The Day that Was - August 16th 2007

Let us rewind the day..

6:00 - Asian markets tanked. NikKei -2.0%, Hang Seng -3.3%

6:30 - European markets down significantly. FTSE -2.6%, DAX -2.4%

6:35 - Bloomberg reports that William Poole of the St. Louis Federal Reserve Bank said in a statement that "only a calamity'' would justify an interest-rate cut now" and also went on to say "no one has called up and said the sky is falling". He went on to say that the mortgage situation does not threaten the US economic growth.

7:15 - US Futures down substantially

7:30 - Bloomberg reported that a run on US Treasury bills because of the sub prime paper contagion was at levels seen few times in history.

7:30 - Country Wide Financial (CFC) taps credit facility for $11.5 Billion to maintain liquidity. This is a major event. The company needs to borrow substantial amounts of money to continue operating.

7:45 - The Japanese Yen rises overnight and now is creating the "carry trade" unwinding effect.

8:00 - Nollenberger reported that the retail environment remained challenging for the second quarter. Mall traffic appeared down from this time last year.

8:25 - Feds inject reserves through 14 day repo to keep liquidity in the market.

8:30 - Housing starts data released. Lowest since June 1995, building permits lowest since December 1996.

8:30 - Initial jobless claims: highest number since June 15th, numbers are creeping up now.

8:40 - Fannie Mae files 10-K, in their statement they indicate they believe average home prices will continue to decline through the rest of 2007.

9:45 - Feds inject a second infusion of funds, $12 Billion on this shot.

10:00 - Market is selling off

10:30 - Moody's sees the possibility of a major hedge fund collapse.

10:30 - Markets selling off hard.

10:35 - Moody's sees "sizable" impairment losses at many banks.

12:00 - Philadelphia Fed survey shows no overall growth in the region's manufacturing sector for the month. (0.0 vs 8.0 consensus).

1:50: Market talk that Fed is holding or will soon hold an emergency meeting.

2:00 - Markets start rising.

2:15 - Markets rising on increased short squeeze (rapid need to cover short positions before they become a loss)

3:00 - Market selling again

3:30 - Shorts start covering again on the pullback and take it right up to the close.

4:00 - Markets ended the day essentially where the day started off.

Now I turn on the TV and all the talking heads are blowing party favors and saying we have hit bottom and are on our way back up. Everything is well with the world again.

I ask you this question, and answer this question honestly. What changed today? Did the credit crisis get fixed today? Did I miss the memo? Did the housing slow down turn around all of a sudden mid day? Did I miss that memo too? Did the banks and mortgage companies all of a sudden solve all of their financial problems? Well, I guess I missed that memo too...

The point I am trying to make is that while everybody is saying how great the bounce was today you have to remember that nothing has changed. What started this mess in the beginning is still there. It has not gone away.

What we did have today was a market that reached down to a key technical support level (see at the bottom of this post for the charts), bounced as most support levels will provide to some degree, and then news of an emergency FOMC meeting was/or will be taking place made those who were short in the financial sectors to start covering. The short covering started the rally in the afternoon and it continued all the way to the close (I should point out that all the while the shorts were covering there were still those selling out on the advances). Every share of just about any company that could be shorted was being held by someone. And no one wanted to be holding onto those short positions with the FOMC rumored to be getting together for an emergency meeting as it was being reported on the floor of the exchanges. They wanted out of their short positions in the event the FOMC does/or says something that would restore some stability into the markets and bring a calm back. At which point normal buyers would be coming back in and the short holders would be losing out. So they were tripping over each other this afternoon to get out.

So at the end of the day with everyone saying the worst is over and we can all go back to being happy and care free and buying stocks again must be the same ones who got the memos today that I never received. They are signing that song "Don't Worry... Be Happy" !

But nothing has changed. Every problem that got us here is still there. We had a rally on a technical bounce which was then accelerated by shorts covering ahead of a possible FOMC meeting. Ok.. so what do we do now? Regardless of how we got our rally today (and the forgotten reasons why the markets sold off over the past 5 weeks in the first place) we are likely to see a continuation of this rally on
Friday only because of the psychological impact of what took place today. They overlook (for now) what started the market sell off and will all jump back into the pool thinking all is well again.

Will I be jumping in the pool carefree like the rest of them... no. What I will do is I will go to a couple of pool parties, one here, one over there. Spend a little time. Have a beer, take in the nice weather. But I will no over stay my welcome. While the party is still going on I will just quietly exit and go home. The ones that stay at the party all night could end up getting rained on by a big thunderstorms that comes out of no where. So while the party animals are carefree, swimming in the pool of the market, and thinking all is well again they will be the ones to get rained on. While I will be at home nice and dry with my souvenirs (money) from my short visit to the party.

In market terms what I just said is that I will take advantage of any big moves and try to capitalize on them but I will not leave my money in the markets for long periods of time. I will look to make some gains on short swing trades by taking advantage of other peoples emotional exuberance. But I am going to remain cautious and not get too extended because as quick as a rally may come it may go again (especially when they realize the original problems have not changed).

On CNBC tonight I was fortunate to catch an interview with Dennis Gartman, who publishes the well respected "Gartman Letter". He spoke tonight that we are still in a Bear market by his perspective. That he is a seller on strength, not a buyer on weakness. When someone like Dennis Gartman says that you have to at least take some note of it and keep it on your mind as we go through the coming days and weeks.

But remember the market is driven by greed and fear (emotional responses). If everyone thinks it's party time then Mr. Gartmans statement may be like your Mother yelling at you to turn the music down, you don't hear her over the noise level you created around you.

So what happens if all the people who are now saying we have hit bottom and the only way from here is up turn out to be wrong. What happens to them when some other bad economic or financial news hits and the market starts selling off again. They come crashing down. Where will I be? I will be in my little hideout counting my money because I did not over stay my welcome.

From a technical perspective we did hit a key support region today. Now in order for the market to show what it has in store for us we have to test the resistance that is about half way back up to where the markets started the drop. What happens at that resistance level will determine if the market is truly strong enough to keep going up. If they are not then we will pullback to where we were earlier today. And it is at that point we know if we will drop further, start a ping pong match of trading sideways stuck in between two support/resistance zones, or if we will bounce back up and then truly be on our way to a real bull market. Many unknowns still. That is why I play with caution.

I will say this time and time again. Don't let your emotions get in the way of solid thinking and planning. If you get too carried away and start buying everything in sight you could end up holding onto too much at once if the market takes a bad down turn then your losses will be big. There is no rush to be a millionaire overnight, no matter how bad or how fast you want to become rich you can be guaranteed of this one thing: If you think you can be rich overnight, you won't. You will lose more than if you plan your moves and don't get carried away.

Now what to do about tomorrow? That is a big question. If in the morning the markets are looking like a strong open then I will buy the following:

(one swing trade for each, no more 10% of my capital on any one trade)

DDM - pays 2x for each point gain on the Dow Jones Industrial Average (the DOW 30). Why? if there is going to be a large 300, 400, or more point rally then a 2x pay out of a move like that will be a nice quick trade.

SPY - An ETF that mirrors the whole S&P 500 index.

UWM - ETF that pays 2x for each point gain in the Russel2000.

UYG - ETF that pays 2x for each point gain in the financial sector.

And one swing trade of your favorite stock.

Why the ETF's? With everything so oversold and if a rally is going to come then I want to capitalize on the whole index rising instead of trying to find a few stocks within that sector that may or may not do as well as the whole sector. The ETF's are easy and you know that as long as the sector is making big moves then your making money. Normally I never play ETF's. For me there is only one time they are useful. And it is during times like these when you want to capture broad market moves (up or down).

But, and I say this again, but... you still have to watch them closely. If the broad markets get the scent of some bad meat and the bulls go running for the hills again then you get out fast. Don't risk holding them through a big down turn. You can always buy them back again later.

My fellow Rebels.. the past 4 or 5 weeks has been the most turbulent, violent, and volatile market of which the likes have not been seen for many, many years. And the return to a normal market (if that happens) will not be smooth either. There will be many bumps on the way back to a normal trending market. So don't try and go out and buy everything in sight. Remember what started this mess has not gone away !

If more bad news hits and we don't have a rally. Well then we are right where we started the day today, in the middle of a storm. And we wait for a trade to present itself (like CAT and UAUA did yesterday, both good winning trades).

Good night Rebels !