"AAA" Spreads Explode: Market Freefalls at the Close

Good Afternoon Everyone!

What a close today folks! The markets looked like a waterfall as stocks plunged in the final 20 minutes of trading. The DOW and NASDAQ fell 3.9% and 5% respectively.

The markets continue to be extremely jittery and highly volatile. The $40 move in gold today was indicative as to how nervous the market is right now. Whats even more alarming is what is going on in the credit markets. take a look at what "AAA" spreads have done the past few days:


My Take:

Folks this is insane! The spreads on "AAA" rated debt have exploded higher in the last couple days. This is supposed to be the highest rated debt out there. The credit markets are basically telling you that they don't want to touch this stuff with a 10 foot pole. This isn't supposed to happen with AAA rated paper! The bond market has been screaming "warning! warning! warning!" all week and yet the equity markets continue to ignore them.

Remember folks, the brains in the credit markets dwarf those of the "bubble" pigmen in the equity markets. Another little known fact is the credit markets are 5x larger than the stock market. Thats a lot of smart money! You are much better off as an investor listening to Rick Santelli in the bond market on CNBC versus plugging your ears as Jim Cramer screams buy buy buy over in the equity markets. All day long the pigmen call bottoms or tell you to" be defensive and buy consumer staples". Gee, what a brilliant strategy. Hows that working for you? Last I saw, Proctor and Gamble is down $10/ share from a year ago.

I wouldn't be surprised if the "AAA" spread blowout is why we dumped so hard today. Stocks cannot continue to ignore all of the bad news in the credit market and the economy. I mean look at how bad October retail sales were:

"Nov. 14 (Bloomberg) -- Retail sales and prices of goods imported to the U.S. dropped by the most on record, signaling the economy may be in its worst slump in decades.

Purchases fell 2.8 percent in October, the fourth straight decline, the Commerce Department said today in Washington. Labor Department figures showed import prices dropped 4.7 percent, pointing to a rising danger of deflation, and a private report said consumer confidence this month remained near the lowest level since 1980.

``The weakness in growth is intensifying and inflation pressures have evaporated,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who accurately projected the decline in sales. ``Deflation is a word that will be increasingly used over the coming months.''

Final Take:

I am not surprised we saw no follow through on the big bounce yesterday. The October retail data is horrendous. Company after company continues to warn and lower guidance. The export price drops in the October retail data were the largest drops that have ever been seen! You think China is going to keep buying treasuries when they have to give away their exports to us for nothing? HAH!

The data is bad and getting worse by the day. You simply can't have sustained rallies in this type of environment. We also haven't seen any capitulation selling that always marks any type of bottom. The early week selloff was way to orderly to mark a bottom.

The only bottom that I will believe in is one in which the DOW capitulates and crashes 1000-1500 points in one day, sells off again the next day and then reverses. You must see a day of total fear in which psychologically everyone wants to get out of stocks all at the same time. Only then will the selling be exhausted.

We haven't seen this folks. We haven't seen anything that's been even close. The increasing credit market spreads on prime paper seen above are absolutely frightening. This is a potential "Mt St. Helens" type explosion that could burst in the credit markets at any moment. Having a high exposure to equities at this point is suicide with the spreads out this far.

Could we still stay in denial and continue to ignore the danger that the credit markets are trying to warn us about and stay flat or move higher? Sure..Nothing would surpise me in this "bubble" market.

I believe one of the reasons we haven't seen capitulation is many "clueless" financial planners continue to tell their clients to stay in equities. They tell their clients "remember, you are in it for the long haul". Yeah ok, did they also tell them that if their portfolio drops 50% they then need stocks to move up 100% in order to get back to even? I bet they forgot to tell them that part. Anyone see a catalyst that sends markets 100% higher in the near future? Yeah me either.

How are these clients going to feel if we drop another 20% from here? They will be lucky to get back to even by the time they retire. Its time to take ownership of your future folks! Buy and hold for the long term simply doesn't work anymore. Find a new financial planner if this is his advice.

Bottom Line:

The credit markets can't be ignored forever. One day we are all going to wake up and realize that a lot of "AAA" paper is almost worthless. God help you if you are "all in" in equities when this day arrives.

Things continue to get worse folks, and my trading positions have stayed the same and reflect this.

Boing! The 2002 Lows Hold

Good Afternoon Folks!

Well we got our answer today on the retest. The 2002 lows held! The reason for the bounce today was purely technical here folks. We knew that one of two things was going to happen today when we got to around 820 on the S&P(2002 lows):

A. We were going to break through the lows and head into the abyss.

B. The 2002 lows were going to hold and stocks would go parabolic on the long side.

The market chose B for now! Folks, this move means nothing from a long term perspective. All it tells you is how sick and desperate the market is. Investors are completely bi-polar right now. They are terrified to miss the next great bull market. At the same time, they are also terrified that they may lose all of their money. This results in a bunch of volatile trading that means nothing from a fundamental standpoint.

The big boys(hedgies, investment funds etc.) all jumped in and bought the technicals when we hit retested the lows this morning. The rest of the afternoon, Wall St basically turned into a feeding frenzy as everyone piled in thinking that this is the bottom. The shorts of course started covering like crazy in the process which exacerbated the move and before you know it... POOF! We had a 7% up day. Umm.... question here: Haven't we seen this show before?:

Note that as of today, we have seen three parabolic moves upward from the lows as the DOW continues to skim along the bottom at around 8000. As you can see above, the first one occurred in early October followed by a second one in late October. Both of the retests failed miserably. I see no reason why this one won't do the same.

I say this because the news is only getting worse, and the fundamentals continue to deteriorate. More importantly, we had a poor treasury auction today:

"Highlights

Demand was poor for the Treasury's 30-year bond auction where the stop-out rate of 4.310 percent was nearly 10 basis points over the 1:00 bid. The bid-to-cover ratio was soft at 2.07. Reaction was swift as money moved out of the Treasury market in response.

Results of the quarterly refunding were mixed showing strong demand for Monday's 3-year note sale, mixed results for yesterday's 10-year auction and poor ones for the 30-year bond. Strong demand is a vital for the Treasury which is facing a mountain of borrowing needs."

My Take:

I warned earlier this week that if treasury demand drops off significantly going forward, the game is over. We got a warning shot accross the bow today that demand already is starting to weaken. Yields soared on treasuries as word got out about the poor treasury demand for the 30 year auction held today. Here is a chart of the yields on the 10 year today. Mortgage rates will be rising as a result. That will do wonders for the housing market. NOT!

I can't stress how important this is to watch folks. The Fed/Treasury is going to be forced to sell Trillions of dollars in treasuries in order to pay for the bailout of America. they are going to need the best salesman in America in order to get this done. Maybe they can bring Chris Farley back from the dead and use "Tommy Boy" to sell these trillions of government IOU's!

Folks, if demand for treasuries is already starting to become poor, whats demand going to be like as the world recession deepens and our foreign debt buyers need to start spending their money at home like China announced earlier this week?

There is only so much money to go around in the world. More and more countries are going to be be forced to spend their national funds feeding their own people and trying to fix their own economy as this recession deepens. If they don't do it, governments will find themselves out of power as their fellow countrymen rise up. We all know politicians are all about getting re-elected and staying in power! Demand for treasuries is going to fall off a cliff folks! We got some proof of this today as noted by the auction above.

Bottom Line:

Try to keep a steady hand as you try and navigate through this market. Its very easy to let emotions get the best of you in situations like this. These moves do nothing but tell you that the market is sick. There is no bull market that's going to take us back to DOW 14,000. Today's move was based on panic not optimism.

The odds IMO are much greater that we will eventually break the 2002 lows. One thing I am going to watch right now is how far we bounce back on this move. Notice that the last two times we moved higher, the move died right around 9500. I think it will be very bearish if we don't get back up there on this bear market rally.

As for trading positions, I got rid of some of my shorts and took profits the last few days. I am still holding onto some SDS and QID. This move doesn't mean a whole lot in my view and I don't have a problem holding onto these. This move was way too violent and was based purely on emotion. It could very well be a one day rally. However, we may see some follow through tomorrow and Monday on any potential good news coming out of the G-20 summit this weekend.

I bought some TBT today because I think think treasuries are going much lower.

That's all for now. Watch the bond market folks. They are starting to get a little bothered by whats going on.

Stay Tuned.

Stocks Continue to Weaken: Retest Likely

Good Evening Everyone!

It was another red day on Wall St! The major averages were down about 2%. The charts tell me that its highly likely that we are going to retest the lows. Take a look a 3 month chart of the DOW:



As you can see, we hit the closing low of 8175 in late October. Technicians will tell you that the fact that the bounce up to 9500 didn't hold means that a retest of the 8175 low set in late October is very likely before we move higher.

Here was Art Cashin's take in his daily newsletter this morning(no link, subscription only):

"Cocktail Napkin Charting –
The market continues to offer conflicting alternatives (that's its job, of course). Look at the wicked selloff last Wednesday and Thursday.

Not only was it the worst two day "point" fall in history, they had other rarely seen aspects. As the fabled Bob Farrell points out, they were the first back to back 90% days since 1987. He also notes that both days had Trin readings well over 2.00 (3.88 and 4.06). We have not seen that since the bottoming process back in 2002.

This continuing confluence of rarely seen performances suggests something very powerful is about to happen.

Okay, let's review. Most of the napkins lean toward a probable retest in this bottoming process. To eliminate that likelihood, the bulls would need to rally above 9750. That's a long way off. The bears have a nearer test of direction.

If stocks break Friday's lows (Dow circa 8650 and S&P 900) that could put bears back in the catbird seat.

Additionally, the moving averages have yet to cross each other favorably. Thus, they have yet to verify that a bottom has been put in.

For today, S&P needs support at 907, then 900 and then 880. Resistance looks like 930 then 951. Consensus –

Today's holiday should keep markets illiquid and, therefore, potentially volatile. Stay very, very nimble. Something's building here."

My Take:

I don't know a better trader on the street than Art Cashin. I will take his 5 decades of experience over anyone so I pay close attention to what he says. I thought his writings today were very interesting. Keep in mind this was from this morning so now we can break this down a little further:

Based on his comments above, Art said the bears should be in the catbird seat if we broke 8650 on the DOW and 900 on the S&P. We ended up closing at 8693 and 898 respectively so we broke thru one of the two supports and came very close on the other.

This makes me lean towards another push down to retest 8175 on the DOW before we move higher. Now keep in mind, this was not completely confirmed according to Cashin's cocktail napkin charting so you need to be careful if you are going to play to the downside.

I ended up closing out my SRS today and took some profits, but I kept everything else on. These retests are critical to where we go next. I find Art's prediction that something very big is building to be very ominous.

My guess is if we break through the 2002 lows of 820 on the S&P that things could get very ugly. The bulls would then run for the hills selling on the way out because technically this would a complete failure.

On the bullish side, if the 8175 level holds, we could see a rocket ride north. We are within a day or two of retracing to these levels so you gotta be nimble over the next couple of days as Art warns. We could test the lows tomorrow the way the DOW has been trading so pay attention! We have seen several 600 point down days in the last few months. Another one tomorrow would bring us right to the retest levels.

Bottom Line:

Things were quiet on the news front. The big news was the loan modification program that was announced by the government.

"WASHINGTON (AP) -- Once again, the government has offered another plan to help troubled homeowners. Once again, critics say it doesn't go far enough.

The plan announced Tuesday by federal officials and mortgage giants Fannie Mae and Freddie Mac sounds sweeping in its approach: Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

To qualify, borrowers would have to be at least three months behind on their home loans and would have to owe 90 percent or more than the home is worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

Qualified borrowers would get help in several ways: The interest rate would be reduced so that they would not pay more than 38 percent of their gross income on housing expenses. Another option is for loans to be extended to 40 years from 30, and for some of the principal to be deferred, interest-free."

This was big news today but I consider it to be a non event. Basically all this does is help a bunch of deadbeats that got in over their head when buying a house. I hope they enjoy their new 40 year loan. The owners will be in diapers and eating food with dentures by the time they get their loan paid off.

I will just lump this proposal in with the other loan modifications that I discussed last week. I still predict millions will walk away from their homes. Who wants to live in the same house for 40 years? With all of the job losses that are coming down the pike as the recession deepens, many will be forced to walk away in order to find work. Half of Michigan will walk away if Ford or GM goes down.

Detroit will turn into a giant Flint, MI filled with empty boarded up homes.

When it comes to the market in coming weeks, focus on the technicals. We are approaching some key support levels on the downside as I described before. If we crash right through them expect all hell to break loose. However, I expect the lows to hold for now because we have just entered into the severe part of this recession, and the holidays are coming which are usually slightly helpful to equities.

We have retail numbers still to come this week, and this could be the trigger that gets us down to the 8175 level.

Lets hope the market holds here. If it doesn't we may see The Grinch steal Christmas.