The Day that Was - September 7th 2007

The charts are leading indicators of the fundamentals

People who study the charts and learn the ways of technical analysis all come to the same basic understanding. And that is that price movements reflected on the stocks, indices, etc. are leading indicators to the overall fundamentals. When the price of a stock breaks a trend line which had been in force for a long time then there is a signal that something is not right. Something is happening that is shifting money out of that stock for reasons which may not be fully identified yet in the fundamentals. In more times than not the price movement of a market or a stock will later end up being the warning sign of trouble which shows up in the fundamental data later. Since July I have been showing you various charts and providing commentary on price patterns which have been signalling trouble. Be it the 10 year T-Note yield showing money making the flight to safety, or a chart of the ratio of new highs vs new lows and the declining trend the point has always been this: To educate our readers on the markets movements and how to protect your capital and then how to make money in the markets.

Some people may have even considered the commentaries have been too bearish in stance. They appear that way because we are simply reporting what the indicators are telling us. RebelTraders is neither bullish or bearish, we are realists. We see the market for what it tells us and we react accordingly. If the markets are in a bullish state then we do not argue with it, if the market is in a bearish state then we don't argue with that either. The market is always right and no one can tell it that it is wrong. The only way to hold on to your money and to make money is to play the market in the direction it is going in, you can't fight it.

This morning the markets received a jolt from the employment data. Everyone was expecting that the data would be soft but the surprise was that the data was actually a negative growth indication. Employment had stopped growing and was now going backwards. This moved the market from "a rate cut will stabilize the credit situation" to now being "the economy is approaching a full blown recession possibility". And even if the FOMC were to cut the Fed Funds rate it may now not do anything for the markets. When it was thought to only being a liquidity issue centered on the credit situation then a rate cut may have stopped the bloodshed and stabilized the markets. But now with recession being a distinct possibility we have moved beyond a simple rate cut cure all.

If the employment data this morning was 'soft' it would have provided the economic evidence needed for the FOMC to do a rate cut and the market would have probably rallied on the news in that a rate cut would have probably been a sure thing and the liquidity crisis would be put to rest for the time being. But the sell off today was due to the negative growth employment data and the knowledge that this is much more than a credit situation. Now the economy as a whole is in jeopardy and a rate cute (sure thing or not) was not going to be the cure all. When the economy is heading into a recession a rate cut will not fix everything. Especially when the value of the dollar is already at all time lows.

So what now? What do we need to do and what do we need to watch for next? On Sunday night Lisa & I will have some guidelines for you and possibly some positions that you need to consider taking in order to protect your long term portfolio and perhaps also some short term trades which you can be on the watch for to take. This morning was a turning point in the markets we feel. We have moved beyond just a short term liquidity issue to now facing the possibility of a recession and a bear market in the future. Come back again Sunday night for ideas Lisa and I will have for you.

I will show you one chart tonight. It is the 10 year T-Note yield. I have shown you this chart in previous postings but what I needed to show you tonight is what happened today. Look at the chart and observe the intensity (length of the candle) of money moving to "safety". In all the days since this credit situation began never has been the greatest flight to safety then there was today. When birds fly south for the winter then you too need to start thinking about protecting your own assets and install the storm windows!