Thursday Was a Huge Day for This Market

I expressed concern recently when Investors Business Daily declared that the market was in correction. I respectfully disagreed. I suggested to one of my clients that it must have been interesting to be sitting at that table and coming to that conclusion, as it was highly debatable. In the end, the strength of the NASDAQ, mostly immune from rising fuel prices and deteriorating credit concerns, was the tell. So, it pleased me immensely Thursday when IBD declared that the uptrend is alive and kicking.

Folks, Thursday was a big, big day. ABK and MBI got the downgrades, and it impacted the market for only a nanosecond. Perhaps even more interesting to me, Mr. Einhorn, huge Lehman bear, admitted on CNBC that the Fed would not let LEH fail. That makes me feel better as an XLF bull - LEH won't be taking down the house. Small-caps and the NASDAQ motored to a new post-March high on good volume. If one is short this market (there are lots who are - check out the recent short-interest data), one should be investing in Hanes (HBI). Talk about a replacement cycle!

Lest I come off as some big-ego told-you-so, let me be the first to say that I have been SO WRONG. I have bet heavily on financials, and that hasn't been the place to be thus far. Luckily, that isn't the only sector that has interested me. I admit to being early, but I am more confident than ever that we are about to experience the mother of all short-squeezes in the sector. I wrote about FNM not too long ago, and I still like that name a lot (as well as the several small-cap names I have shared). XLF is due for a big bounce - look for a 30+ print this month.

This article has 27 comments:

Jun 06 06:54 AM
hm, so "the mother of all short squeezes" - based on what?
fundamental strength of the banking sector that is proving the naysayers wrong? Sure!
Einhorn's comments? as (un)likely . In fact, those should be a huge red flag to your position! If Einhorn admits that the Fed won't let LEH fail, yet he stays/is short the stock, what does that tell you?
It tells that LEH will survive why its shareholders might share the fate of Bears-bagholders.
There is so much truly astonishing good reserach available for free on the net taht shows how and why the banks' woes won't be over anytime soon and that a recovery will in any case be slow and fall well short of the bubble-years' highs.
But hold on to financials waiting for your mother of short squeezes to bail you out. The point is not that they will crash another 50% they might not, overall. but they will take years to get rid off trillions of garbage and during that time frame , comparatively little new income will be generated. The zombie-banks are dead money at best - for at least another 1-2 years.
Btw, there is one thing i agree with: the stock marlket's decline of the past week was NOT a correction. The correction has been the uptrend since mid-March. And even though it may well extend a bit more into mid-June and we may reach new highs for the year, it's very likely that this will be the mother of all shorting opportunities wirth regard to the overall market
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Jun 06 07:29 AM
econ 101

The Slosh Report, TOMO
www.gmtfo.com/RepoRead...

Simple supply and demand. Pump 9 extra billion USD into your friends at the IB's with the understanding that they will use some of it to buy index futures. It's not rocket science, it's cheating. The market was trending down, and there was talk of nastiness brewing for Lehman. It simply couldn't be allowed. Turning public perception is a lot cheaper than buying another bank, and god forbid what FDIC would have to do if they ever had to enter the picture in a big way.

This market is being managed, market fundamentals be damned. Except that they're only damned temporarily. They'll be back.
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Jun 06 08:03 AM
Yikes you freely admit every time you come to a decision about the market it goes the other way and then you expound more.... It would seem a time to clam up.
My indicators flashed correction as well and indeed the NaZ dropped near 100 points in one months time and the DOW 600 or so.... I was glad to take my high beta off the table although SIMO & MRVL continue to look good. So there is some logic in not pruning positions but many others fell out of bed. Small caps are beckoning as of two days ago and we will see what today's jobs report brings... in general you would be wise to not buy IBD, I too used to be interested in their change of direction opinions on the market until they blew quite a few calls. Your best sentiment gage is the bear reading from individual investors near 50%!+ the big cash on the sidelines... however this should be measured equally with a very bad earnings period coming up in which companies will point further out at the restricted spending picture by both government and consumer alike. ~ stoney
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Jun 06 11:15 AM
WOW .... What do you say about this morning? Have you ever heard of Jim Rogers?
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Jun 06 11:58 AM
be fair

is today also a "big, big day" ? (as per almost 11 am cst)
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Jun 06 12:01 PM
you're a brave and lonely soul, buying falling knives.

there is no stock that has the "protection" of the federal reserve. just because the fed will "not let lehman fail" doesn't mean they give a damn about what happens to its shareholders. bear stearns was saved too...and shareholders were all but wiped out.

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Jun 06 12:07 PM
I've learned the hard way not to overstate my position, especially after the market had a huge up day. And the next day it gives it all back. Humility lessons are tough. XLF is a very complicated problem. Some really smart people are on opposite sides of the argument. So what's the trader to do?

Well this is what this trader did. The day before the huge rally, I bought a heavy MSFT in the 27s. Sold it on the pop and shorted the market via QID SDS and SCC. That was going into the close. Today's jobs report was weak and all the gains were given back so I liquidated the short position. Point is, I'm not sure where the big picture is going so I try for the high percentage trades.

Prevoius poster notes Jim Rogers who I know is short a bunch of banks. Very smart guy. I don't like betting against very smart guys. But with XLF getting killed today, I might take a trade. It's only a trade. Today, everything is only a trade. Nobody really knows.

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Jun 06 12:07 PM
Stoney, I am not sure what you are saying about "every time I come to a decision..." My calls have been spot-on all year. Perhaps you are referring to a comment I made regarding very short-term I tend to be wrong when I write (by like a day or so). I would certainly "clam up" if I didn't think that I was actually nailing it with respect to market timing. The last thing the world needs is another 50% accurate market-timer! Maybe that's all I will prove to be, but review my posts this year and you will see that I entered the year bearish, switched the weekend before MLK day, got bearish again, got bullish just before BS blew up (and reiterated after). I haven't been short a single stock since March. I even own some of the stuff I used to be short (TIE, NTAP).

Yes, IBD has missed a few, but I still give their philosphy a great deal of respect. As far as sentiment, I watch cash levels for mutual funds, P/C ratios on sell-offs, short-interest levels and, quite frankly, the types of reactions I get when I publish what I view as contrarian ideas. I have noticed the stronger the backlash, the more likely I am to be correct.
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Jun 06 12:16 PM
I agree - LEH could be wiped out. The bigger issue is that the financial system won't. That is what interest me. As far as catching a "falling knife", if you check out my holdings, you will see that is far from the case (click through from my website). With respect to XLF, while some of its components are indeed falling knives, the index itself made a clear bottom in March. While I may be wrong, I view this as a correction from the lows to the peak above 28. I see support around 23.5-23.75 - I hope it holds. That level was the low area before BS imploded and we saw a quick drop to as low as 22.29. I agree 100% that times are extremely tough for many of the companies that comprise the index - my argument is what's priced in. What wasn't priced in today, in my opinion, is the SEC probe of AIG. Anyway, thanks all for your comments.
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Jun 06 01:15 PM
I'll sit on the sidelines for this one. The financials are several years away from a real turn-around.
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Jun 06 02:27 PM
good luck alan....we all need a bit of luck in this kind of market, whether you're philosophy is long or short. i tend to agree with your short term view on xlf but i think it's just a trade to 25 or so. the big risk is a new bear situation. but we'll see what happens.

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Jun 06 02:37 PM
Well that was a very short party. Even the lights are still on. Could we get a buyer to come back and turn them off.
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Jun 06 04:17 PM
read your follow ups to several people's comments made during today's market, am glad you did some up-dates, and appreciate your honesty re going either short or long, depending how you see things

it builds trust in what you say; i for myself appreciate it - thanks!
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Jun 06 04:52 PM
Thanks, Adan. I waited to respond to your question (is today a big day), as I wanted to see how it closed. Clearly, it was a painful day for bulls. Any sort of follow-through on Monday will certainly concern me. I was hoping that the R2000 and the QQQQ, which have been strong relative to the overall market, would hold their 10dma, but they didn't. Today wiped out a very positive week in what has been a good trend for more than two months. Of course, my favorite contrarian area was aboslutely hammered (along with Consumer Discretionary).

Was it the culmination of the move from Mid-March? I don't know. My view, expressed in writing on the pages of Seeking Alpha, has been that the S&P 500 would make new highs but might not make it through 1455 before correcting. I had indicated in that article that the pullback to 1340-1380 was within reason (seekingalpha.com/artic...). We made it to 1440 (a new recovery high), and now we are at 1360. Of course, the R2000 is still higher than when I changed my view from bear market rally to something more sustainable. I either have missed a good trade or am just wrong about characterizing the bear market as over. My guess is that we will learn shortly.
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Jun 06 05:14 PM
Friday was also a HUGE day - bigger then thursday I believe.....//

disclosure: still long SKF
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Jun 06 08:20 PM
Put a 400 day on the 5 yr. SPY chart and see why John Murphy thinks we just saw an intermediate correction before the resumption of the bear market.
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Jun 07 02:29 AM
Alan, i'm a market Top and Bottom picker so I'll give you my opinion. Get out of your longs until 3rd week in September and watch as the S&P hits somewhere between 1175 and 1223.
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Jun 07 04:08 AM
Great call Alan! I think I'd look at a career change.
There are always opportunities in the market but you have to find the right areas. In Australia for instance, coal gas has been huge just recently. But financials! Give me a break. You would have to be nuts to be in financials.
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Jun 07 12:06 PM
Actually, the price action on both Thursday AND Friday remind us that very important lesson that as traders, we have to respect BOTH sides of the market!
The 200-day MA of the SPY is still in a downtrend, and even a quickie glance at the 2-year weekly chart of SPY will instantly remind us that things have yet to recover from the breakdown that began last October!
That chart will also show us that we are still in a trader's market, and that this is not yet the time for jumping into long or short positions and then confidently counting your coin!
The past months have been riddled with reversals, squeezes, breakout and breakdowns, and there is not a shred of technical evidence that this 'trend' is about to end!
This environment is one in which there are only two kinds of traders: the nimble and the dead.
Pronouncements that we are either stuck in a bear market or that the worst is over, are not only silly; they can be downright dangerous!!!
Long or short, be very careful of opening new positions, and then watch 'em like a hawk!
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Jun 07 01:25 PM
Another sobering thought:
The S&P500 first hit its current level back in April, 1999. That was a time when many were making outlandish predictions about a SPX of 3500+!
Price action is the only "real" action there is... Predictions can't even buy you a phone call nowadays!
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Jun 07 05:09 PM
You people sure are a tough crowd (career change?). I don't think that my post was meant to be be a prediction of Friday's action. Despite enduring one heckuva ugly day, I have reviewed my work this weekend and maintain my belief that the bear market is over. Oh how quickly everyone wants to declare the rally over after one day. I have found over the years that more often than not, the magnitude of moves tends to run inverse to trend. Most of the biggest up-percentage days in the last few decades occurred in the bear market of 2001-2002. One of the worst days, if not the worst, last year was in February, well before the market peaked. Maybe the guys at Bespoke will crank that one through their database!

There wasn't any signficant technical damage done to most of the stocks I follow, which tend to be small-cap. Even looking at the major averages, the S&P 500 didn't break any significant support. I become concerned if 1340 breaks. Even my beloved red-headed step-child, the Financials, aren't making new lows (yet).

Does anyone else find it interesting how many negative responses positive articles provoke? Maybe Seeking Alpha readers tend to be more negative than investors in general. Maybe people like to disagree rather than agree. Rising short-interest, falling margin borrowing and the anecdotal sentiment reads that I get all suggest that the crowd is expecting a decline. I don't always bet against the crowd, but it sure pays off when it works. I was negative like many of you folks - read my posts. I like to buy oversold markets for a trade in a bear market, which I suggested in January and in March. I just realized, wrongly you folks all seem to believe, that March actually was a good low, and adjusted my outlook accordingly. I was lucky to never be on the wrong side of a trade in what was an extremely volatile market thus far this year, though I may be now. I am not married to my present beliefs, and I certainly have no vested interest in being bullish.
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Jun 08 08:13 AM
The guys at Bespoke have spoken:

seekingalpha.com/artic...?
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Jun 08 09:48 AM
Yes, Alan; the guys at Bespoke certainly have! Their data deserves a closer look, don't you think?
Now, do some real tough critical analysis, ok?
Events like -3% down days do not occur in vacuums, but rather in the context of broader trends and conditions...
Currently we are in a bear market, if you grant me that bear markets exist when both the 150 and 200 day MA's are in a downtrend, as is the case today.
If you look at Bespoke's recent dates for DOW -3% downers in bear markets, we find these lovely numbers for the S&P500:
9/3/02 SPX 878 fell to 776 10/9/02
8/5/02 SPX 834 climbed to 962 before falling to new low of 776 7/19/02 SPX 847 fell to 797 climbed to 962, fell to 776
7/10/02 SPX 920 fell to 797 climbed to 962, fell to 776

The percentages both up and down make for quite a ride, and would sprout grey hairs on a bowling ball... Yet, for a nimble trader, they represent great opportunities.
Alan, this market has had a nice rally of some 56 days or whatever from the Bear Stearns lows back in March... hopefully, you've been able to take some profits and bank some coin.
Right now, the SPX has been in a very tight technical range between support and resistance. It will soon either breakout or breakdown, and those who have made their predictions either way will congratulate themselves on a win from 50-50 odds...
Personally, I'm 90% in cash and waiting patiently for the next up or down elevator... patient as an Anaconda.

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Jun 08 11:53 AM
I came to the exact same conclusion as you did, recognizing that there is no 100% correlation between the big moves and the direction of the market (i.e. just because the market fell sharply doesn't prove we are actually in a bull market). Where you and I disagree, though, is whether we are in a bear market. I certainly may have been premature in shedding my bearishness, but, as I have stated, I prefer, based on many things I am observing, to stick to that position for now. Your strategy of doing nothing while waiting for more evidence one way or the other may prove to be wiser, but I find it risky as well. My guess is that IF we advance from here, there will be a big short-term trade up (especially if the S&P 500 goes green on the year). It will be very hard for people to throw in the towel and buy in my opinion. By the time they do, the rally maybe over and folks will get whipsawed potentially. I don't see the potential for a huge rally - interest rates will be working against us most likely.

The fact that the S&P 500 150dma (or 200 if you prefer) is down doesn't prove that we are still in a bear market. It is flattening. Go back to the worst bear market of my life - 2001/2002 and look at how long it took the 150dma to turn after the lows in October 2002: April 2003. Hey, last year I said we would have a bear market and a recession, but I think I am wrong now (better to be lucky than smart!). We didn't get the official 20% down, and we didn't get the negative GDP prints. I am fully aware of what a crappy world we seem to live in, though it is sunny here today, and I will certainly adjust my presently optimistic views accordingly if/when proven wrong.
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Jun 08 11:37 PM
Alan, thanks for information. With the rising of oil price, the profit margin of companies will decrease. Do you think that could change the direction of market to bear?
Thanks.
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Jun 09 06:54 AM
A continued rise in oil prices could clearly cause the bear to resume. Worse than hurting overall profit margins, it hurts the consumer and consequently the financial system. An additional $1 increase in gasoline costs a two-car family approximately $1500 a year (I am assuming 16mpg and 12k miles per year). Not to mention heating and cooling costs for the home. With that said, a lot seems to be priced in - check out the Airline performance relative to the NASDAQ, for instance.
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Jun 10 12:11 AM
Alan, I appreciate your work and comments.
I didn't mean to imply that my strategy at present was to do nothing.
I was heavily into cash last Friday night due to profit-taking, and some of that ammo went back to work today...
My point is that until we do have a clear trend, then the most successful traders will either be very nimble, or consistently lucky!
Luck has proven to be a poor investment strategy for me, I'm afraid!

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