Wednesday, May 26, 2010

DOW Closes Below 10,000 as Worries Mount



I guess it's time to throw away the DOW party hats! Hmmm...Now when do you think we will be rolling out the DOW 10,000 3.0 versions?

Will it be a day from now or will it be another decade before they make another appearance? That's the question every investor is asking themselves right now.

The market has clearly lost confidence as fears on several fronts continue to worry investors. Stocks pulled back sharply at the close as the DOW closed below 10,000 for the first time since early February.

The trigger today was a drop in the Euro late in the day as rumors started to float around the trading floors that China might be backing away from European debt. A strong correlation right now is a weak Euro means weakness in stocks. As soon as the Euro started moving stocks started to roll over.

180 Degree Turn from 2009

I find it fascinating to see how psychological the market is. Last year the market rose no matter how bearish the news was. The bulls got their mojo back and the momo traders/speculators sent the DOW soaring 70% higher from the lows.

Today, the exact opposite is true. Good news is now ignored as fear has crept back into the market. This was seen today. The durable goods and housing numbers both came in way above expectations yet stocks still sold off on the news.

I think what's going on right now is the market is looking 6 months ahead like it always does and it doesn't like what it sees.

Any smart economist knows that we have pulled a lot of our GDP growth forward in the forms of various stimulus. Cash for clunkers or home buyer tax credits were excellent examples of this.

It definitely worked as we saw strong GDP growth over the past several quarters. The problem we have looking out forward into the second half of the year is these programs are all now gone. So the question now becomes where is the growth going to come from in the second half of 2010?

Uhhhh...Good question!

Adding to concerns around future growth are the announcements over the last couple of days around severe austerity measures in Western Europe. Italy, England, Portugal, and Spain all came out with austerity programs in that will slash jobs and cut spending.

This is a huge concern since about 30% of our multinational corporate earnings come from the major economies in Europe. Spending is going to come to a halt in these countries as they start paying off their enormous debt loads. This combined with a strong dollar is going to slam exports and thus badly hurt corporate earnings.

As if these worries aren't bad enough we also have oil spewing into the gulf, serious military tensions in the Koreas, and continued concerns around potential failed bond auctions in Europe.

Other than that everything is great! In fact....Why aren't stocks going up?(sarcasm off)

The Bottom Line

Technically the market acted terribly today. Usually you see strong follow through the day after you see stocks rebound from a 250 point loss to close near even.

The fact that we saw no follow through today was not a good sign for the bulls. I actually grabbed some SDS on the bounce and held it into the close.

From a macro perspective, I was expecting one more thrust higher before stocks rolled over. However, I am starting to wonder if that's ever going to materialize which is why I grabbed a position today. BTW, the ES has now turned red(-1.75).

If the bulls can't organize a move higher here over the next few days I think the market is in deep deep trouble.

I wouldn't be surprised to see the market dump on Friday. I expect that we are about to revisit the price action that we saw back in 2008 where no one wanted to hold stocks over a long weekend when there were so many potential triggers for a huge sell off.

Stay nimble out there folks. Like 2008, there are several holes in the dam that threaten to bring down the whole financial house of cards, and we are rapidly running out of fingers.

Disclosure: Bought ETF SDS on today's early bounce.

10 comments:

getyourselfconnected said...

Wow, nice SDS play. You have courage my man!

Jeff said...

Thanks Get

I am playing small here but it worked today.

The volatility is creating some nice opportunities.

We'll see what happens tomorrow. Who knows I could get stopped out on a huge ramp.

No signs of it so far though.

CT-Hilltopper said...

Get, read the comments in Jeff's previous story for my prediction.

It'll make you feel better about yours.

As for the market, it might rally and drag on for a while yet...but I still think this is the Great Depression II, followed by war.

I feel like such a cynical bitch for typing that, but I fully expect it to happen.

getyourselfconnected said...

Well C-T, Spain did have to merge 4 of their big banks for "liquidity issues" and then merge a few other ones as well. Maybe you are more right than you know? Of course anothe rbig bank failure is unlikley with the world bailout circus on tour.

Herb said...

Cutbacks at the state level are now starting to snowball. 2010 will end up a very rough year.

jeff said...

Herb

Yup I agree.

I think they all keep spending thinking they will get a bailout which will probably happen. The insanity will end at some point and it will be sooner rather than later

Anonymous said...

It looks like TPTB are going to try their best to keep the DOW at or above 10K. Probably not too hard since the big financial firms are essentially the stock market now. So Jeff, when do we start to not even care what the DOW and S&P are at because they really aren't representative of any useful information? It is tough to look at any numbers these days to try to figure out the state of the economy. Everything seems to be manipulated in some fashion.

Jeff said...

Anon

Great points.

I have pretty much accepted the fact that the market means nothing at this point.

Outside of bonds I am almost completely in cash. I have a few small positions.

Hopefully one day the market becomes a place you can actually invest in again.

Right now it's nothing more than a manipulated casino like you said.

flipdippy said...

But it's the only casino!

We should have some follow through tomorrow...I'm learning to run with the herd (finally)!

Jeff said...

Flip

Nice!

Got pipped.

I figured we had another leg up coming at some point.

Next wave down will be interesting.