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Market Direction: Monthly Trends Suggest November Will Not Exceed 1100 SP

I am not a huge follower of trend-lines and not much of a follower of monthly trend-lines either. They are sometimes right, and sometimes wrong. However, it is best to understand that they are there or buying - or selling - can come out of seemingly nowhere. With that said, the monthly downtrend looks like it is somewhere just below 1100 on the SP and about 10,500 or so on the Dow.

While these trend-lines should provide resistance in those areas, common sense is more likely a reason to sell there. If the market was a strong sell at 1200, how can it possibly be a buy at 1100? It isn’t. Profits have climaxed, possibly for years. Profits have dropped this quarter 11.7% for companies reporting thus far, and this takes into account energy sector profits when oil was at it’s height. Those profits will also decline, possibly sharply, in coming quarters. This is why I have said to ignore the TV talk about “how cheap this market is” for a year. It is only cheap - or expensive - if people know future earnings, and they don’t. If earnings drop 12% this quarter, and another 12% next, then a seemingly cheap market just got a bit expensive. And I believe this is exactly what will happen.

Update: I looked at the trend lines again after the month closed, and the lines are lower. It appears that the downtrend on the SP is about 1030 and the Dow about 10,100 or so.

Market Direction: Long Term and Short Term SMA’s Are On A Collision Course

The market is in a holding pattern right now. For today it is clearly leery of Wednesday’s highs. The bigger picture is this: The long term moving averages and the shorter term moving averages that I watch are growing ever closer. The short term charts say any weakness should be contained above 9000 on the Dow. Long term chart says 9600 right now may be an issue. Something is going to have to give in the next couple of days or less.

If we pop above Wednesday’s high here, the action should get going and we may see big moves again. Longer term i am still very skeptical of this move as we still have zero firm numbers to be long this major move. I just cannot say where we are headed here with any degree of certainty. Probably why the market is in a very tight range today.

StockBlade: The Big Picture

It is easy to get caught up in huge swings in stock prices. It is money and important. However, sometimes people need to step back and look at the forest, not the trees and look at the big picture. While it is clear that we need to clear 9380 on the Dow to have any more upside here short term, the question remains, will it last? I strongly say no.

If you recall, when the market was far higher, about 1300 on the SP, i said one day ” I do not care if the market goes up another 1,000 points, they are wrong”. While the markets can and will be wrong for a very, very long time, sometimes you have to step back.

Here are the facts:

1. Consumer debt is at all time highs, $900 billion in credit card debt alone

2. Consumer incomes are falling (real incomes have fallen since 2000)

3. Disposable income came out today and recorded the biggest drop in history

4. The economy will get far worse before better

5. The rising dollar will hurt manufacturing and global trade which has held much of the large cap profits

6. Housing is no where near a stable bottom, let alone rising

7. The massive fiscal and trade deficits will restrain the ability for future responses to downturns

8. Baby Boomers are coming of age and will need to sell the market for cash

9. State pensions are underfunded by many trillions (not reported as public companies are required to do) and will eventually cause another panic if not corrected

10.  Social Security and other federal long term obligations dwarf the current financial crisis by a magnitude of at least 20, probably far more.

While I have long said that I would prefer not to be all doom and gloom, these problems are very real and cannot be ignored forever. The economy cannot expand without real gains in incomes, and real incomes cannot increase without a net increase in goods produced, IMO. This notion that we have transformed into a service based economy is the biggest economic hoax in history. I have said this since the beginning of time.  Economic “experts” have strongly said otherwise, and I have strongly said they are wrong.

If you examine what is likely in a free trade environment, I would suggest that most all of the benefits of trading with significant unequals would occur in the first few years, possibly a decade. After that, a serious economic decline should begin. The reason for this is simple. The first few years of trading with economic unequals results in a huge surge in disposable income as prices drop because of cheaper imported goods. Real incomes enjoy a pop higher because of the reduction in cost of imported goods- until wages fall. This “benefit” should gradually decline over time as  wages increase in the third world trading partner countries,  and more importantly, manufacturing begins to deteriorate and reduce wages and benefits to compete globally. This erosion should lead to lower wages and benefits for workers over time. This is exactly what has happened and could have easily been predicted.

While I would argue that we do need some level of trade with these countries, to make the case that it should be free trade regardless of the consequences is foolishness. It should have been limited trade. But that cat is already out of the bag and this will likely be very difficult to correct. If we stopped trade now, or put significant restrictions on trade, I believe we would see another financial panic. So we have to be very careful on the response to our massive trade imbalances. This concerns me, as i believe if the Democrats take over and enjoy huge majorities, they may be tempted to reverse our trade policies. Swift action in this direction would likely also see a swift action in the financial markets - to the downside. And the move would probably be very severe.

The only reason we did not see the economic decline earlier was because of foolish monetary policies that created asset bubbles. They were fake economies created with paper and leverage.They weren’t real. While most will blame Bush for this, this started way before President Bush. Unfortunately, it came to bear while he was president, so the general populas will cast the blame on his door.  While I do strongly argue that this is complete nonsense, he could have stepped in and dramatically changed course. But you have to keep in mind that the leading economic minds have said that this free trade with unequals, such as China and Mexico, was in our best interest and the economy was better for it. Therefore, to blame Bush for real incomes dropping since, well, the day he took office,  is foolishness. This began 15 years ago, or longer.

The reason for this post is to remind readers of the big picture, regardless of daily market action. Several months ago I made a post that said Briefing.com and their President, Dick Green, was 100% wrong on the economy and the market.  I made the case that he, and most others, simply did not understand what was going on. I have been proven correct on this issue thus far. Unfortunately, I believe I will continue to be correct, possibly for many years. This is not a long term investing market, it is a suckers and uninformed bet. This is a traders market as I have said for over a year.

Lastly, the Talking Heads need not insult my intelligence that a “depression has been priced in”. Not even close. If a depression were priced in the Dow would be at least 6000 probably far lower. It has priced in at the low a recession, not a depression. I highly doubt it has even priced in a severe recession, which I believe is coming.  What we have in place is a tradeable low, nothing more.

A far more common sensical view would be this. If the U.S. and Europe did not have free trade agreements with unequals, would they be in economic peril? The answer is rather obviously no. They may have sluggish economies, maybe, but peril would not be an issue. it would be a cyclical downturn, not fundamental.  However, while this near financial collapse was not the direct result of global free trade, it was without question an indirect result. World financial leaders attempted to “prop up” their economies via debt and leverage and keep everything the same “as it ever was”. The problem was it wasn’t the same -  real incomes said otherwise. That game has ended and we are now seeing the result - or some of it. I would argue not all, possibly not even close.

Think The $700 Billion Bailout Cannot Be Repaid? Try This On, Americans Have $900 Billion In Credit Card Debt

People are worried about the near trillion dollar bill that will be handed to U.S. taxpayers because they think it cannot possibly be repaid and will put our grandchildren in debt forever. Fair enough, but the government can create inflation and reduce the “real” size of this number and I believe that is exactly what they will do. Therefore, the number will never be truly repaid in today’s dollars.

A far more troubling problem, that i have long warned about, and possibly the next tidal wave to hit the market is credit card debt. Actually, it will more likely resemble a slowly rising flood than a tidal wave. But either way, it ends up being an ugly flood with serious consequences. U.S. consumers have a staggering $900 Billion dollars in credit card debt. Keep in mind that is accruiing at an interest rate of well over 10% while the federal government can borrow at 3% or less. So if you are concerned about the federal deficit, and believe it cannot possibly be repaid, you want to reconsider the true problems facing the country - consumer debt.

I have long mentioned that real incomes have been falling since 2000 and I believe that trend will continue. The economy had forged ahead on massive leverage and debt, for which we are now paying the severe price for. It was not built on anything real. It was borrowed time. Consumers financed the economy via their house that was used as an ATM machine and credit card debt. The housing fiasco has already come to bear. Next up - consumer credit.

There is no possible way, period, that this money will ever be repaid. Ever. It is not possible.  It is not inconceivable that consumers cannot even afford to repay the interest on this debt, let alone actually paying down the principal. You will begin to see this as an issue soon i believe. Banks and credit card companies are going to have to take huge losses on this debt - at some point.

The five largest companies that issue credit cards (they issue 90% of all credit cards) are Discover, Citi, Bank of America, Chase and Capital One. I would consider avoiding these companies like the plague. As we have seen, the balance sheets cannot be trusted as they refuse to own up to the problems until the ship is calling mayday, mayday. If you must be long this train wreck with the Dow approaching 10,000 I see no reason to buy these companies. There are thousands of other stocks that likely are financially better off, longer term, IMO.

Market Recap: Huge Short Covering Rally Pre-Fed

Well I mentioned that the market tends to have a positive bias before the Fed meeting because the trade is one sided as a general rule - no shorts. Today was no exception. It very much took me by surprise as we had no firm intraday low. What i did not notice is that the SP briefly went negative. Once that happened and it became obvious that it was going to close above the open and shorts began to cover. Once we cleared Friday’s highs I said ” I guess we are going to 8800 maybe higher” as there was nothing left to stop it.My bad as i simply saw no indication of this happening on an intraday basis - at all. It was simply buying above the low and see how it played out, basically.

These moves with no firm intraday lows are very difficult to say the least. There was no warning of a low that I could see. I should have just listened to my own instinct that shorts would not take out the Dow low before the Fed meeting. It was just very unlikely.

Anyhow it was a frustrating day as I was wiating for a firm low and didn’t get it. I should have just went “blind” long above the Dow low and waited it out. As this is basically what happened apparently. I am not sure where we are headed next. These Fed days become impossible to predict as huge moves can happen because of short covering and very little, if any, indication.

Bear Market Plunge: StockBlade Timeline Of Views For 2008

As many of my readers know, I have warned, repeatedly, that the financial crisis was greatly understated 8 months ago, and most everyone was wrong. I also made the comment many times that “I was the most negative person alive on the U.S economy and the market - not named Peter Schiff”. Unfortunately my views have proven correct. While this site is intended to be a trading site, I periodically have given my views on fundamental issues regarding a stock and the economy.

Here is a summary of some of my posts this year regarding fundamental problems and that the market would ultimately go lower.

March 11th: “Fed Increases Liquidity - Massive Short Covering Rally”. I make the case that it was a “fake rally orchestrated by the fed” and the facts had not changed for financials and did not believe in it.

March 20th: “Don’t Ignore History”. I make the case that the market was being driven higher by inflation and paper and this never had happened before. Because of this I was concerned about an eventual market implosion.  I also reiterate that the market would go lower.

March 25th “Cramer Is Wrong on Housing - Again”. I state that “Cramer is dead wrong” on FNM and housing and the sector would go far lower and the rally was short covering and should be sold. FNM was about $35 and the homebuilder ETF was about $24. They are now .95 cents and $13.79 respectively.

March 29th “Gold Stocks Are Trades Not Investments” I warned that these stocks were being driven by euphoria in gold, and should not be consider investments at those levels as they “could easily drop 50% or more once the euphoria ends.” AEM was over $70 and has been cut in half since.

March 30th: “If You Think We Are In A Bear Market”. I made the case in this article to “sell the rips” because I believed any rally would not last.

April 25th:  “Market Strength Surprising”. Post is about the fact that the $600 rebate checks will do nothing and the market was ignoring the facts and was wrong and to take profits when you can.

April 26th: Financials: Very Skeptical Long Term” The post says that “there is massive short interest in financials - for good reason”.

May 11th: Mortgage Crisis Is Not Over Like TV Analysts Say - It Hasn’t Even Begun.” Post goes into why the mortgage crisis will get worse, not better, as all the talk was at the time.

May 26th: Buffett Says Recession Will Last Longer Than People Realize”. I agree with Buffett and outline two possibilities. That the recession would be obvious and the markets would go far, far lower rapidly or that we would get “bullfrogged”, basically that the markets would gradually drift lower and lower and lower but never a severe one time plunge.

June 7th: “Current Views”. Post outlines views on economy and the market as negative to very negative.

June 9th: “Financials near March Low”. Post outlines that financials are a trade, nothing more, and the problems would get far worse and that “there are billions and billions of bad debts hiding on balance sheets”.

June 10th: “Bernanke: Downside Risks Have Faded”. I pointed out that I “believed this - like not at all.” and the risks remained or were growing.

June 24th: “Energy And Commodity Stocks Are Trades - Not Investments”. Post outlines the bubble in commodities and “if you are investing in these here for the long haul - you are a fool.” Rather harsh, but was trying to make it clear my position that both would go far lower over time and to ignore the hype that they were going higher. The energy index was near the all time high then and is down 50% since that post.

I could outline other posts, but I think people can easily see what has been my point of view - that everyone was WRONG on the problems coming and the market. I wish everything was fine, and the markets and economy were steadily improving as it would be very easy to help people money on the long side. But that was not the case and I could not ignore what I believed to reality. Unfortunately, virtually all of my views have been proven correct, both with the economy and the markets.

It is very difficult to predict exactly when the markets will understand reality as i have also said that the markets can and will be wrong for a very long time. If i had known that the market would finally understand the problems I would have simply shorted the market. But again, as 2000 pointed out, the market clearly is not an efficient mechanism, regardless of what textbooks teach. Not even close. It is fear and greed.

Market Action: Lower Lows and Lower Highs - Not Good

I thought the market would remain in a tight range before the Fed cut Wednesday. While this still may be the case, we continue to make lower lows and lower highs on the SP. This is not good. True buyers (not traders) are not being rewarded for being long the market. They are gradually losing ground each and every day.

With that said, the only thing holding the market here is the Dow low. I have mentioned many times that I do not consider the SP low a valid low and believed it had to clear - eventually. We may see it clear soon, possibly tomorrow. I believe the game of buying above the Dow low will likely continue however. If it clears, we HAVE to reverse and go positive. If we cannot, we will likely see panic selling into the close. The market may attempt to hold the 2002 low. That would be a logical place to hold next step down.

The most obvious next support on the Dow is about 5900. Yes, I know, that is far, far lower, but that’s what I see on the charts. This is also probably why Cramer made the comment that the Dow could fall all the way to 6,000. Do not be the Lone Ranger here if we clear the Dow low and be buying some concept of “value”, IMO. The market will tell you what it considers value, and what it doesn’t.  The recent action suggests that it does not consider the 8000 area as value relative to the downside risk we are facing. But one thing at a time - the Dow low has to clear. The fake toy train of an economy could get far worse and we might be wishing the market was at 8000 soon enough.

In addition, I also firmly believe that the eventual low will be made once volatility subsides. The end of bear markets generally do not come on massive moves off a low but rather finding a bottom over time. Those are tradeable lows, not ultimate lows, IMO. This is why I believed that these lows would eventually be proven to be a bear market rally off a temporary low on the way to further downside.  Look at 2002 for an example. The market made huge moves to the upside periodically, but they all failed. Once the market finally stabilized and volatility subsided, we found a bottom. There are reasons for this, but one of them is confidence and a reduction of fear. Traders often mention that the time to buy is when fear is greatest. While this may the case for a trade, I would strongly argue that is not the case for long term investing.

Market Recap: The Game Continues As Mentioned

Well, the game continues, as I mentioned Friday. Buy above the lows and sell into rallies. I said Friday that traders will continue this nonsense until they get scorched. They know where they are wrong, so they have the numbers to be long above. Today was a very difficult call as we had zero intraday lows that i liked. It was all about buying above Friday’s low. I had thought we were going to continue higher once the Dow cleared Friday’s intraday high, but had not noticed that the SP did not.

At any rate, this game will continue, most every day, until it no longer works. With the Fed coming up, I am not certain of the direction as the market will likely get very volatile - one way or the other - after they cut.  The market does seem very weakhowever, as pre-fed tends to rise as shorts will likely sit on the sidelines. That tells me legitimate buying interest is marginal, at best.

Close Update: They sold it HARD into the close. It fell 150 points in the last 5 minutes. The same setup that happened Friday happened today. The Dow had to clear 8445 into the close, it got to 8440 and fell back. We had no firm intraday low to stop the fall - and down she went. This is why i mentioned I hate sma related trading - especially in this market. Once the market get’s below them, there is nothing to stop the fall. We saw the result in the last 10 mins today.

StockBlade Opinion: The Crisis Is Far From Over

I have been harping on the fact that people grossly misunderstood what really was going on for a year. The world economy was largely built on not only paper - but leveraged paper. Virtually all of the Talking Heads kept reassuring investors that all would be fine and people were far overestimating the housing crisis. What did I say? They were dead wrong.

This crisis is not over.  Not by a long shot. It has filtered over into all kinds of paper. Companies cannot get loans, even to operate on a daily basis. Consumers cannot get loans and they are losing their jobs by the tens of thousands with virtually all industries announcing layoffs daily. Housing has likely not even hit a bottom. Even if it has, there are millions of homes to be sold.

What does this mean? At the very least it means major uncertainty going forward. Not good for the stock market. At worst, we will face another round of financial crisis that could bring near financial collapse. What people do not understand is the magnitude of the CDS’s (credit default swaps) and what will happen when these unravel.  CDS’s are essentially insurance against losses for these securities. Obviously these are mostly near worthless and whoever holds these CDS’s are in huge trouble. AIG was the largest holder of CDS’s. They obviously collapsed.

The trillion dollar question, probably literally, is are there more AIG’s out there? My guess is yes. Even if there aren’t, the market cannot possibly have sustained moves higher until all of these are gone. Investors have to know, with some level of certainty that the balance sheets they are looking at reflect reality. While I love to go against Cramer in his picks, I completely agree with his complaint that why are companies allowed to pretend there isn’t a problem after Sarbanes-Oxley? Last I checked, companies were supposed to provide real data. Have the brokerage companies provided real data this year? Obviously no. Not even close.

The point being, nothing can be trusted with regards to financials. If companies would have come clean day one, we may have just had company failures and moved on. But that didn’t happen. Now even banks are afraid to lend to one another because everyone is afraid they are liars. If banks cannot trust other banks, then how in the world can an investor. This is a huge problem.

Anyhow, there is a long list of companies and industries trying to get at some of the federal bailout money. What does this tell you? They need it. They would not be after the money while the market is down if they didn’t need it. Buy low, sell high. They are selling low.

Therefore, remain very skeptical of all moves higher. Investors that have been long this market in the face of reality have got crushed, and there is nothing that suggests that will stop. This is a traders market and will remain so, for a long time.

This is how i view the market, for long term investors. The lows of 2002 are still below where we are today.  Is the economy better off or worse than 2002? The economy is FAR worse, and it isn’t even close. While many may argue that balance sheets are far better now than then, that doesn’t consider the fact that earnings were based upon a false economy via paper leverage that likely will not be repeated soon. Probably not in a decade.

While we may not have a total financial collapse and go into a depression, any notion of a bull market is complete nonsense as I see things. I could go on and on that virtually 100% of the forces of a bull market are not in place, and will not be for many years.

Factors That Create Bull Markets:

1. Lowering Tax rates: We have to raise them because the financial mess and grossly negligent Congress over the last 10 years

2. Expanding Economy: Not happening anytime soon. Housing will take 5 years to rebound with the glut

3. Real Incomes Rising: Real incomes in the U.S. have fallen since 2000. i have long said that the economy would eventually fail because real incomes were falling, unlike anytime since the Depression.

I hate to be doom and gloom, but I said 6 months ago the same thing and people ignored it. People had this belief that because we were the United States that all would be fine. Wrong. While I mention often that the scariest words on Wall St. are “it is different this time”, well, it is different this time. And have said so - often. Real incomes rose for over 70 years and led to a multi-generation bull market. That is not the case now, and will not be anytime soon.

The only issue that i am not sure of is the effect of printing money. Stock prices are a hard asset, to some extent. They represent a percentage of hard assets and company earnings. Will the market rise over time because of inflation? This I am not sure of as this has really never happened before. My guess is no as the market is generally a reflection of future earnings, not balance sheets. If all companies were trading just on balance sheets I would buy puts right now as the market would be cut in half tomorrow.

This economic train is likely a toy train, and be careful. This isn’t over.

Market Direction: Uncertain Near Term - Fed Week, But SP Low Is Not A Firm Low

News should dictate direction here near term, but the sentiment is clearly to the downside. The Dow lows are key, IMO. There is no low in the SP I like. Therefore, I believe the SP has to go lower.  If we gap down on Monday, I doubt it will reverse as we should clear 8165. There could be buying near the close depending on how low we go. I do not think the Dow low will clear on the first trip down there, but anything is possible.

I am very skeptical of any move higher here. Sideways would be a win for the market at this point. One thing is very important. If we clear the lows, it does not necessarily mean the market will collapse, but it is possible. It will depend on when it clears and where the open was. For instance, if we opened up on Monday, and then cleared the Dow low as the day went on, the market would be in HUGE trouble, IMO.  Down 1000 or more would not be out of the question. In fact, I think it would be likely.

At any rate, I do believe we HAVE to make a new low on the SP. I do not thnk the SP low is very important. It will get people’s attention a bit, but the Dow low is still key.  Also, the market did close above the open on Friday. Therefore, Friday’s low is somewhat important. I think it is a false low however, and traders likely agree with the selling into the close as I said I thought very likely.

The Fed meets this week and we all know that those days can be very unpredictable and very volatile. One thing I do find likely is this. If they do cut a half or .75 and the market cannot find a floor, the market is likely in big trouble. If they cut they will not have much ammo left - and that is the danger here.

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