“If you can’t take ‘em up…take ‘em down!” TB
…sometimes switching from CNBC to Bloomberg isn’t even enough…the insanity or more accurately lack of thinking permeates there too sometimes. Take yesterday, one of the young women there who considers herself a technician was breathlessly explaining that the 200 day moving average on the S&P 500 had turned positive and that this is a very bullish sign as historically once this has happened the stock market rallies further. If you recall this was the same argument used when the 40 day and 50 day moving averages crossed but unlike prior events…due to the naturally bullish nature of equities (or inequities)…both flatlined and have been joined at the hip since July 9…an incredibly long time as the market rallied for those 11 straight sessions but has rolled over for the past four sessions. Too show you just how insignificant her observation on the 200 day is, recall how the 200 day was in a steep decline with a slope of about -20 degrees but began to flatten out around July 15…it can’t decline forever especially when the S&P 500 has rallied 43% from the March 6 lows! Here are spots of the 200 day since 6/30:
6/30 890.84
7/2 887.91
7/10 879.95
7/17 873.65
7/24 870.59
7/27 870.57
7/28 870.92
7/29 871.30
Note that since last Friday the gain has been 0.69 points! Without a magnifying glass you wouldn’t even see it. Meanwhile, since the 40 day crossed above the 50 day (silver cross), on April 23 the spread peaked at 27 points on May 8 and has since narrowed to just 3 point…another sign that the rally is very tired. The 40 day crossed the 200 day on June 18 (golden cross) followed by the 50 day on June 23 as the 200 day continued to fall and is now 53 points below the 50 day and 57 below the 40 day….there is no conviction!
Also watch as the 4 point difference between the 40 and 50 day narrows and eventually crosses again (double cross…sorry couldn’t resist).
As of now the index is still 48 points above the 40 day but that could evaporate in a few sessions…and this is true of virtually every index which also have the 200 day now flat if not starting to turn up. Imagine how devastating that would be to see several indices drop below not just one but both moving averages in three days or so…we have seen this in individual stocks such as McDonald’s that gapped down on earnings last week right thru the 40 and 50 day AND then closed well below the 200 day….which for the past four sessions has proven to be major resistance.
Now we come to the point for the indices…actually two:
1. the advance from July 10 has been so fast (+11.7%) to the July 27 high (982.49) and high close (982.18), and the highs since have been 982.35 (double top) and 977.76 with two consecutive down sessions, and NYSE Volume has averaged just 1.16 billon shares without a single ‘average volume’ (1.5B) day, that there are a lot of ‘trapped long’ positions which will readily exit on a break of the 40/50 day or before…perhaps the smart ones already are?
2. the volume can only increase if this occurs…a standard event in the selloffs through the entire bear market (the last two down days on the S&P 500 have both been 1.25B shares). If that happens support will drop to the 200 day (871) on a break of 900 and then 869-72 the support in the selloff from the June highs. Remember that the highs failed to take out 1000 …a level last exceeded on November 4 and by just 7 points followed by a huge selloff to741…the November 21 ‘interim low! There was one more attempt that failed and ended in the March 6 low. While TB does not expect this, a ‘correction’ at least to the 200 day should be expected.
That is what happens when you have a rapid advance without building a base. True, there are also a lot of trapped long positions at the June highs were the highs ranged from 938-945 for seven sessions as managers who missed the runup bought to provide cover on their June 30 statements.
Daily, TB has commented on the volume of just two stocks (BofA and Citi) as a percentage of total volume which has run 50% or more of total NYSE volume. But those volumes include trading on Electronic Trading Networks (ETN’s) which are at least equal to NYSE volume. Still, that is a massive percentage of the volume on the NYSE.
For the last two days, Citigroup’s total volume has exceeded 1 billion shares, or about 85% of total NYSE trading, while BofA continues to be more than 20%. If this isn’t an indication of a thin market TB doesn’t know what is!
This brings us to ‘high frequency’ trades…computer generated trades on the electronic trading platforms which receive rebates for ‘providing liquidity’ so that they can ‘wash’ a trade and still make ¼ cent a share on each side! Is this truly liquidity? There is a huge debate going on in Washington and both sides have huge interests…Wall Street and a few big hedge funds (Citadel, Renaissance mainly) who profit from this.
TB has mixed feelings on the topic but feels that the market activity of late, especially the trades in BofA and Citi, prove that they do not provide liquidity but a false sense of liquidity. The reason being that they are run by computers using complex algorithms and testing the market on 100 share bids or offers posted for just a microsecond to see if they get any bites….that is 1,000 times faster than the blink of an eye! The ‘false’ sense of liquidity is that it is there until you need it. Also, TB has noted wide bid/offer spreads on ETF’s and less actively traded stocks so that when you buy you have no idea what the value of the stock is if you put in a market order and if you test it by bidding in between you will see an almost immediate change in the spread…first noticed in trading preferreds. Look at this example:
Lately, the spread on the iShares S&P California Municipal Bond Index ETF (CMF) has been about 50 cents…and that spread was centered on the 200 day moving average of the ETF! It has been tracking the 200 day since June 11 with some wild swings in between. For instance, on July 9 at that peak of the California budget mess, the ETF traded down to 95.66 yet closed at 100.39 with a high of 101.90! This is madness. On several days before and after it traded between 100 and 101…again huge moves. This illustrates just how important it is that you NOT put in a market order without ascertaining the spread between the bid and offer! Your performance depends on it.
What TB believes high frequency trades are doing due to the overall thinness of the market is creating ranges which is why for the third time in three months the market has hit plateaus that lasted for five or more days and while eventually rising the prior two times, the market is clearly ahead of itself…companies cannot continue to ‘beat’ on lower costs alone…they have to have higher revenues…significantly higher revenues.
Both Shell and Exxon reported overnight and both suffered huge declines in earnings and revenues…Shell earnings down 67%….Exxon profit -66%…a five year low! …and guess what? Crude averaged $59.63 in Q2 and is just $64.21 so far this quarter with the peak being on July 1…just under $70…in Q2 it peaked at $72.68. Better rethink those oil service companies…and what about oil company dividends? Energy was the worst performer yesterday, down 2.04% (oil services -3.1%), and the NYSE Energy Index closed just above the 40/50 day moving averages…it will break them today!
Bonds have been similarly volatile and that means you can be buried in a bond within minutes…especially with all the supply coming. We are now seeing the yield curve flatten as optimism picks up on an economic rebound…more like stopping the bleeding. TIPS have, despite comments to the contrary provided little or no relief due to their volatility. But if consumption is 70% of GDP and the the consumer is not only tapped out but trying to improve his balance sheet can we really have inflation? Especially with tons of excess capacity and even if that were to be sopped up, would wages rise? Not other than minimum wages…which just increased but is below minimums in most states! So how do you get inflation? Why do you need inflation protection when the real fear should continue to be deflation?
Please answer these questions for yourself instead of listening to a thirty-something tell you how optimistic he is based on historical data which does not apply in this situation, and has never seen a market he didn’t like! TB recalls the short 1987 crash which was the first downturn many in the business had ever seen…since then we had the 2000 crash which was salvaged by the housing market…what will save us this time? Not housing!
Here is some scary data for you: in addition to the $165 billion in commercial real estate loans that have to be refinanced this year, there are now $2.2 trillion of U.S. commercial properties bought or refinancd since 2004 that are worth less (worthless?) than the purchase price as reported in a Bloomberg article yesterday. In San Francisco, 333 Bush St., a 43 story tower, will be surrendered to the lender(s) after the main tenant, a law firm, filed for bankruptcy. The owners are Hines Interests and Sterling American Property Inc. Worse yet how many of these buildings are in commercial real estate REITS?
Everyone was excited about home prices ticking up yesterday…even Robert Schiller was feeling better, yet the foreclosure rate rose to 2.86% in June from 2.5% just a month earlier! That means banks are sitting on even more OREO’s that will eventually have to be sold…somehow. Are you (still) bullish? TB is NOT…green shoots – what a bad joke!
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Don’t be a bull….they don’t always get rich…or a bear…they don’t either especially in this market…and definitely not a pig as they always get slaughtered!
Keep thinking not spending!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 30, 2009.
