Tuesday, October 28, 2008

Fear Works Both Ways

Wow

That was interesting. This market continues to amaze me. The DOW took a moonshot on a day when consumer confidence hit an all time low:

"WASHINGTON (MarketWatch) -- Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low, the Conference Board reported Tuesday.

The October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists surveyed by MarketWatch had expected an October reading of 52.

Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%."

My Take:

Today was another historic day on Wall St. One thing you need to keep in mind after seeing days like today. When you have this much panic in the markets, stocks can move violently in either direction. Fear works both ways. Investors can panic about missing the next big move higher just as much as they can worry about losing everything when the market begins to crash.

We had some obvious short covering towards the close as the pain threshold for the shorts became intolerable once we got towards the highs of the day. This exacerbated the move higher.

We have seen this move before:

Anyone remember the parabolic move below on October 13th?:




Final Take:

I think its worth noting how this bounce turned out. If you were a bull and bought at the top on the 13th, you are probably wondering where your next meal is coming from. As you can see there was an immediate reversal the following day followed by further violent selling the following week.

Now I am not predicting we will see the same pattern this time, specially with an imminent announcement of more fed rate cuts.

Now this Fed announcement sets up an interesting inflection point tomorrow. Most think a .50 cut is baked in the cake. If they go .75 does the market cheer the news and rally or do they sell in a panic thinking the economy is worse off than anyone expected? If we get the expected .50 cut, does the market sell the news? If we get only a 1/4 point cut, does the market tank because they were expecting .50?

Its going to be very interesting to see what happens. I am not going to get in front of this announcement with any new trades. I will hold what I have and adjust accordingly until after we hear from the Fed.

Bottom Line:

Lets see what kinda follow through we see on the rally today. Keep in mind only 1.4 billion shares were traded on the floor. This is light for such a big move which means you should probably take it with a grain of salt. Panic moves are never a sign of health for the market. We are still in a pretty tight trading range.

You gotta trade small in this kind of trading environment because the whipsaws can rip you apart. There really is no strong confirmation for the bulls or the bears at these levels. The news continues to be daunting, but the government intervention to prop up the markets is just as strong.

This leaves the bulls and the bears both in the dark. Its time to settle down and see what the Fed says tomorrow. Lets also see what happens in the credit markets over the next few days in response to the TARP and the commercial credit support from the Fed that began this week.

When this rally burns itself out which could be as early as late tomorrow, its going to set up a nice entry point to short. The news out there is too horrific for any of the bulls to hold long. This is a traders market. Many stocks had 50% moves today. I see very little reason why traders wouldn't take profits here.

Be careful out there folks! Keep any positons small and hedge yourself. The market is about as mentally stable as Cybil right now.

6 comments:

FOIAMAN said...

Nice commentary. I also believe we're heading lower. We still need to see that capitulation low. I got the crap squeezed out of my short positions today. Luckily I was able to put on some longs to balance it out before the final push into the close.

Jeff said...

foiaman

Thanks. Congrats on cathcing that move this afternoon.

Yeah I took a hit too with TWM and QID today. They are small postions so its no biggie. The nice thing about the ETF's is you don't have to cover.

I have gold mining call that is looking good after today. The dollar is falling hard afterhours and gold is up. Gotta be diversified in this crazy market.

SRS got destroyed today. It was down 33%!

I will get more aggresive when I see signs that this rocket rally is running on fumes.

johndaniels said...

all this rally does is insure things continue to slide. It insures against shorting, it makes perfect sense. If shorting is too obvious, there should certainly be a rally in the market. Now, we will seea 1,500 pullback (or more) over the course of the next 10 days or so. Its how the market has been all year; and theres no reason to assume theres any "new money" that will hold in this economic climate.

Jeff said...

John

I agree.

Some seem a llittle concerned we could have a bear stearns rally part two that could last several weeks.

I think their are too many leaks in the economic boat this time for a bear stearns rally. That being said, the bear stearns rally is something worth noting.

I agree with you. I think we drop down like a cheap hooker within a few weeks. There are so many potential shoe drops out there.

The currencies are bouncing around like rubber balls. US $$ is down tonight on the imminent Fed rate cut tomorrow.

The US dollar rally seems a little overdone here.

We got everyone in the world into this mess by selling bad loans to them, and I think the fact that our dollar is strengthening based on our fraudulent behaviour bothers China and others.

One day its going to be payback time. Perhaps they start to bail on buying treasuries and our dollar.

The problem is right now they don't have a safer alternative in which to hide. Once they find one its going to get very interesting.

FOIAMAN said...

I'd suggest we look at the reaction to the jobs number tomorrow and the GDP number Friday. I'm hoping for bad numbers, which could put the final nail in the bear's coffin. But a good reaction to bad numbers would mean this rally probably has legs.

Jeff said...

foi

I agree

I think we could swing either way here. what a close today though eh?

I think the GDP number is going to be ugly. Some are calling for a -4.5% GDP in Q4.

If we get that look out!