Tuesday, September 1, 2009

Post Traumatic Crash Disorder?

You gotta wonder if the longs experienced a little bit of this today as September arrived.

As most of you know, last September was when the market begin its unprecedented fall as it ended the year losing about half of its value.

As I watched CNBC today, I couldn't help but notice how uneasy the talking heads looked as the market plunged nearly 200 points.

I had to laugh because everyone that I saw on the financial networks looked like they had seen a ghost as Mr. Market tanked in a matter of minutes after more "good news" was announced via the PMI.

The fact that the sell off pretty much came out of nowhere had to rekindle thoughts around the nightmare of last Sept/Oct. I bet there was a lot of Paxil popping during the commercial breaks on CNBC.

The bulls must be asking themselses: " Green shoots and the market still went boom? Whats going on?".

Folks, when the bulls are all in, you often see large moves to the downside when there there are no shorts left underneath the market to stop it from dropping.

Last year, the sell offs were usually triggered by some horrific event like a Lehman bankruptcy or a much larger jump in the unemployment rate.

I think what we saw today was simply an exhaustion of buying. Mos of the longs that are responsible for this bounce are mostly traders. Many of them are professionals and just trade the sentiment/momentum. They know all to well that going long AIG makes no fundamental sense. They don't care because the trend is the trend.

I always recall a veteran trader telling me "Jeff, its just a numba!". Traders in the pits for the most part don't care if the number moves up or down. They are in it to make clients money.

IMO, the last several months has been pure momo trading folks. The buy and holders are still on the sidelines for the most part.

The problem with this type of trading is it's not sustainable. Once insolvent or poorly run companies like Citi(C) or Fannie rise to a certain level their P/E's start to look ridiculous. AIG is a perfect example. Somehow this piece of garbage ran up to $55/share. Remember folks, this stock was under $10 before the government propped it up!

The valuation on AIG was ridiculous given the hundreds of billions in losses that are still on their balance sheet. Finally, an analyst came out today and stopped the insanity by slapping a price target of $10/share on this dog.

The Bottom Line:

We have known for months that the economy was continuing to deteriorate despite the rise in the stock market. When the banks were allowed to play with the houses money via funds from the government bailouts, it was easy to run the market up.

It appears this little game of pump and dump is about over. Once the market got to 1000-1050 on the S&P it pretty much flat lined.

Just a quick warning, if we see any follow through on the selling we saw today things could get ugly in a hurry because there is nothing sustaining the market at these levels.

The problem the bulls have right now is fundemantals. Sustainable earnings growth is a MUST in order for stocks to hold their prices after such huge gains.

We all know this earnings growth isnn't going to happen in this bailout dependant economy. The lack of short interest in the market sure won't help things either. High short interest underneath the market helps actually can help the longs because if the market moves higher, many of the shorts are forced to cover which can exacerbate a move higher.

On the flip side, short interest can also help prevent a sell off from turning into a plunge because many shorts may decide to cover at various levels.

If the short interest is light or non existant, there is nothing there to stop stocks from violently dropping deep into the red.

The ADP jobs report tomorrow is going to be a critical number for the markets. Investors are starting to question if stocks are overvalued, and if the job losses from ADP come in much higher than anticipated, a big sell off could ensue.

On the flip side, if the number comes in better then expectations, stocks may pop because the news was fairly positive today, and a better jobs outlook may embolden the bulls to believe that the recovery is for real.

Futures are flat for the most part now. Stay nimble tomorrow. Equities could get very violent on a big ADP number in either direction tomorrow morning.


Anonymous said...

Jeff, great post as usual.

Where do we go from here? Are normal investors that are investing and saving for retirement ever going to be able to get back into this game and not get raped by the slime on Wall Street?

I get the strange feeling, as many do, that we haven't seen the worst of this yet. There's no telling what another major drop could do to the future of the stock market and the "buy and hold" mentality that has been crammed down our throats for the past 3 decades.

Jeff said...



I think buy and hold is gone for a generatation.

The volatility thats been created by all of the speculation has made many lose confidence.

I feel your pain and share your confusion. I just try to stay diversified and hold lots of cash and bonds.

I think Wall st has blown it when it comes to the average investor.

I wouldn't touch stocks at these levels.

We likely have one more massive dump when the fraud is eventually exposed.

The system won't work until the fraud is worked out and the losses are taken.

At least thats how I see it.



Anonymous said...

I'm starting to see a parallel with the slowing of the governments intervention and the actions of the stock market but the economy is showing signs of improving but one has to question if these improving economic numbers are a lagging indicator of the stimulus that was pumped, what does the future hold without the stimulus?
On a second note: Even though like Jeff, I am overweight cash, I dissagree that buy & hold is dead. It is impossible to market time, the last 5 months are a prime example. I never would have thought the market would have risen at it has. I did find it funny how in this weeks Businessweek that there was an article that after the crash that people are changing their strategy and dumping their fund managers in place of index funds. Should have considered that beforhand, everyone thinks they can beat the market.

jeff said...


m don't disagree

Buy and hold is dead until the fraud is eliminmated.

When this happens, the DOW probably drops to 3000 or so and at those levels I would probably take a significant chunk of money and go long.

Let me rephrase what I said and say buyn and hold is dead as long as out current system is in place.

I totally agree with you around the government stimulus.

The future without government stimulus is a depression I am afraid.

Scary times. Thats for sure!

Thanks for your thoughts.

Anonymous said...

the DOW probably drops to 3000 or so and at those levels I would probably take a significant chunk of money and go long.
this will never happen, my advise - invest at least some of it when it drops to 8000 (this is still probable)

The future without government stimulus is a depression I am afraid.
Gov stimulus will be there

jeff said...

It will be there until inflation becomes an issue. I still see a double dip coming. 8k? Too high for my taste.

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