally high negative day rate and I think we should see the market come down on Monday, resuming its down trend. We are still in a bear market, make no mistakes about that and this holiday shortened week would only add to the uncertainties and result in more selling.

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Thursday, November 20, 2008

Down Down & Away!

The Dow went down down and away today, dropping over 5% in an all out bearish breakout. It certainly looks eager enough to touch and probably break (like the S&P500 did) the 7200 support level (low of the last crisis in 2003) that I spoke of yesterday. At this rate, it could take out the 7200 level by next week! In fact, the S&P500 has already taken out the low of the last crisis in 2003! To put the severity into perspective, since the market crash back in 1974, never have a market crisis caused the S&P500 or the Dow to take out the lows of the preceding crisis! Again, this is history in the making.

Leading indicators reported today continues to point towards economic contraction as the Philly Fed survey also turned in its lowest level since October 1990. More evidence of pessimism emerged as investors rushed for the safety of bonds today like a band of panicking zebras, depressing bond yields to new multi-year lows across the board. In fact, bond yields were not nearly this depressed in the last crisis! Like I mentioned a few days ago, such is the kind of pessimism that is needed to make stock market bottoms. The bulls were just too active around the 8200 region to convince me that it is capable of marking a bottom.

So, things certainly looked pretty lousy both on the fundamental and technical front. But lousy only for stock buyers. For sophisticated investors employing a mix of stock trading and options trading strategies (like myself), this must be some pretty profitable times. :) Of course, my stock pick subscribers made some decent profits as well. Tomorrow is QUADRUPLE WITCHING DAY (see economic calendar) and definitely a day of extreme volatility. Best to stay safe and sleep sound for the weekend.

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Wednesday, November 19, 2008

The Final Capitulation Begins!

The final capitulation that I have been expecting and talking about for weeks has begun at last with the Dow breaking over 400 points downwards and crushing the 8100 support level which marks the bottom edge of its intermediate term neutral trend. In short, it is a bearish breakout. This also mark a 5 years low for the Dow. Investors are obviously pricing in lousy leading indicator numbers for tomorrow (see economic calendar) and a possibility that the lower CPI will result in lower corporate profit in the months ahead. So, where is this final capitulation heading for? While it is too early to try to predict a bottom (yes, where this final capitulation ends could probably be the bottom for this bear market), it sure looks certain that the next support level would be the 2002 low at about 7200 points. Yes, giving back all the gains accumulated since the last crisis.

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Tuesday, November 18, 2008

Holding the Final Line of Defense...

The bulls defended and held the final line of defense against a marauding wave of bears today. The 8200-point line of defense is safe for now but not without signs of cracking as the Dow made a lower high and a lower low today. Lower high and lower low means that the bears are still active and still might win the day tomorrow. Today's struggle may be the prelude to this Thursday's Leading Indicators (see economic calendar) as the bulls continue to speculate a bottom set by a positive number. From my perspective of economic outlook, with the recession spreading globally, I really don't see where the stimulus may be for leading indicators to point upwards. In this sense, this Thursday's lousy leading indicators numbers may be the catalyst needed to produce that final capitulation that I have talked about so much lately.

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Monday, November 17, 2008

What's Stopping The Final Capitulation?

In a word, NOTHING.

With Fed fund target rate already down to 1% and a huge stimulus package which the government can hardly fulfil fast enough already in place, there is little more the government or the Fed can do to prevent the final capitulation from happening when economic numbers continue to turn in rotten. Today's Empire State Index (see economic calendar) turned in way rotten as expected and with the economy newly in recession, it seems like it could get worse in the coming months. In fact, most economists are seeing the peak for unemployment rate at way above 7%, which means that the unemployment peak reversal is just not going to happen yet. On the bright side, with oil and commodities price this low, it only takes a slight increase in aggregate demand for production to step up big time under the low cost, bringing the economy back up quickly. It seems like production has indeed stepped up but don't expect the economy to come back up anytime within the next few months.

The final capitulation, or what the Fib guys call the 5th (final?) wave, is one last big leg down that I expect to happen before the market call a bottom. This process may take months to complete though. Why do I think so? Simply because I am still not seeing the kind of all out, extreme pessism that marks bottoms. Sure the market is pessimistic enough but with all that buying still taking place near the 8100 level, it is clear that not all the bulls are slaughtered yet.

The Dow is once again sitting right at the doorstep of the 8100 support zone, marking the southwards border of its intermediate neutral trend. Will it continue its intermediate neutral trend by turning up from here? With the big 552 points rally of last week completely given back, I am not that optimistic.

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Sunday, November 16, 2008

Inflation Week

Every third week of the month is when we get the Producer Price Index and the Consumer Price Index numbers and hence, Inflation Week (see economic calendar). This week, however, focus would probably not be as much on inflation as it will be on the Empire State Index on Monday and the Leading Indicators on Thursday. A recovery in both numbers could signal a bottom to this economic slump but chances are that we would probably still get multi-year bad numbers this time round. Going by the market action last week, a significant number of investors are betting on a bottom right now and with the numbers still expected to get worse, these investors might be disappointed to the point of producing that final capitulation that I have been talking about for weeks.

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Thursday, November 13, 2008

Touch & Go...

Well, it does look like the Dow have decided to reverse its course back up in continuation of its intermediate neutral trend afterall. Traders are buying into those dreadful economic numbers (see economic calendar), such as the multi-year high jobless claims today, in expectation of a reversal following peaky looking numbers. Indeed, that was exactly what happened in the past but is it going to repeat this time round? My take is a resounding YES. The bottom is certainly near and traders like myself are just trying to spot the exact reversal point. For amateur investors who don't need to get to that fine a resolution, this is certainly the time to start a progressive position building program. Don't be surprised to see the market actually come down a little bit tomorrow, its just textbook after such a strong, committed rally. For now, the neutral channel and the 8100 support level remains safe from the final capitulation that I have been expecting.

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Wednesday, November 12, 2008

Ready For The Final Capitulation?

The Dow slumped over 400 points today as investors come back to reality with all the bad earnings and bad short term economic forecast. Is the market ready for that final capitulation that I have been talking about? It certainly does look close enough as the Dow approached the bottom line of its neutral channel. Over the next two days, we should see the Dow either reversing its course back upwards again, continuing its neutral trend or breaking out to downside, fulfilling my final capitulation prophecy. The deciding factor would be the strength of the 8100 support level. I maintain my outlook of a bottom after one final capitulation.

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Tuesday, November 11, 2008

Neutral Channel Continues...

The Dow completely returned last Friday's gains as it dropped another 176 points, continuing its intermediate term neutral trend defined by the channel within 9700 to 8100 points. This of course made today's drop look nothing more than just a continuation of a simple technical pattern waiting for the next breakout to happen. With companies reporting dismal earnings all season, it truly is hard for investors, including fundamentalists, to muster any optimism. I maintain my view that the market requires one final capitulation before a recovery can be staged.

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Monday, November 10, 2008

Everything's Going Sideways...

The Dow's going sideways, US dollar's going sideways, Oil's going sideways, Gold's going sideways... everything's going sideways lately as markets seem to fall into a sort of limbo. Is this the fabled calm before the storm? If so, which direction would the storm be? Upwards or Downwards? Yes, obviously a lot of learned traders are providing extremely strong support by buying into the high (peak?) unemployment rate with reference to the rebound on peak unemployment rate during the last crisis. This has certainly helped stem the last of the bears and profit takers. Tomorrow's Veterans Day, which is a public holiday, but stock market's still open for trading. Certainly a lot of risk takers and opportunity seekers would actually be home staring at the stock market and probably taking some action.

The Dow continues to be in a intermediate term neutral trend within a primary bear trend.

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Sunday, November 09, 2008

Quiet Week Ahead...

Last week's unemployment number really came in multi-year high at 6.5% as I expected and the stock market really did rise on that news, again, as expected.

Did last Friday's surge do anything for the market trend? Sadly, no. The Dow continues to be in a short term neutral trend within a primary bear trend. Nothing changed. However, such a resilience in the face of such high unemployment rate did get me worried. Capitulation in the unemployment number usually do not suggest that the stock market is going lower but HIGHER! Yes, in fact, the stock market turned right up and never looked back when unemployment peaked at 6.3% during the last crisis. Is it time for the stock market to start pricing in a recovery? Is 6.5% unemployment rate the peak for this crisis? These are the most important questions to try to answer within the next 2 weeks in order not to miss a bottom. So, is the stock market going to still make a new low and a final capitulation like I predicted? That prospect would get rather shaky if 6.5% unemployment rate is indeed the new peak. Either way, I would say that there is now little money to be made with a lot of uncertainty if anyone wants to be newly bearish right now. The money have been made for the bears and its time to look for bullish opportunities instead.

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Thursday, November 06, 2008

Party's Over...

With the election party over, investors turn their capricious gaze upon the sinking economy again. The negative GDP and the dismal ISM number seemed to be registering at last as the market corrected over 10% in just 2 days. IMF's prediction of a global recession in 2009 also contributed to the bearishness today even though it is impossible to tell the extent of that contribution. Even though IMF's predicting 2009 to be recession year, I am actually predicting 2009 to be recovery year instead. Tomorrow's Job report (see economic calendar) is going to show another ugly unemployment rate and the market seems to have priced that in today. This could mean another pessimism crunch where the market could actually get back up a little tomorrow if the unemployment number turn in ugly indeed.

As ugly as the market action has been, the Dow is actually still within a short term neutral trend and could test the Oct lows by next week. Yes, this stock market crisis is not going away without at least one more final capitulation before investors start pricing in a recovery. It is always darkest before dawn... or could it be darkest before it goes pitch black like Jim Kramer loves to say? Well, at least it has never really been pitch black in the stock market before.

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Wednesday, November 05, 2008

Why Was The Market Down On Obama Win?

Why did the Dow drop more than 5% on a landslide Obama win? Wasn't the Obama win one that won the hearts of men? Well, the answer is simple. The effect of the win (Obama or otherwise) has already been priced into the market over the past 4 trading days as the Dow gained against dismal economic numbers. As the textbook behavior goes, whenever good news gets priced in too early, the market drops when the good event eventually happens due to profit taking. On the other hand, democratic wins have never been as much a boost for the stock market as a republican win.

The market looks like its ready for that final capitulation that I spoke of over the past week but don't be surprised to see the market actually go sideways or pullup a little over the rest of the week as such huge drops usually lead to a few days of slight accumulation. The next big thing for the market this week would be Friday's Jobs Report (see economic calendar), which is most likely going to see unemployment rate hit a new high. Could that be the catalyst needed for that final capitulation?

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Tuesday, November 04, 2008

Which President Is Better For The Stock Market?


Neither because it doesn't matter who's President. The Economy works on an engine of its own. Recessions will come and recessions will go no matter how brilliant or blunt a President is. In fact, even if we see the stock market recover from this point forward, it is due to all the things that have happened and have been done so far and due to the discounting effect that I have mentioned the past week. Why wouldn't a new President cure the stock market? Because whatever can be done to cure this mess have been done so far. Those are not the kind of things that can be done only with a change of President.

Being President is a tough job and as commoners, we should examine ourselves before we cast the first stone at the exiting President. Could anyone of us have done a better job if we are President? Have the most brilliant President in the history of the United States ever managed to completely avoid recessions and beat the economic and business cycle? No. The Economy is a bigger engine than mere human effort can change. So much theories and methods have been proposed (some winning nobel prizes) to smooth out the business cycle but what happened in the end? Nothing changed. Cycles are everywhere in nature and is the natural state of things. Earth changes in cycles. Seasons come and go in cycles. Humans have biological cycles and a collection of human worldwide involved in what is known as the economy has cycles as well. Nobody can change that, not even with a new President.

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Monday, November 03, 2008

Unusually Calm Day...

Investors were unusually calm in the face of totally dismal ISM index today. The ISM index measures manufacturing activities in the US and has the highest level of correlation with quarterly GDP numbers. The fact that it turned in 26 years low for October suggests that GDP is going to look pretty nasty ahead. A year ago, a number like this would have caused an immediate sell-off but today, investors remained totally calm as if waiting for something else to happen. Indeed, with an extremely uncertain Jobs Report and the election results looming in the horizon, nobody knows what to expect, not even me. As an options trader, I would rather go multi-directional with my Ride The Flow System instead of speculating on a single outcome.

Somehow, I wasn't surprised at all with the way investors behaved today. Investors have been unusually optimistic on every lousy economic numbers lately and that seems to suggest that investors are beginning to price in a recovery and a favorable election outcome. Indeed, the next President does have the honor of being known as the President who took the US economy out of the 2008 slump. Like I mentioned yesterday, the stock market, being a discounting mechanism, prices in expected economic conditions 4 to 6 months in advance. If this is true this time round as it was the last crisis, could we see a recovery in unemployment rate and GDP 6 months later? Is 6 months sufficient time to totally turn around production, start hiring and selling to the world again? Seriously, its going to be a very difficult call at this point of time. With this in mind, I cannot bring myself to conclude that this 8500 region is the absolute bottom for the stock market even though I do think that we are just merely one step away from it.

That being said, I am sure enough to say that we should see a testing of the Oct low again before anything is conclusive. In fact, the Dow is once again coming up against its 30MA line which defined the intermediate bear trend and would act as resistance. This could be the catalyst which will result in the Oct low testing. For ultra long term investors buying stocks, this could be the best time to start a progressive portfolio building program but not forgetting to hedge your portfolio using stock options.

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Sunday, November 02, 2008

Heavy Weight Week Again...

It's the first week of the month once again and time once again for the most heavy weight of all economic numbers; the ISM index and Jobs Report (see economic calendar).

In my humble opinion, we should see all these numbers turn in pretty nasty with unemployment rate hitting a new high. If these numbers do not result in the final capitulation that I had been talking about, then the stock market could really have found a bottom at this 8500 level. This is because the stock market moves ahead of the economy and if really nasty numbers do not take the market down any further, then these numbers could already have been factored into the market itself and are now beginning to price in a recovery. Indeed, in the last crisis (2001 - 2003), stock market recovered about 4 months before the unemployment number started turning down again (July 2003). In that 4 months, unemployment actually went higher and then peaked in June 2003. Could that be the case right now? Its really hard to say but the signs are there. What I can say for sure is this; the Worst is over in the stock market but the Worst numbers are yet to come for the real economy.

On the technical front, the Dow went back into its short term neutral trend after a brief bearish fake out last week. What does short term neutral trends indicate? It indicates that the market is about to decide on its next short to intermediate direction through a breakout. With the primary bear trend and a short term resistance indicated by the top of the bearish channel in place, a bullish breakout is going to take a lot of effort to happen.

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