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We started out the day with the Japanese Yen showing strength overnight. That rise in the Yen sent our market futures down in pre market. Then we had the consumer confidence data and it was low, actually the lowest since this time last year and on a plot is declining steadily. Remember that consumer spending makes up almost 70% of the US economy. When consumers are cutting back so does the economy. When other factors such as a banking crisis, credit crunch, financial companies facing substantial losses from notes they can't unload, and hedge funds facing liquidity problems then you have some ingredients for a "perfect storm".
Another bit of news today that goes in the category of consumer confidence or should I say their ability to spend is a report issued today that credit card holders are defaulting on their accounts at a sharply higher rate compared to last year. Moreover, late payments are also up and credit card companies have written off 30% more payments during the first half of this year than a year ago. These are not small numbers. This is a substantial barometer of the US consumer. The cost of living has increased with rising fuel costs and other goods to the point that middle America is stretched, regardless of what economists want you to believe. If you want to know the real feeling of the US consumer go to a shopping mall near you and ask people questions. If you can get past the ones who will look at you funny I'm sure you will hear that things are not rosy.
So what else happened today.. well the Standard & Poor's US National Home Price Index showed home prices in the largest 20 US markets had their worst decline in 20 years during the second quarter. You must keep in mind that this data does not reflect the latest financial crisis and credit crunch. So one can expect that this data will deteriorate further.
And then today Merril Lynch downgraded 3 top financial companies citing their exposure to the debt markets. Citigroup, Lehman Bros., and Bear Stearns were hit hard today as was the entire financial sector. But it does not stop there. Reports from some economists are calculating that other large financial institutions will be forced to write off hundred of millions of dollars due to notes that can not be unloaded and also loans to other companies will not be able to be paid back as they too were tied to the credit collapse which this is turning into.
Then if that was not enough already the minutes from the August 7th FOMC meeting were released. Generally this is a non event as on the day of the FOMC meeting when they release their press release statement it generally covers the headlines. The minutes is just a formality. But what the minutes showed today was an even larger disconnect between the Government and reality. The statement in the minutes which just burned the back sides of the markets today was "Members judged that the risk that inflation would fail to moderate as expected continued to outweigh other policy concerns". It was this statement along with the context of the entire minutes which sent the market in a nose dive as the feeling came back in full force that the FOMC does not grasp the situation.
Throughout the day today I monitored the 10 year T-note yield. And as expected it showed stronger flight to safety as more and more money is leaving the equities markets and moving into long term bonds. Remember the chart I showed over the weekend comparing the recent advance in the markets (previous 6 days) to the 10 year T-note yield.. I showed you how while the market was advancing on that flimsy low volume the money was still going into the bonds. Technical analysis goes beyond just looking at a stock chart, it includes doing charts on the indices and other aspects of inter market relationships. Last night I said that the recent advance was akin to building a house of cards but the lack of volume showed the foundation was weak and it would tumble down. This is why I was not recommending any swing trades. It was better to sit in cash as the signs of another collapse were building. And today it did.
Some were claiming that we had hit bottom on August 16th. I would not say that as there has been and still is too much going on in our economy and markets that when all put together are forming the ingredients of the "perfect storm". Today's sell off has brought the indices back below some significant support levels. And when a support level is breached (again) it then becomes stronger resistance. And the next time it will be harder to overcome that resistance. So with the action today we are now more likely then ever to retest that August 16th low. If we spend the next couple of months continuously testing and retesting support and resistance levels then we are setting up for a major break downward, past the August 16th low. Many things are still coming together but the clouds are dark and a storm may be brewing.
Now comes the FOMC. What if they do a surprise Fed Funds rate cut? Then the market will be shocked with the proverbial paddles you see paramedics use. Will the rate cut be enough? Will they have to raise the voltage and do it again and again before they get a heartbeat? Or will their attempts just result in a flat line? There are many opinions on what a rate cut would do. One thing however that is widely believed is that a rate cut will lower the value of the US dollar. And that in itself will create new problems down the road and could come back to just reinforce the economic slowdown (or worse yet a recession). If the economy is indeed going to go into a recession it may be too late to pull it out of the hole, even with a rate cut. That remains to be seen. In 1998 the FOMC cut the Fed Funds rate 3 times. And for a while the markets did great, but it was unable to prevent the bear market that followed in mid 2000. The rate cuts kept the heartbeat going on the economy and the markets but it only lasted for so long before the market topped and we had our 2000 bubble burst and then a bear market which brought down many companies.
If the FOMC were to cut the Fed Funds rate (now, tomorrow, or at their next meeting) there will be a knee jerk reaction in the markets in which case I have recommended positions for you to take. But will there be a selling on an advance by people who are still looking much further out in time and see recession? If that happens then the markets will pullback yet again in time. A vicious cycle it can be.
A comment received today regarding taking swing trades on the short side was raised. The reason I have been leaning on cash as opposed to swing trading long or short is that the FOMC could issue a statement at any time. It would catch short trades and murder them. The risk is not worth it. If we knew for a fact that the FOMC was NOT going to cut the rates anytime soon then yes we could go short on some key indices and ride them down. But the volatility and wild swings has long or short swing trades a dangerous play. It is a different story for day traders however, if you are experienced and know how to day trade there are good plays in this volatility. But I can't recommend to you swing trades (remember that swing trading is for the stock trader who wants to capitalize on large moves in a stock during a short period of time, typically days to weeks in duration). The market we are in now has so many large swings from day to day it can wipe out a swing trade in no time. And those kinds of losses I don't want my readers and subscribers to experience. When stability and direction come to the markets we will be swinging like monkeys in a tree.. till then we hunker down and wait for the right time to strike. A note of caution if I may please.. day trading can be very profitable and yet very risky. If you are in this market currently doing day trades then I urge you to exercise extreme caution and furthermore if you are new to the stock market then don't even try it. I want you here for the long term to make money with us. Don't get caught up in the excitement of the market moves and think you have to be in there. Day trading is dangerous and you must be experienced at it. Over time and with the move to the RebelTraders full web site you will learn many aspects of the markets, and you will from time to time get guidance and education that you can carry with you into day trading if that is a path you wish to pursue at some point. But first you have to master the markets and just survive without losing money.
Even long term buy and hold type investors need to learn how to survive the markets. The fallacy of 'buy and hold' and I will be forever fine is just that, a fallacy. Buy and Hold investors can actually do more harm to their long term growth potential by not paying attention to charts and learning the importance of major trends. For those that fail to heed the charts will be the ones with substantial losses. Had they paid attention to the markets and the charts they would know when it is time to bank the profits on long term stocks and sit on the profit until the time was right to reinvest. Once a stock breaks a major trend line it becomes very difficult for that stock to ever come back to the levels it was once at. And never put your faith in an investment advisor, do your own homework and manage your own accounts. It is your money so don't hand over your wallet to someone who is not as vested in it as you are!
After the markets closed today Dilliard's, a retail department store chain reported earnings and they were terrible. They missed earnings by a substantial amount. Is this one more indication of a slowing economy? Could be...
Before I show some charts tonight I want to now take a moment to introduce you to the newest member of the RebelTrader team. Lisa Doby of Texas is now a Rebel and she will be contributing to this site over time. She has been granted rights to this site and will be able to post her own thoughts, ideas, observations, or whatever she has on her mind that she wants to share with the RebelTrader readers. I first got to know Lisa on another trading board and she and I have kept in contact over time. I had the opportunity to meet Lisa recently on a recent trip she made which brought her to the east coast where I am located. We met and I was very impressed with her market insight, intuition, and understanding of the financial markets. I asked Lisa if she would consider becoming a member of the RebelTrader family and she accepted. Lisa has a good head on her shoulders and she is smart and has a very good investment philosophy. She is bright and intelligent and I'm sure you will enjoy her posts when she begins contributing to the site over time. Please welcome her to the Rebel family!
Now one last thing before the charts. Last night I did a study of which sectors reacted well when the FOMC cut the Fed Funds rate. In that study I found one surprise. Technology stocks did not react as well as other sectors. My plays for a FOMC rate cut are:
Another bit of news today that goes in the category of consumer confidence or should I say their ability to spend is a report issued today that credit card holders are defaulting on their accounts at a sharply higher rate compared to last year. Moreover, late payments are also up and credit card companies have written off 30% more payments during the first half of this year than a year ago. These are not small numbers. This is a substantial barometer of the US consumer. The cost of living has increased with rising fuel costs and other goods to the point that middle America is stretched, regardless of what economists want you to believe. If you want to know the real feeling of the US consumer go to a shopping mall near you and ask people questions. If you can get past the ones who will look at you funny I'm sure you will hear that things are not rosy.
So what else happened today.. well the Standard & Poor's US National Home Price Index showed home prices in the largest 20 US markets had their worst decline in 20 years during the second quarter. You must keep in mind that this data does not reflect the latest financial crisis and credit crunch. So one can expect that this data will deteriorate further.
And then today Merril Lynch downgraded 3 top financial companies citing their exposure to the debt markets. Citigroup, Lehman Bros., and Bear Stearns were hit hard today as was the entire financial sector. But it does not stop there. Reports from some economists are calculating that other large financial institutions will be forced to write off hundred of millions of dollars due to notes that can not be unloaded and also loans to other companies will not be able to be paid back as they too were tied to the credit collapse which this is turning into.
Then if that was not enough already the minutes from the August 7th FOMC meeting were released. Generally this is a non event as on the day of the FOMC meeting when they release their press release statement it generally covers the headlines. The minutes is just a formality. But what the minutes showed today was an even larger disconnect between the Government and reality. The statement in the minutes which just burned the back sides of the markets today was "Members judged that the risk that inflation would fail to moderate as expected continued to outweigh other policy concerns". It was this statement along with the context of the entire minutes which sent the market in a nose dive as the feeling came back in full force that the FOMC does not grasp the situation.
Throughout the day today I monitored the 10 year T-note yield. And as expected it showed stronger flight to safety as more and more money is leaving the equities markets and moving into long term bonds. Remember the chart I showed over the weekend comparing the recent advance in the markets (previous 6 days) to the 10 year T-note yield.. I showed you how while the market was advancing on that flimsy low volume the money was still going into the bonds. Technical analysis goes beyond just looking at a stock chart, it includes doing charts on the indices and other aspects of inter market relationships. Last night I said that the recent advance was akin to building a house of cards but the lack of volume showed the foundation was weak and it would tumble down. This is why I was not recommending any swing trades. It was better to sit in cash as the signs of another collapse were building. And today it did.
Some were claiming that we had hit bottom on August 16th. I would not say that as there has been and still is too much going on in our economy and markets that when all put together are forming the ingredients of the "perfect storm". Today's sell off has brought the indices back below some significant support levels. And when a support level is breached (again) it then becomes stronger resistance. And the next time it will be harder to overcome that resistance. So with the action today we are now more likely then ever to retest that August 16th low. If we spend the next couple of months continuously testing and retesting support and resistance levels then we are setting up for a major break downward, past the August 16th low. Many things are still coming together but the clouds are dark and a storm may be brewing.
Now comes the FOMC. What if they do a surprise Fed Funds rate cut? Then the market will be shocked with the proverbial paddles you see paramedics use. Will the rate cut be enough? Will they have to raise the voltage and do it again and again before they get a heartbeat? Or will their attempts just result in a flat line? There are many opinions on what a rate cut would do. One thing however that is widely believed is that a rate cut will lower the value of the US dollar. And that in itself will create new problems down the road and could come back to just reinforce the economic slowdown (or worse yet a recession). If the economy is indeed going to go into a recession it may be too late to pull it out of the hole, even with a rate cut. That remains to be seen. In 1998 the FOMC cut the Fed Funds rate 3 times. And for a while the markets did great, but it was unable to prevent the bear market that followed in mid 2000. The rate cuts kept the heartbeat going on the economy and the markets but it only lasted for so long before the market topped and we had our 2000 bubble burst and then a bear market which brought down many companies.
If the FOMC were to cut the Fed Funds rate (now, tomorrow, or at their next meeting) there will be a knee jerk reaction in the markets in which case I have recommended positions for you to take. But will there be a selling on an advance by people who are still looking much further out in time and see recession? If that happens then the markets will pullback yet again in time. A vicious cycle it can be.
A comment received today regarding taking swing trades on the short side was raised. The reason I have been leaning on cash as opposed to swing trading long or short is that the FOMC could issue a statement at any time. It would catch short trades and murder them. The risk is not worth it. If we knew for a fact that the FOMC was NOT going to cut the rates anytime soon then yes we could go short on some key indices and ride them down. But the volatility and wild swings has long or short swing trades a dangerous play. It is a different story for day traders however, if you are experienced and know how to day trade there are good plays in this volatility. But I can't recommend to you swing trades (remember that swing trading is for the stock trader who wants to capitalize on large moves in a stock during a short period of time, typically days to weeks in duration). The market we are in now has so many large swings from day to day it can wipe out a swing trade in no time. And those kinds of losses I don't want my readers and subscribers to experience. When stability and direction come to the markets we will be swinging like monkeys in a tree.. till then we hunker down and wait for the right time to strike. A note of caution if I may please.. day trading can be very profitable and yet very risky. If you are in this market currently doing day trades then I urge you to exercise extreme caution and furthermore if you are new to the stock market then don't even try it. I want you here for the long term to make money with us. Don't get caught up in the excitement of the market moves and think you have to be in there. Day trading is dangerous and you must be experienced at it. Over time and with the move to the RebelTraders full web site you will learn many aspects of the markets, and you will from time to time get guidance and education that you can carry with you into day trading if that is a path you wish to pursue at some point. But first you have to master the markets and just survive without losing money.
Even long term buy and hold type investors need to learn how to survive the markets. The fallacy of 'buy and hold' and I will be forever fine is just that, a fallacy. Buy and Hold investors can actually do more harm to their long term growth potential by not paying attention to charts and learning the importance of major trends. For those that fail to heed the charts will be the ones with substantial losses. Had they paid attention to the markets and the charts they would know when it is time to bank the profits on long term stocks and sit on the profit until the time was right to reinvest. Once a stock breaks a major trend line it becomes very difficult for that stock to ever come back to the levels it was once at. And never put your faith in an investment advisor, do your own homework and manage your own accounts. It is your money so don't hand over your wallet to someone who is not as vested in it as you are!
After the markets closed today Dilliard's, a retail department store chain reported earnings and they were terrible. They missed earnings by a substantial amount. Is this one more indication of a slowing economy? Could be...
Before I show some charts tonight I want to now take a moment to introduce you to the newest member of the RebelTrader team. Lisa Doby of Texas is now a Rebel and she will be contributing to this site over time. She has been granted rights to this site and will be able to post her own thoughts, ideas, observations, or whatever she has on her mind that she wants to share with the RebelTrader readers. I first got to know Lisa on another trading board and she and I have kept in contact over time. I had the opportunity to meet Lisa recently on a recent trip she made which brought her to the east coast where I am located. We met and I was very impressed with her market insight, intuition, and understanding of the financial markets. I asked Lisa if she would consider becoming a member of the RebelTrader family and she accepted. Lisa has a good head on her shoulders and she is smart and has a very good investment philosophy. She is bright and intelligent and I'm sure you will enjoy her posts when she begins contributing to the site over time. Please welcome her to the Rebel family!
Now one last thing before the charts. Last night I did a study of which sectors reacted well when the FOMC cut the Fed Funds rate. In that study I found one surprise. Technology stocks did not react as well as other sectors. My plays for a FOMC rate cut are:
- Buy UYG (ETF for the financial sector)
- Buy URE (ETF for the real estate market)
- Buy UKW (ETF for the Russell MidCap index)
- Buy SAA (ETF for the small Cap 600 index)
- Buy QLD (ETF for the Nasdaq 100)
- Buy DDM (ETF for the DOW30)
- Buy GLD (Trust that tracks the performance of Gold prices, hedge against a declining dollar)
Now all of these are buys if the market likes the rate cut. What I mean by that is for example lets say the FOMC does cut the rate but they only cut by a small amount. The market may not like that and it trades flat or even falls. The FOMC action must be strong and decisive to make the markets react positively. Only then do you take swing trades in each of these positions. Do not buy before.
DOW, S&P 500, and 10 year T-Note charts:
1 Comment:
Excellent job !
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