Wednesday, November 26, 2008

Stocks Rallying as Turkey Day Arrives

Good Afternoon Folks!

Before I start I want to wish everyone a Happy Thanksgiving. I hope you have a great holiday with your friends and family. I am on my way to the families house after I finish this post. I won't be back until the end of the weekend so things will be quiet around here. I might try to sneak on over the weekend and post a thing or two but I can't promise anything!

Stocks are rising today despite more disappointing news on the economy. The data on durable goods, jobless claims, and consumer spending continue to point toward a deep recession :

"Nov. 26 (Bloomberg) -- U.S. business investment weakened last month and consumers are retrenching worldwide, reports today showed, heightening pressure on policy makers to take stronger steps to combat the credit squeeze.

Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001, while British households slashed expenditures last quarter by the most in 13 years, government agencies said today. A U.S. Commerce Department report showed orders for durable goods slumped twice as much as forecast as domestic and foreign demand dried up.

``It's about as bad as the 1970s and 1980s,'' said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. ``We're looking at back-to-back very deep'' slump in the global economy this quarter and next.

Durable Goods

Excluding demand for transportation equipment, which tends to be volatile, orders dropped 4.4 percent, also more than anticipated and the biggest decline since January 2002. Those bookings were projected to fall 1.6 percent, according to the Bloomberg survey.

Jobless Claims

The number of Americans filing first-time claims for unemployment benefits fell to 529,000 last week, while remaining close to the highest level since 1992, Labor Department figures showed. The four-week moving average for claims reached a 26-year high."

My Take:

All of this data is obviously terrible. The fact that the market is going up despite the bad news is something to take notice of. This is not a good sign for the shorts.

If we close higher today, we will have a 4 day winning streak on the DOW. This could start giving the bulls some confidence and induce more buying. Bear market bounces should be expected after reaching such lows, and they can be sharp and violent. The market in 1929 rallied over 50% before once again heading to lower lows.

The consistently bullish bias thats almost always seen on Wall St must be respected here. The good news for the shorts is all of this buying tells you that we did not see the bottom last week. Bottoms are not seen until almost all of the bulls have capitulated. This recent buying spree tells you that we are not even close. The true bottom will come when no one ever wants to own a stock again.

The Feds promise to throw $7 trillion dollars at this problem also cannot be discounted. This could pose a big threat to the bears in the short term. We have never seen such stimulus thrown at our economy so we really don't know how the market is going to react. It would not surprise me at all if we rallied over the next several weeks.

The Bear Stearns rally in the spring was a similar setup: Massive stimulus providing hope that things will get better. The mortgage news that I discussed yesterday could also further fuel the pump as many begin to refinance their mortgages. As you can see, we are at 7 year lows on mortgage rates as the Government continues to buy the 10-year.

On the flip side, there are shoe drops everywhere that could take us much lower. If GM goes under or we have a bank failure we could crash right back to reality. Another thing to take note of: The move higher this week has been done on light volume so I don't consider it to be very credible.

Bottom Line:

This is a very dangerous time to be trading stocks in my view. There are too many unknowns out there to be confident long or short. The $7 trillion in stimulus combined with the fact that we have no leadership from Washington as we transition to Obama leaves us with a market that reminds me of a boat without a rudder.

Paulson is pretty much done IMO after his latest round of bailouts. I expect him to quietly finish out his term from here on out unless we have another Citibank fiasco that comes out of left field.
I will be mainly staying on the sidelines for the next few weeks and let this rally fun out of fuel. If the S&P runs up to the 950-1000 level I will jump back in on the short side.

Some advice: If you have some longs in stocks or funds that you have been looking to dump them in the near term. I would be a seller if we get to 1000 on the S&P. You might not get another chance to sell at these levels for a very long time.

Be careful and realize that this move higher could be for real in the short term.

Longer term you all know my view:

The market will be as cold as a winters night in Alaska.

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