The Volatility Continues

Good Afternoon Folks!

It was another quiet day in the markets. HA! Yeah right! Are you going insane attempting to trade this roller coaster psychotic market? I bet many of you are looking forward to a few days where I start a post with the words "quiet day".

The volatility continued today as the markets rallied hard into the close based on hopes of an automotive bailout and some positive comments from GE. The major indices closed up over 3% following a very volatile session.

Today was a perfect example of why I hate trading the current market. There was absolutely no clear direction today. Stocks zigged and zagged all day reacting to any news that hit the wires. I felt like I was watching a tug of war between the bulls and the bears. About a half hour going into the close, I thought we could close violently in either direction. The bulls ending up winning this one.

The reason I don't like the market right now is because the bulls and the bears both have a reasonably strong case at these levels. It was easy to short the market when the DOW was up around 13-14,000. If you did your research, it was like shooting fish in a barrel. The financials, homebuilders, and technology were all way overvalued and were easy targets to short.

The bulls were able to stage some minor rallies during the 49% drop on the S&P with some assistance from the Fed(Bear Stearns rally ring a bell?). They also had their "bubble stage" on CNBC that allowed them to fill the airwaves with a bunch of stooges screaming "stocks are cheap!" "the bottom is in!" "buy buy buy". In the end it was to no avail as the market continued to plummet.

However, now that we are 50% from the highs, things are considerably tougher from a trading standpoint short term. Whats tough here is both sides feel they have strong arguments. The bulls case is we are 50% from the highs, stocks are undervalued, and we are way overdue for a sustained bounce. The bear case is we have just entered into a severe recession, stocks are still overvalued, and the credit markets are beginning to price in a severe deflation/depression scenario.

Speaking of the credit markets, AAA spreads are once again blowing out:

This is a bad sign folks. The spreads came in last week when the Treasury announced it was going to buy $600 billion of this AAA MBS garbage. Nice job Hank! That helped for about two days! We are once again nearing the highs from a spread perspective. Remember folks, A sh*t sandwich is still a sh*t sandwich no matter how many the Fed takes off your hands. Buying $600 billion of Sh*t sandwiches doesn't help much when there are trillions of sh*t sandwiches that are still stuck on the banks balance sheet!

Back to the bull/bear case:

So now here we are basically 50% from the highs. Each side has a fairly legitimate short term case. This makes going long or short a tough call as we head into Christmas which is usually bullish. Adding to the confusion of this scenario is the massive amount of hedge fund selling that we are witnessing in order to satisfy redemption calls.

I was listening to a CEO of a large commodity company yesterday, and he was explaining that they were seeing massive selling of their stock by hedge funds on a daily basis. The reason the hedge funds are continuing to sell stocks that they would most likely like to hold is because they have no choice. Many of them have very few options because a lot of their assets are stuck in the AAA sh*t sandwiches that I described above. Right now, there is no market for these assets so they can't sell them.

As a result, they are forced to sell good assets like blue chip stocks and commodities in order to satisfy margin calls. This is why you see stocks that are ridiculously cheap with valuations that make no sense. Its forced selling. You need to take note of this before you start buying these types of companies. There could be more margin calls which could take these stocks lower.

Bottom Line:

I hate the stock market right now! Its turning more and more into a casino with each trading session. I see nothing but pure speculation. I just have to shake my head as I watch insolvent banks like Citibank move up 30% in a day.

My guess is that you are going to see a lot of chop that lasts all the way through New Years. If you invest over the next four weeks, I wouldn't hesitate to take profits because they could get wiped out the next day.

I personally have my eye on SRS. I see commercial real estate falling apart after the Christmas selling season turns out to be a disaster. I expect several dozen retailers to go under after the holidays. Many of them stayed alive hoping that a huge holiday season could save their year. We all know that the consumer is toast and this isn't going to happen. Its going to be a Grinch Christmas!

Commercial real estate will then feel the pinch from the Grinch as these retailers go bust and stop paying rent. Making matters worse is the fact that the retailers they find to replace the companies that go under will be paying lower rents as the consumer led recession continues to deepen.

I am looking to pull the trigger on SRS at around 120. Its sitting at around 133 right now. One more green day should put it in my zone.

As for the long term outlook nothing has changed folks. The bears will take charge once the horrendous numbers from the holiday are released and the recession continues to worsen.

In the short term, play small and take profits.