Off with their heads! GES to the Guillotine

What a difference a week makes. It looks like a combination of sub-prime implosion, rebounding energy, the end of the yen carry trade and a global market meltdown may have finally brought the end to this overextended and tired bull market. No single factor is to blame for the violent reversal but I think the spreading of sub-prime lending woes is the poster child of the end. What started off as the isolated problem of a few lenders going under has spread into a big sell off in all mortgage then banking and now all financial stocks. Of all the financial stocks you would expect the Wall Street giant Goldman Sachs (GS) to be the most immune. Well GS topped with a nasty high volume breakdown last week:

It is almost unbelievable that GS could drop from within a few percent of an all time high to 30$ lower in just a week. The scale of the technical meltdown in other leading stocks is staggering. You can see it clearly in CROX, NYX, ICE below, but open up a chart of just about any recently "great" stocks and it will be there. I want to be very clear about this action, this is no orderly pullback, no correction and no buying opportunity as the mass media portrays. In my humble opinion this is the end of the 4 year bull market and the beginning of a multi year bear phase. If you want more color on my broader view leave some comments or drop me an email.


In the past, when the market begins a large scale bear movement I have found the IBD top 100 often provides some of the best shorts. And it makes sense because these popular high growth stocks, and high priced stocks can't quickly turn sour as investors seek to lock in profits. One sector that you have heard me and betweenthebars (btb) be very bearish on is retail. Btb nailed the DDS call at 52 week highs as well as JWN. Both have subsequently fallen hard, but those as well as many other retail stocks have much further to fall. Take the IBD #2 stock for this week "Guess?" (GES).

With all the credit problems we are hearing about with the fall of the housing market you have to wonder why retail has been so strong. It would certainly appear as though it can only get worse from here especially if the US does follow through with an economic slowdown. Even if we don't go into a recession though, the psychology of a falling broad market will take retail stocks down hard. The best of them, JWN got it's head taken off on great earnings last week, the worst of them, DDS broke through major support. But GES is trying to hold out, as is common with the leaders (and it sure is a leader at #2 in the IBD 100). Furthermore, GES is expensive by any measure and currently sports the highest forward PE in the sector aside from COH. I think it goes to at least $60 before all is said and done but probably to $70 (-10) in the next few weeks. The 75$ March and April puts come to mind with the stock over $80. If you want conformation watch for 78.74 to be breached.

Here's a chart that looked similar to GES near the open on Friday. It also involves a top ranked IBD stock, in fact it is # 6 this week: ICE. It paid off huge for me and has much more expensive options (so its harder to profit from). I wouldn't chase ICE to the downside right away. It will undoubtedly test and hold its 50 dma, at least initially. But I would short the bounce. These following two charts also demonstrate what the indicators are telling you and how rapidly they can change over the course of a day.

Friday morning:


Friday after the close:


A common behavior to look for in the coming weeks is where a stock vascillates about it's 50 dma a few times. The 50 day moving average often provides very strong support as investors step in to buy the pullback. This leads to often multiple swings around the 50 dma level before the eventual plunge. The first big drop happens to start the move and the second big drop is usually this eventual giving up of the 50 dma. I will provide more examples of this behavior in the next few weeks, but keep in mind this oscillatory behavior when trading. Good luck out there. And stay short!

Ps. If you are wondering about all this sub-prime talk take a look at a few charts of these stocks: NFI, NEW, FMT, LEND, HBC and CFC. And there is going to be another big gap down in them all Monday as NEW basically said they are bankrupt last Friday.

Disclosure: I own CROX (June) and DDS (April) puts.