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.

Capitulation is a MUST Before we Bounce

Good Afternoon Everyone!

Lets go back in history to 1929 and take a look at a chart. We need to capitulate like we did in 1929 before we bounce:

I have been listening to the bottom callers all day on CNBC that are looking for a significant bounce. I find it funny because they are all trying to cover their butts now by saying "we have hit a bottom, BUT I am not saying this is the bottom". I guess the "bubble boys" figure maybe now its time to add a disclaimer to the end of their bullish claims that NOW is the time to buy. What fools.

My other favorite pigmen line right now is "I think now its time to start nibbling on the consumer staples". Folks, this is the bulls way of saying "Run for the hills!". Anytime you hear them advising you to buy healthcare and consumer staples...Run for your life! God forbid they actually tell you the truth when they think the market sucks!

I am even starting to see some bounce calls on some of the bearish websites that I like to follow. This surprises me. Trading 101 in bear markets tells you that you need to have capitulation in stocks in order to wash out all of the weak longs before you begin to see any type of tradeable bounce.

Art Cashin has been saying this for weeks. Look at the chart above, we needed a "Black Tuesday" in 1929 before people felt comfortable jumping back in. When the market psychology is horrific and the market slowly bleeds everyday, you create a situation where the bulls aren't confident in going long.

This results in a "no bid" environment as people continue to sit on the sidelines. Any bounce is immediately sold into. Today was a perfect example. When the market jumped 200 points in the afternoon the bulls immediately sold into the rally. The bottom then fell out in the last hour as the buyers went back to the sidelines.

I simply cannot see any chance of a significant bounce until we see a 1000+ point down day on the DOW. The lack of trust, confidence, and continuous bad news simply is too much for the bulls to overcome. Psychologically, they are a mess right now. If you were a bull and walked into a pysch ward right now, you would end up in a straight jacket.

Capitulations are certainly not fun, but they are badly needed at times. Today would be one of those times. Investors need a reason to buy. They need to psychologically think that they are jumping in near the bottom. The problem we have now is how on earth can you have the confidence to buy when the DOW slowly sinks day after day?

I believe a washout is the psychological shift that is needed to pull us out of this for the short term. This will bring many buyers back into the market. Why? Because everyone knows the playbook. Brutal bear markets find bottoms after capitulation. Its been this way all the way through time. The smart money like Art Cashin knows it. He isn't going to send his clients back into this tsunami until he sees the classic signs of capitulation. That goes for every other veteran trader that's worth a crap on Wall St.

In this modern fast paced world we always love to say "its different this time".

History has almost always shown that this is never the case.

Bottom Line:

I continue to hold onto my shorts that I bought on Friday. I grew a few grey hairs in doing so today though due to the volatility! I will probably sell them off on any serious tankage. I see no significant bounce until we see a sharp capitulation type selloff.

We have the Fed back in the picture over the next couple of days. I am sure we will see more rate cuts. I kinda see this as a non event at this point. A half a point rate cut is nothing after bailing out the whole financial system!

We somehow need to restore confidence before we start moving higher.

I'll end this with some more great news:

"Oct. 27 (Bloomberg) -- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds soared to the highest in more than seven months relative to government notes, potentially boosting home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year U.S. Treasuries climbed about 21 basis points to 224 basis points as of 3:45 p.m. in New York, up from 162 basis points on Oct. 20, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

``It is the deleveraging,'' Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co., said in a Bloomberg Television interview today from Newport Beach, California. ``There are still people who absolutely have to liquidate, and that is keeping a number of the spreads in the high end of the markets much wider than they should be.''

The average rate on a typical 30-year fixed-rate mortgage climbed to 6.08 percent at the end of last week, after falling to 5.92 percent on Oct. 22 from a two-month high of 6.38 percent, according to Bankrate.com data. That compares with as low as 5.72 percent last month."

Sigh...Just what we needed: Higher mortgage rates!

Stay tuned

Is Citadel going Down?

Rumor has it that the reason the futures went lock limit down on Friday was because the massive hedge fund Citadel was going down.

Here is the article from Reuters. It appears that Citadel went to the the government looking for a handout:

"CHICAGO, Oct 25 (Reuters) - Examiners with the Federal Reserve have questioned Wall Street counterparties in recent days about their exposure to debt and other holdings of Citadel Investment Group, the Wall Street Journal reported on Saturday.

The report came a day after Citadel, one of the world's largest hedge funds, said it has more than $10 billion in available credit. The Chicago-based fund was seeking to stop rumors it was liquidating some portfolios after its two main funds had lost 35 percent since January.

Citing people familiar with the matter, the Journal said the Fed had questioned the counterparties in at least two instances.

Talk has swirled in the market that Citadel had asked the U.S. government for a cash injection and that financial regulators were coming to inspect its accounts."

Final Take:

This seems to be the next kaboom in the stock market. I doubt that the Feds will start bailing out hedge funds. The Citadel was leveraged at 10-1. A 35% loss on their equity pretty much tells me they are toast.

Expect a violent market reaction if this turns out to be true.