The Day that Was - August 17th 2007

Well today is one for the history books. The rumors of an emergency meeting of the FOMC yesterday were true. And the results of their meeting was disclosed this morning before the market opened.

Now we see clearly why so many of those that were short in the market yesterday started covering when the rumor that the FOMC was going to hold an emergency meeting. They did not want to be holding onto anything in case the FOMC did something to restore some order to the financial sectors.

Many people are saying that yesterdays big drop and then the sudden reversal was due to buyers stepping up to the plat in force and causing the market to rebound into the end of the session. It was not buyers that caused that move yesterday. It was massive short covering by those with very large stakes in the financials who were short. Playing back the tape from yesterday the moves came right at the time the rumor of the FOMC emergency started circulating through the trading pits. I just wish the media would report accurately. They instead try to make it into a big deal that the markets just sold off so much that buyers just had to come in a start buying in droves. Not true. If it were not for the FOMC news yesterday we were possibly going to have even more selling yesterday and would have ended the day very badly.

But regardless of what caused the reversal yesterday the fact remains that the market printed a 10% pullback on the S&P. That reversal would have been more comforting if it had been bulls making a stampede to the keyboards and hitting the 'buy' button as opposed to shorts panicking and hitting the 'cover' button (cover and buy, same thing. I know.. just trying to make a point). Everybody was jumping up and down saying we had 'hit bottom'. Saying that we had hit a bottom and it was time to starting "loading the boat" was and is just nonsense. Those that were claiming we hit a bottom and everything is over now were simply caught up in the excitement of the moment, nothing more.

The news of the FOMC cutting the discount window rate by 50bp's in the pre market this morning sent a shock through the entire world in a heartbeat. In pre market there was many more shorts covering and that sent the market up before the open. So when the markets did open we essentially gaped up on just about everything. While watching the tape in real time once the market opened I saw a gradual decline of buying interest start to show itself. The reaction of the FOMC cutting the rate was being received as mixed by many and it was showing itself on the tape. But frequently the first 30 minutes or so after some big news the market will be very volatile. In a previous post I had laid out a plan for how to capture a broad market rally by going long on certain ETF's. And that plan is still valid for any good rally. But this morning when I saw how 'confused' the market was appearing I scaled back my plans to buy all of those ETF's. Instead I only went long on the financial sector ETF in the hedge that the volatility would subside and a strong rally would follow. Next I added GLD (Gold) to my long term portfolio as this rate cut is most likely only a stepping stone to a full rate cut on the Fed Funds Rate. And if that happens the US Dollar is expected to melt away and Gold would ramp up. So for a longer term hedge I added GLD to that account.

Throughout the morning the markets were attracting very little buying interest. All of the big gains you saw on your screens this morning was mostly the gap up difference. If you looked at a chart of many stocks what you saw was the quick gap up at the open and then a flat line. So while our trading screens were filled with lots of green it was mostly from the pre market gap up. Once the market did open it just flat lined. No buyers were willing to carry that and make it into a rally. That tells me that so far the markets were not confident enough yet to buy into what the FOMC did as a "cure all" and rightfully so. What the Feds did only took care of the liquidity issue for the banks. It does not address the economy which is what (regardless of what politicians will tell you) started this mess. The credit crisis is a manifestation of an economy that is weakening and the mortgage companies are losing money on loan defaults. Everyone can probably point to one thing or another of what started this. But underneath who or what pushed the first sell button 5 weeks ago the cause is the economy and the value of the markets were too extended above real value. What we had is a conflict between 'perceived' value and 'real' value of the markets and this time the 'real' value won and stocks sold off fast as people started realizing that things are not so great as everyone was thinking. When you think all is well in the world you buy and buy because everyone else is doing it. You think the stocks will go up forever. Take Apple for example, I said a long time ago that Apple was topping out, the signs were clear and evident that Apple was going to rollover. People emailed me and told me I was nuts. They said Apple would go to $200 in a matter of weeks. And what happened, Apple rolled over. Apple was the canary in the mine to the rest of the market. the perceived value of Apple came into conflict with 'real' value and reality set in and it sold off. Then the markets followed soon after. I'm not saying Apple caused this, not at all. Just saying that Apple was one of the first clues. Every stock has it's period of hype and rallying that pushes the price up beyond what it really is worth. And then it pulls back for a 'reality check'. Then slowly works it's way up again over time. Our financial markets got it's reality check 5 weeks ago, and once reality set in and the problems were brought out from the closets of the banks, mortgage companies, and insurance companies, and on and on we saw just how bad the economy was getting. Things were no longer so rosy as the media and the Government want you think it was.

Reality sucks.. as some will tell you. Just let me live in my dream world where everything is happy and wonderful. But every now and then you have to wake up from your dream and see things for what they really are. And it was an ugly picture. So that is why we are now where we are. People started waking up.

The market action today said to me by the afternoon that I don't trust it. I did not want to be holding onto the long position on the financials in case it started selling off again. When the market goes almost the whole day basically flat after big news like we had this morning from the FOMC that tells you something. The news was not being received well. At least not well enough to bring buyers into the market in droves. It was like a store having a big grand opening bash with party favors, the media, entertainment, and then when the fan fare dies down the store owner sits in front of his shop with the "open for business" sign and nobody was going inside. That is what our markets did today.

Will things be any different on Monday? We can't say yet. We have to wait until Monday gets here to find out. Over the weekend people, hedge fund managers, institutional money movers, and the like will be planning their next moves. Only when we see their moves executed on the playing field will we get a flavor for what is going to be served to us.

In my Sunday night newsletter I will have an article that details what I use to help me in my market analysis. Some have sent me emails asking me what software I use, what magazines I read, what web sites I monitor, etc. So this weekend I will provide you some insight into what I find to be valuable resources. A successful trader surrounds him or her self with quality information and people. If you allow yourself to be surrounded by garbage information then you will make garbage trades. Being the very curious person that I am by nature I have spent much time checking various places to get news, or trying different software to assist me with technical analysis, etc. So Sunday night I list what I use and why.

And to leave off for this Friday night I will tell you that I am not convinced this FOMC action today is going to restore the markets. We will have some upward advances but I feel they will not be smooth and there will also likely be some more sell offs because there is more bad news out there still to be unveiled to the markets. I do not see the DOW getting back to 14000 this year based on current economic conditions and I anticipate this will start showing itself more in consumer sentiment in the coming months. But we will still find good trades to make money on. The past 5 weeks has been extremely challenging in the markets, more so than in recent memory. And since RebelTraders portfolio started on May 24th (just a short time before this mess started) the portfolio is still a positive gain and well ahead of the S&P 500 for the same period. So following my logic and style has helped my readers and subscribers maintain their cash, and make some additional cash as well while all those who kept buying on the dips were losing money. And those who kept buying on the dips as stocks kept dropping may be in for even more losses in the future if the markets do fail down the road and we go even lower.

Discipline, keeping a cool head, and protecting your capital works. And I'll do my best to try and keep finding ways for you to make money in this market. It is easy for anyone to make money in a bull market. It is another thing if I can still show you a profit during the past 5 weeks of 'blood in the streets' type market we have been in, and a profit I have.

Good night Rebels, enjoy your weekend. Be sure to check in Sunday night for the weekly newsletter.