主题：10/06/2008 Market View -- 宁子

SUMMARY:

- Market gets close to capitulation with an 800 point Dow selloff, but a late rally may have allowed the bears to wiggle off the hook.

- Fed ponies up more money to try and break credit free, set to bolster Commercial Paper market with direct liquidity injections into companies.

- Technical readings lining up better with the sentiment and internal readings.

- Trying to set a bounce after this third downside leg.

Monday continues the selling then market reverses, cuts losses in half.

Foreign markets started the week weakly, getting whacked to the tune of 7.6% if you averaged them together. That didn't quite put a happy face on the US market. The US Fed entered pre-market and announced it had increased its already big $450B credit swap line (Term Auction Facility) to $900B, doubling the amount once more. It also announced it would pay interest on member banks required and depository reserve balances. Big moves, but there were bigger ones to come. That was, however, a disappointment for investors looking for an intermeeting rate cut. Futures were down and sagged more. The Fed also encouraged WFC and Citi to reach a compromise over WB, signaling they powers that be are in no mood to have legal fights slowing the wheels of recovery. Massachusetts said it was close to insolvent. No tea parties there. Europe's situation gets uglier and uglier as you look behind the curtain. The euro tanked again versus the dollar (closed at 1.351 dollars after opening at 1.3604 and closing at 1.3795 Friday); huge, huge moves. Gold rallied (860.30, +27.10) though it closed well off its high. Oil sold off though it managed to close well off its intraday low that took it closer to 85/bbl, the support before it breaks and sells down to $55ish (closed at 89.10, -4.78).

What a morning packed with news, all bad or worrisome. The market opened down and sold straight down. Bounce at the traditional midmorning point, but that bounce failed heading into lunch. New lows then more new lows. The Dow lost 800 points, NASDAQ 170, and SP500 91. That is an 8.3% loss on SP500 intraday. Blistering selling that sent the indices below the 2004 lows that tested that first strong run off the test of the 2002 double bottom. It was not good with the indices in dive mode with nothing to break the fall.

Massively oversold, looking for a trigger to cover. Rumor came out that someone in Europe was calling for an emergency G8 meeting, indicating the desire for a coordinated move against the crisis. The indices started to bounce and we issued alerts to take the DUG and SDS and any EEV and SPY you had as well. An 8+% loss in a day on top of the prior bludgeoning? It was time to reel in some downside gain. The indices continued to bounce on into the close, cutting the losses by more than half. Reversal? Maybe. Would have preferred more selling into Tuesday to get that major, cataclysmic, puking on the floor of the NYSE reversal plus some more gain on the SDS, etc. plays before that.

TECHNICAL. Intraday the action was down to worse with new lows for the year - buy a long shot - then an afternoon reversal that cut away half the losses. This is the kind of action you look for after an ugly selloff, though some puking on the NYSE trading floor would have been nice.

INTERNALS. Some more massively negative internals once more, even more so intraday. A/D hit -45:1 on NYSE right before the afternoon turn. New lows zoomed back over 1000 on both NYSE and NASDAQ as the indices hit new 2008 lows; unlike last week there was a big jump in the lows as the selling continued. 800 points on the Dow will do that. NASDAQ volume surged to rival the volume on the announcement of the bailout proposal. That is good. Like to see high volume on the reversals. NASDAQ is not the leader right now, however, and the NYSE volume, while up sharply, was not at a level commensurate with that associated with a bottom. Close but there always seems to be a missing link somewhere.

CHARTS. Well, DJ30 was about 5% below the prior low as of Friday. As of 2:30ET it was 12% below the July low, the first possible low in a double bottom. As of the close it was 8% lower. That likely means the Dow will have to make a test of this low at some point. It broke through the 2004 range of support as well on Monday. Doesn't mean this wasn't the low for this selling, but that there is more work to do in order to get a bottom in place. With the leadership dearth, that makes sense as the market needs time for leaders to develop good patterns.

The market tends to do things in rather symmetric patterns. A head and shoulders base is very symmetrical. A cup with handle. Double bottom. Double top. A trend up or down. Selloffs tend to occur in three's. From the peak in 2000 to the trough in October 2002, SP500 sold in three big and rather symmetrical legs before bottoming, the last leg being the biggest of all. This time the SP500 peaked in October 2007, sold 17% into March, bounced, then sold another 17% from May to the July low. It bounced modestly in the summer rally, then rolled over and as of the Monday low was down 23% on this leg. The last leg in 2002 was a bit more, a 35% scorcher.

Thus SP500 and indeed DJ30 have put in three legs and are in position to form a bottom here, particularly when you factor in the internal data and the sentiment readings. The question you have to ask is one we asked back in July when sizing up when a bottom could form: is this enough of a selloff to make amends for the massive problems in the housing and mortgage arena and now the credit collapse? SP500 hit 768 on the October 2002 low, falling from the same heights as hit in 2007. That was just a tech bubble. This rattles the foundations of the basics in the US and as it turns out, many foreign countries. There is still another 239 points to the October low. I don't want to go into how bad this could get; if the $700B doesn't work the 2002 lows won't hold and we go down to 610 and then if everything collapses, down to 475ish. There. I went there anyway.

The point: Maybe the $700B and what else that is coming has saved the day and put off our fateful encounter with too much easy money and free liquidity for another 6 to 8 years. If so then the sentiment and technical indicators are in position for a rally at some point starting over the next few weeks. It could be a rally that lasts on up through January and even onto May. It may be the next bull run. That will work for the short term, but it won't solve the problems that got the economy where it is today. That will be pushed off for another day. Right now, however, it is nip and tuck as to whether the market and thus the economy will make the turn.

LEADERSHIP. Still not there. Financials sold back but recovered. The short sale ban is still set to expire Thursday and no news on whether it will be extended and that suggests it won't be. If that is the case the financials will not hold up. Medical and healthcare continue taking on water. Food is about all that is going higher, but not necessarily the eateries, just the processers. There are some techs that are beaten down and trying to bounce (e.g. JNPR with a nice reversal from low to positive) as pointed out over the weekend and others are trying to set up a bounce as well. They are not necessarily in leadership position. That is the problem with most stocks: they need time to set up bases though when the market takes off to the upside as in 2002, not all are there. Most based out during the December to March pullback that ratcheted fear back up as many called it another bear market rally gone bad. We saw the solid stocks basing and the great price volume action and had a list of buys at the ready that made is a fortune on the run from March 2003 to 2004 rally. So, even a lack of patterns here is not necessarily fatal, but you need a pretty good stable just to get things started. Again, things are thin right now.

THE ECONOMY

Fed is betting the farm on this liquidity gambit.

As noted above the Fed doubled its TAF from $450B to $900B. This allows qualified institutions (about every financial institution these days) to swap out its crappy loans and collateral with the Fed for 84 days, allowing the institutions to meet their liquidity requirements and conduct business. The Fed also announced it is going to pay interest on all deposits member banks hold. It is trying everything to get more money into their hands so they will get comfortable and lend baby lend.

It is a big move but there is a seriously big problem the Fed is trying to rectify. Over the weekend I discussed some of the aspects of the 1907 Bank Panic that preceded the 1908 recession. J.P. Morgan said that everything would be okay if people would keep their money in the bank. Outside of a few runs on institutions early on, citizens are staying pat. It is the BANKS that are hoarding money, scared to be the one that lends to a company the FDIC takes overnight. Thus credit rates rise and the spreads widen as the risk is perceived to be high. They all know what crap they have on their balance sheets and are really scared about what the other guys have. Thus they are not loaning so maybe this bailout that makes us buy their crap will work once it is off their balance sheets.

There are some very disturbing and downright scary aspects of this. The banks are afraid to loan and are hoarding money that is not even backed by gold as it was back in 1907 when the citizens wanted to hold greenbacks in their hands. This stuff could be devalued to change by the Fed yet the banks won't give it up. That is how bad things are from the banks' perspective.

Money heading to fix the commercial paper market.

Bernanke is not stopping at the financial institutions. The Fed indicated today that it is going to now work on the commercial paper market, the market where companies issue obligations with interest in exchange for short term money to conduct operations. This is a vital part of their short term financing and you can imagine that not many companies in this environment are able to turn much paper.

The Fed statement today said it would take 'additional measures' to support commercial paper but it was not more specific. We hear it is going to work with the Treasury to inject capital DIRECTLY INTO companies that it deems (through an unknown process) in need. House Banking Committee Frank confirmed today that the $700B bailout did include authority to do just that.

The behind the scenes meaning of these extraordinary actions.

Bernanke is a student of the Great Depression. He has spent most of his free adult time researching it. Bernanke is throwing everything at the problem. He says the government needs to pay a premium for the mortgages in order to get more money in to the financial institutions. When I say everything, I mean everything.

What has him so concerned? Only Bernanke knows as well as other Great Depression scholars. He knows the beast and he is going to do anything he can to liquefy us out of the problem. He does not want a Great Depression 2 on his watch and the tool he has is money.

That only likely puts off the day of reckoning until later, but it is a day of reckoning Bernanke is attempting to avoid. It is not his making. There is plenty of history before him from poor monetary policy choices to encouraging lending for bad mortgages and the refusal to acknowledge problems and oversee what the feds created. Nonetheless it is Bernanke's charge to avoid a collapse and thus we see each week more and more money committed to the problem. We risk debasing the currency, but with Europe in the tank the dollar is surging to Bernanke feels he has some room to work with.

It is a desperate gamble by one of the experts on the Great Depression. Problem is, if we avoid really tanking, the policies put forth by certain political candidates are cited by the authority on the economics within and after a depression as being the exact wrong policies to shorten and shallow up a depression. Scary stuff all around.

THE MARKET

MARKET SENTIMENT

Still reeling off some heavy duty negative sentiment readings, more than enough to support a bottom, much less a rebound.

VIX: 52.05; +6.91. Surged to 58.24 on the high before the rebound in the market brought it back on the close. That kept it just below the October 1998 Russian Ruble Crisis level of 60.63 and the other major spike that hit 172.79 in October 1987, the old Black Monday high.

VXN: 55.36; +5.6

VXO: 59.5; +7.74

Put/Call Ratio (CBOE): 1.51; +0.4. Three weeks above 1.0.

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 33.7%. Big drop from 37.5% and below the 35% threshold considered bullish. Now with the bulls down and the bears up big there is plenty of pessimism here. Down from 40.7% on the high during the rally off the July lows. Heading back toward the 27.8% on the low this round. Hit 30.9% low hit in March. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 47.2%. Surging from 40.9%. Closer toward 50.0%, the high on this move, but a long way off. As the NYSE indices test the lows you would want it higher. Still above the 35% threshold so still a bullish indication. A move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -84.43 points (-4.34%) to close at 1862.96

Volume: 3.532B (+38.58%). Strong enough volume on NASDAQ for a reversal.

Up Volume: 373.128M (-276.325M)

Down Volume: 3.117B (+1.247B)

A/D and Hi/Lo: Decliners led 5.47 to 1. Strong but it was -14.50:1 just before the afternoon rebound.

Previous Session: Decliners led 2.53 to 1

New Highs: 8 (+2)

New Lows: 1141 (+680). On the rise once more as the indices dove to new 2008 lows.

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped lower, sold off 171 points, then found support at the 2004 low and snapped back up to the close, reeling in over half the losses. Big numbers internally on breadth and volume to go along with that big reversal. It has the attributes for a reversal, just not a lot of great patterns just yet.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg

SP500/NYSE

Stats: -42.34 points (-3.85%) to close at 1056.89

NYSE Volume: 1.974B (+39.08%). Volume was strong but it was not as strong as the volume seen on the sessions involving the bailout proposal. This is the weakest link Monday.

Up Volume: 173.38M (-261.456M)

Down Volume: 1.801B (+824.443M)

A/D and Hi/Lo: Decliners led 12.12 to 1. Very weak on the close, and right as the reversal began it stood at -45:1. I have never seen breadth that negative.

Previous Session: Decliners led 1.87 to 1

New Highs: 2 (-15)

New Lows: 1663 (+1021). New lows explode again as the indices tumbled to new 2008 lows.

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Undercut the 2004 lows intraday and then reversed to close very near those levels, and that puts it just over a consolidation level from Q4 2003, part of the run off of the March low after the October 2002 bottom. As noted above, if this bailout does the trick the move to this point satisfies many technical and internal bottom indicators. Now it just needs to put together some leadership. If not, well, it heads lower. For now there is enough in place for a significant bounce that we can trade.

SP600 (-3.44%) reached down to some mid-2005 levels and snapped back. It is still well down from the bottom of its 9 month trading range so there is plenty of work to do, but SP600 can bounce here and run up to the bottom of its former trading range at 340 (closed at 320). That is tradable to the upside and then if it fails, then to the downside.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg

DJ30

Similar to SP500, the Dow undercut the 2004 lows and reached toward the important June to August 2003 flat consolidation level, the first rest stop after the 2003 low. Big recovery here as well to close at the bottom of the 2004 base. Closed below the 10K level for what that is worth. Now we see just what is in the tank for a bounce back up after this third leg lower. It will likely rebound toward 10,750 to 11,000 and then come back to form the rest of the base, likely another double bottom attempt.

Stats: -369.88 points (-3.58%) to close at 9955.5

VOLUME: 391M volume versus 299M shares Friday. Solid volume but as with NYSE it was not blowout volume on the reversal.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg

TUESDAY

Another sharp drop Tuesday without the intervening Monday afternoon bounce would really have made things interesting and would likely have cleared out the most of the market as the hedge funds, despite their desire to take advantage of a market selloff, have to liquidate and raise funds. Thus they get out to raise funds and then buy back in. It would be nice to have some short selling allowed as that would help the rebound some, but with the financials the only group not shorted that is not a complete bar to a short covering rally. The short sellers moved onto other areas such as large cap tech.

After hours the financials were again under pressure as BAC cut its dividend by 50% and announced a stock offering to raise $10B. Asian markets are down sharply as Japan injects $1T into its economy and Australia adds A$1.815B (US$1.3B). The metals and commodities are down again as comments from foreign money managers center on how quickly the world economy threw in the towel.

US futures are basically flat thus far, not indicating the kind of after hours follow through to the Monday afternoon reversal. Of course they are not pointing to another dive either. It may be that the Monday afternoon recovery was a safety valve that let off the downside fear and pressure and let the bears off the hook, i.e. will allow them to hunt another day on this selloff.

Maybe, but with these sentiment, internal, and technical indications we are looking at a bounce higher at least near term, one that we can play with some of these indices and stocks that were hit hard but can rebound to test just as quickly. After the bounce we see what is in the tank for more upside or if they crap out. Remember, there will likely be another pullback to test this deeper low before a longer term bottom sets itself so any upside move outside of a high quality pattern will likely test as well.

Thus we look for some upside bounces after closing the downside on Monday with the idea of riding the move as a bounce and then seeing what the status is after the indices approach resistance.

Now looking for a rebound move to get things started to the upside and we see where it goes from there.

Upside:

Play Date: 10/06/2008

DIA (Diamonds Trust (DJ30 EFT)--$99.90; -3.30; optionable)

STATUS: Trend reversal. Looking for a bounce after the gap lower, 800 point selloff, then rebound into the close. Looking for a bounce up to near the 18 day EMA (108.12) to get things started off.

Volume: 49.88M Avg Volume: 26.788M

BUY POINT: $100.11 Volume=35M Target=$107.45 Stop=$99.24

POSITION: DIA LV - Dec. $100c (52 delta)

http://www.investmenthouse.com/ci/dia.html

Play Date: 10/06/2008

IWM (Ishares Russell 2000--$59.72; -2.98; optionable)

STATUS: Rebound. Another stock that sold unmercifully, breaking it down from its 9 month trading range, gapping lower Monday and selling all the way down to 56.38 before reversing on high volume. Ready to rebound, fill the gap, and test the breakdown from the 65ish level at the bottom of the range.

Volume: 172.302M Avg Volume: 120.938M

BUY POINT: $60.11 Volume=155M Target=$64.88 Stop=$59.21

POSITION: IQX LG - Dec. $59c (44 delta)

http://www.investmenthouse.com/ci/iwm.html

Play Date: 10/06/2008

LMNX (Luminex--$21.43; -0.31; optionable): Medical instruments

http://biz.yahoo.com/p/l/lmnx.html

EARNINGS: Early November

STATUS: Test 200 day SMA. Looking at LMNX again as it tapped the 200 day SMA (20.29) on the low and rebounded on strong, above average volume. It sold off from the top of the channel of its 6 month uptrend on very low, below average volume. Tapped key support and bounced on great volume. Looking to play the bounce back up.

Volume: 647.024K Avg Volume: 375.932K

BUY POINT: $21.89 Volume=500K Target=$25.92 Stop=$20.36

POSITION: UQV AD - Jan. $20c (65 delta, 37 OI) &/or Stock

http://www.investmenthouse.com/ci/lmnx.html

Play Date: 10/06/2008

PNC (PNC Finanical--$75.40; +1.25; optionable): Money center banks

http://biz.yahoo.com/p/p/pnc.html

EARNINGS: 10-16-08

STATUS: Double bottom w/handle. Testing the 50 day EMA (71.82) on the lows in the 9 week handle to the 10 month base. Broke to a new all-time high on the announcement of the bailout proposal but then faded to continue work on the handle. Volume was up Monday as PNC tested the 50 day and rebounded for a gain. Strong money flow leading higher. This is one of the strong, the few big banks.

Volume: 4.827M Avg Volume: 5.448M

BUY POINT: $77.89 Volume=7M Target=$88.95 Stop=$74.92

POSITION: PNC AO - Jan. $75c (53 delta) &/or Stock

http://www.investmenthouse.com/ci/pnc.html

Play Date: 10/06/2008

SPTN (Spartan Stores--$26.14; +0.86; optionable): Food wholesaler

http://biz.yahoo.com/p/s/sptn.html

EARNINGS: 10-15-08

STATUS: Double bottom w/handle. Strong volume the past week as SPTN bounced up off the 50 day EMA (23.94), tested the move last Tuesday through Thursday, and then started higher. Nicely formed 12 week pattern that is part of a 15 month cup base. Strong money flow is leading higher. Very solid. Wish some growth stocks had this kind of pattern.

Volume: 319.773K Avg Volume: 181.395K

BUY POINT: $26.32 Volume=275K Target=$31.84 Stop=$24.48

POSITION: QGH AE - Jan. $25c (62 delta, 50 OI) &/or Stock

http://www.investmenthouse.com/ci/sptn.html