Market Action
Posted by Ray on October 31, 2009 under Main | 
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Well, I am not sure if I should feel bad or not. I actually had this conversation on Friday with a reader as we watched the market plummet and break through the 50 day moving average. Frankly, I was a bit concerned with the GDP print on Thursday and the rally that followed. However, I stuck to my guns and held on to my shorts, actually added a bit more to them on a reversal bet that did not pan out. My whole premise is valuation, I place fair value of the S&P 500 at 875, but given how irrational the markets are I am not sure where I will cover.
I have been extremely vocal and honest about where and what I have been doing in the markets, especially when it bounced at the 1100 area. I also look for confirmation in the people I talk to and the articles I read, the more bullish people were the more skeptical I became. Especially with the lack of conviction we saw on the way up, there was no volume. Perhaps the lack of volume is part of the new normal, but that does not explain the crushing volume n the downside, as we saw Wednesday and Friday. Regardless, a long position in this market, in my opinion only, is dangerous.
There will be a bounce, I have no doubt about that, but no matter what news that went out on Friday, jobs or whatever, it did not save the market at all. I would have liked to see a close on the lows, but actually the close off of the lows tells me there is more to go. There are a couple of things that worry me, being short of course, that is a stronger than expected ISM number, but given the mixed Beige book reports I will be shocked to see a number above consensus. Frankly, I am in the camp of David Rosenberg and think we have seen the highs of the ISM for the year and a number lower than 52 will be devastating to equities, perhaps 300 points on the Dow, but who knows for sure. However an upside surprise may provide a bounce in equities.
If we do get that upside surprise I do not think it will be a very strong move or last very long and would be a very good time to close long positions, in my opinion. I do not think earnings are sustainable, I do not see how 500K a week initial claims are good news nor do I see how creating more debt to encourage more spending is going to get us out of this problem we have. I think some of the more sobering news that was a big deal on Friday was the Citi rumor where they are said to have more write downs against earnings, if they have any, and Citi never outright denied the rumor. If this is true, we are talking about 10% of the company’s capital requirements, that’s a major problem. Furthermore, if Citi has this problem, does BoA or Wells?
Regardless, this is a sobering reminder that these problems are still with us and have not gone anywhere. Not only that, but all of these banks must start moving their offshore accounts onto their balance sheets, that is a huge issue. As I have said many times before, it is a year later and nothing has really changed except for trillions in liquidity and government spending, big deal. The underlying problems are alive and well and may rear their ugly head at anytime.
I believe last week’s move was the beginning of something larger and the volume confirms that. A further move next week, especially below 1020 of the S&P 500 will fully confirm that this is a correction. Then the question will be, was the last 6 months a bull trap? Is there an actual recovery happening at all? Since we use the market as a barometer, which is ridiculous, this mean we are going into another recession? It will be extremely interesting to see all the bulls on CNBC and the other networks explain their way out of this one. Especially of I am right and all of my price targets are hit, man where is Dennis when I need him? He owes me an apology.
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