A Retro Dow Heads Back to the 90's

Yesterday I posted a stunning chart of the Dow Jones Industrial average in the 90's. The benchmark index more than quadrupled before it ended the decade near the highs around 11,600. Today I was looking at a more recent chart of the index when I noticed something somewhat disturbing, the dow is back at that late 90's level.

A few weeks ago I posted a dow chart which suggested that the tide was turning for the bulls. The dow broke it's 50 dma and we all know about how hard our loving federal government has been trying to save wall street, so a rally seemed appropriate. Unfortunately for those who own stocks, the index ran into a declining trend (in red) line bounced off a horizontal area of resistance we've been watching (in blue). For now, the dow remains in a long term down trend but is range bound in the intermediate term. The volume has been weak lately as the market sold off but notice how the last big leg down (begining in Dec.) also started on low volume. If this decline continues I would definately be looking for the volume to increase.

My money is on a retest of the recent lows around the 11,700 level and I wouldn't be surprised to see new multi year lows in April. Does anyone else find it disturbing that the market has made no forward progress in the past eight years? It truly has been a lost decade for stocks and music.

Saturday Rock Blogging: Smells Like Teen Spirit

According to VH1, this was the greatest song of the 90's. While I'm not sure I would give it the #1 spot, this revolutionary track does deserve to be in the top 5 for sure. I don't think the 90's was the greatest era for music or anything but it sure beats the hell out of the past eight years. This week I'll post some 90's music videos for all you cool kids out there that were watching MTV back when it didn't suck. Any favorites?

And by the way, the 90's was a golden era for stocks. The dow more than quadrupled in that period (see above). Ah, the good old days...

Heres a bonus Nirvana track in honor of the lost 90's:

MOS Short Entry @ $108

Looks like a symmetric triangle forming after the recent failed late stage breakout on this over bloated pig of a stock. Since the very late stage breakout failed I would definitely expect this symmetric triangle to break to the down side. Picking a target is tough because this stock is up so much with very little support created along the way. I think the rising 200 dma ($68) will seem fair eventually but obviously now that seems kinda greedy. MOS is almost back up to the upper end of that symmetric triangle for a safe short entry around $108. Today after the market close there was some news of a new fertilizer contract in India so there should be a good opportunity tomorrow near the open to sell MOS. Be sure to set a stop at $110 where major resistance lies.

Has student lender Sallie Mae bottomed?

For Sallie Mae (ticker SLM), 2007 was a rough year. The student loan industry ran into a perfect storm of bad conditions and you can see the damage in the leading lenders' stock prices. After a buyout at $60 fell through last year SLM tumbled down roughly 60% in 2007 and has recently been hanging out near $15.

Looking at the chart above you can see that the stock is still in a clear downtrend but there may be signs of a forming bottom. First of all, the stock seems to be trying to hold above $16.19 after breaking below that January low a few times in recent weeks. To me that looks like a failed breakdown of a descending symmetric triangle and you know how much we love failed breaks around here (since they lead to fast moves). The chart also has the look of a double bottom perhaps an eve and eve and the volume pattern is right for this.

Its too early to say if SLM has bottomed or not but I think its close. According to Bulkowski, the double bottom is not confirmed until the price closes above the high between the two bottoms, that would be $23. However, given the significance of $20 as past support/resistance, the 50 dma's proximity and a declining trendline now under $20, I would watch that level for an entry.

Saturday Rock Blogging: Ride My Seesaw

The Dow Jones (which now includes BSC)

As you can see above, the dow jones industrial average has been in a huge 1000 point range since the start of this year. The range goes from 11,750 to about 12,750 which happens to be where the dow "bottomed" in August and November 2007. I don't see many reasons why the bulls won't rally this market up to at least the upper end of that range with the aid of the media. If you watched the headlines last week or cnbc, you would get the feeling that the financial crisis is over after the fed sacrificed Bear Stearns to save the rest of us. There is a fair amount of idiotic bullish momo going around and if they want to give us better prices to short from then why not let them. Some indicators are looking bullish now too, like the CCI and stochastics which gave buy signals last week. Furthermore, volume on up days has been increasing and is well above average.

Another point worth noting is that for the last six months or so the declining 50 day moving average has acted like resistance. In fact, shorting at the 50 dma has been ideal and the dow just rallied back up to it last week but I wouldn't short it here. The dow broke the 50 dma on the fed cut rally Tuesday, pulled back on lower volume Wednesday and broke it again on Friday with huge volume. This is not the type of behavior I'd like to see when the dow reaches resistance. In addition, the 50 dma is beginning to slope upwards. Long story short (no pun intended), I bet the dow rallies up to 12,750 ish, stalls then has a "super bullish" breakout to suck all the idiot money in. I can see it now, we breakout of this range, and the media screams bull market touting net gains for the year. We get back up to that 13,000 area and we tank big time on the accelerating contraction of the US economy and soaring commodity prices. If the dow reaches the declining 200 dma thats where you really want to short like crazy, but that would be asking too much I think. My guess.

You are probably wondering why I seem so bullish all of a sudden. I think it has something to do with the government intervening in /manipulating the market on scales I would have never dreamed possible. They are hell bent on saving wallstreet, and while I know this will end badly, theres a good chance it works in the short term. I was thinking about the BSC fraud last week and I realized a possible hidden agenda for the move. I originally thought the fed insisted on the $2 price so they could say "we aren't bailing out risk takers, look at the poor BSC shareholders." I'm sure theres some truth to that, and Hank Paulson said the line a few times last week. But what about this, JP Morgan is one of the 30 stocks in the dow, Bear was not. Bear Stearns was a huge company, a blue chip with a book value of something like $84 per share ($11B) but it was not in the dow average. The fed essentially took all that value, divided it by 40 and injected it into the dow jones. In a sense, the fed organized a $10B capital infusion into the most watched market index on the planet. Recall that many stocks just track the performance of the dow jones. Call me crazy, but it seems like that was a huge prop job and frankly it worked, just take a look at JP Morgan last week:

Call me a conspiracy theorist if you want but it seems pretty clear to me that the government will stop at nothing to prop this market up and boost the pocket books Paulson's buddies on the street. These relentless rate cuts and fed interventions are going to have the intended effect in the short term and I'm not going to fight it. Instead I think I'll just sit back and watch the monkey's do their dance until its obvious they are up the creek without a paddle.

More Johnny Cash

Can we break out of this SPY range?

Two huge rallies on the S&P 500 took us from the lower end (~127.5) of this range to the upper end (~134) in the last 10 days. Can the market break out to the upside here? If so that would be very constructive for the bulls and would bring in to play the 50 day moving average at $135 (and falling). I am skeptical however, this rally could possibility be options expiration (Thursday) related since put holders are most certainly taking big profits right now, especially in financial stocks.

Did Hank Paulson get punked by JP Morgan or does he belong in Folsom Prison?

Some related articles:

America gets conned - who will pay?
Bear Stearn's former CEO walked away with $232M
Whistle blower exposes insider trading program at JP Morgan

The Rise and Fall of Bear Stearns

It took 20 yrs for BSC's share value to grow to $170 but only a little more than a year to become worthless. If Bear Stearns is worth $2 now, then what about the other investment banks? How about the dow jones? Are we going to see a full scale collapse of the US financial system tomorrow? Dow -4k? Meanwhile the US central bank is freaking out.

I think this Barron's article just about sums it up.

And now from Singapore... Jim Rogers!

Saturday Rock Blogging: Ring of Fire

According to wikipedia, "In 2005–2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune’s "America's Most Admired Companies" survey, and second overall in the security firm section. The annual survey is a prestigious ranking of employee talent, quality of management and business innovation. This marks the second time in the past three years that Bear Stearns has achieved this top distinction. However, by March, 2008, Bear Stearn's share price reached a ten year low (losing 80% of its stock value) resulting from troubles related to the U.S. subprime mortgage market crisis."

I guess you could say that the range (2005-2007) won't be expanded to include 2008 after the federal reserve had to bail them out yesterday. After loosing 50% over the past year the stock then lost another 50% Friday on the news that their "cash position had unraveled in the last 24 hours, prompting it to secure emergency financing." Fortunately for them, the New York Times is reporting that plenty of people want to buy the company.

Disclosure: I own BSC and hedged.

A Most Totally Excellent Chart!

One of the common themes here has been the exchange rates on the US Dollar, and the course of the FXE exchange traded fund, in particular. For those who don't know, FXE mirrors the EURUSD exchange rate. Buying one share of FXE is the equivalent to holding 100 Euros in a bank account, and yes you get interest on that deposit too.

For the retail trader it is a remarkable tool for hedging the US Dollar, even while you earn interest on your money. As a speculative trade it can be most impressive because to be honest, I haven't seen anything this consistent in a long, long time.

This is a weekly chart, going back two years...


As you can see, there has been a big buy signal given every time the PSAR reverses under the quote. This isn't how the PSAR was envisioned to be used but in this case it is working. The chart shows a series of higher highs and higher lows and volume is on the upswing too.

Is this a screaming buy? Nope. Wait for your entries.

In addition, with this little item we have to be aware of the risk for political or even central bank intervention to chop the Euro back a bit. The business section in every newspaper here in Germany describes local businesses and how their profit expectations for the year are being cut. Last years exports from this country went out at an average of 1.37 Euros to the Dollar. This year we started at 1.47 Euros to the Dollar, and the Euro has only gone forward from there. Something is going to have to give, and the politicians are hearing the message even if the German central bankers seem to be more concerned about price stability.

But it is still a Most Totally Excellent Chart! And it is usually the kind of thing I like to buy.

MOS Faces a Wall of Resistance

Today Was Not Such a Good Day (unless you're Ben Bernanke)

Today Was a Good Day (but not for Eliot Spitzer)

Failed Late Stage MOS Breakout

I've blogged about failed moves here in the past and how they often lead to fast moves. When a leading stock breaks out to new highs momentum investors pile in as this is usually a successful strategy. But all trends eventually end and when that momentum turns the initial drop can be big. After a late stage breakout (or breakdown) fails to follow through new investors panic easily and long term investors decide that maybe they should lock in profits and you get a waterfall decline.

MOS appears to be rolling over with the other agricultural stocks and the commodities themselves, just look at DBA. MOS is a stock that has had a tremendous run over the last few years and could potentially fall a long, long ways. Take a look at this two year weekly chart and ask yourself if $85 is a reasonable level to drop to. This fertilizer stock is up from $20 in early 2007 to over $100 today, those are some nice profits for someone. Over the past three months (chart above) $85 has acted like support so thats going to be my initial target, but should this thing really break I could see MOS heading back down to the $50-$60 level. Watch for volume to increase as this thing rolls over (or rebounds to new highs). I'd put a stop in at the previous breakout price of $110.20. Good luck.

Disclosure: I own MOS puts.

Saturday Rock Blogging: The Weight

Sorry for the late rock blog, has google blogger been down frequently for everyone lately? I want to tip my hat to TooQuiet for this great video, thanks. Above is a monthly chart (which explains why the volume is low on the most recent candle) of the Russel 2000 (small caps) ETF, ticker IWM, since its inception in early 2000. You can clearly see from the volume by price (on the left) that the volume weighted average transaction in this exchange traded fund was at a price higher than its current level. This basically tells us that the average buyer is at a loss or that the average seller is at a profit. The weight hangs heavy on the small cap stocks...

What is left for the shareholders? (ABK ceo)

When asked about the maximum loss estimates and if ABK could take those losses since its a requirement of being rated "AAA," Michael Callen, ceo of Ambac (ABK) said on CNBC:

"If you take armageddon then whats left for the shareholders of Microsoft, whats left for the shareholders of any household name on the street down here? When you get into these extreme scenarios we've got much bigger problems i think than any particular company. Uh, and the fact that we're not going to get to that is the responsibility, at the end of the day, of the US government. I think then we need to talk to Hank Paulson."

Yeah, Hank Paulson will get right on that. Well, uh, he'll get on it until he gets fired in November.

skip to 6:30-ish

You can call me Al

This one goes out to the patient shorts out there, good work. I can be your long lost pal. And for all of you who have been wondering what betweenthebars looks like, he's a spitting image of Chevy Chase only a little shorter (pun?).

Slip slidin' away...

The chart of the S&P 500 above says it all. The major indexes have made new 52 week closing lows, the recent uptrend from the January lows has ended and we appear to be beginning the next leg lower. This second phase of the bear market will be characterized by acceptance of the fact that equities will be declining for a long time and the market will now try to price in the new accepted reality of a recession. The only thing that stands in the way of a full scale market crash is tomorrow's jobs report. Good luck out there, I hope you have been short.

Baby Got amBack

Hedge Funds, TMA and Margin Calls

If you think you are having a tough time in the market these days, you aren't the only one...

"Hedge funds saw their worst month performance in about five years in January, generating a composite loss of 2.46%. It's the group's worst month since July 2002, when funds saw a loss of 2.86%, according to Chicago-based industry data group Hedge Fund Research...

Santa Fe, N.M.-based lender Thornburg Mortgage(TMA) also has been the subject of mounting margin calls that could be putting it and other financial firms at the precipice. Thornburg saw its stock plummet more than 60% to well below its 52-week low, after saying that it faced new calls from lenders requiring it to post some $270 million in capital on top of the $300 million it already disclosed it had to post last week.

Thornburg's and Peloton's pain are the sorts of narratives that Wall Street fears could play out at other organizations and hedge fund shops as banks and brokers rein in lending amid plummeting prices.

Hedge funds faced a woeful November, when HFR's data showed that the firms posted a composite loss of 2.18%. In the new year, uncertainty lingered and new worries about bond insurers and other arcane aspects of the market continued to unsettle investors. " -source

Speaking of TMA, that was a stock that I talked about a while back in our chat room as a possible bankruptcy candidate. Well that stock really ate it bad over the past week as they have been forced to sell equities to meet margin calls. Then news today in the after hours sent the stock another 40% lower. The story goes something like this:

"The company said late Wednesday that its failure to meet a $28 million margin call from JPMorgan Chase(JPM) has triggered a series of defaults on various lending agreements.

The company's obligations under those agreements are "material," Thornburg said in a filing with the Securities and Exchange Commission.

About $320 million was lent to Thornburg by JPMorgan, which notified Thornburg that it planned to exercise its rights under the loan agreement due to the default, which resulted in cross-defaults across other loan pacts.

The announcement comes just two days after the mortgage lender announced a cash infusion involving about $1 billion of prime hybrid adjustable-rate mortgage loans. Thornburg has been burned by nearly $600 million in margin calls over the past month, following the slide in the mortgage-backed securities market. " -source

Now don't get me wrong here, I am bearish on the financial sector among other things and I own BAC and MDC puts (wish I held my FNM puts but oh well). But this decline (see above) is too much, too fast for a stock that is certainly heavily shorted. Furthermore, TMA was able to hold up for so long because they are the best in the industry. They typically lend to only higher income customers and had been turning a profit and raising their mile high dividend even as NFI, NEW, etc went belly up. So there is likely some value there and I would be surprised if they go bankrupt all of a sudden because of a $28M margin call.

I think this stock will rocket at some point tomorrow and see massive gains over the next two weeks. The options are too expensive to buy with implied volatility over 400%, yes I said over 400%, so I will be writing naked $2.50 March puts and buying stock (its as cheap as an option anyways). The nice thing about writing naked $2.50 puts is that you can't loose more than $2.50 minus the cost of the option, which is going to be about 1$ tomorrow morning. And thats only if it goes to zero in the next two weeks. Furthermore, those options will decay faster than Radium-216 and I'd bet you see at least 50% gains from the first half hour till the close tomorrow. This one of those plays where I will put as much cash into it because these types of opportunities don't come along too long. I wonder how high that implied volatility will get by tomorrow morning, should be fun. One word of caution, the P&F chart actually has a price objective of $0.0 for the stock.

They say that when theres blood in the streets its time to buy, but I would prefer to adopt a slightly different motto: When theres blood in the streets, write naked puts. (tm) And you can quote me on that.

Dow Support and Resistance

I recently posted a couple of charts concerning some fairly hard resistance points that I was seeing in the broad market indices. To be fair, I should post when I see support too.

I am convinced that we are on the edge of a major breakdown, but to be fair, there is always support and resistance in the charts.

Nasdaq Monthly Chart

It seems silly to think that the Nasdaq has been in a bear market since the dawn of the new millennium (eight years) but thats sure what it objectively looks like on this 14 year monthly chart. To put things into context as we begin the third month of 2008 I thought it might be fun to look at some monthly charts, something I rarely do. In all cases you can see that the rally lasting the past five years is clearly over but the S&P 500 and Dow Jones Industrials made new all time highs during this time. The nasdaq on the other hand, got no where near its previous high. In fact is was almost 50% short of that high!

Now there isn't any grande realization I'm trying to discover here and the thought of an eight year old bear market is somewhat alarming. But looking at this chart and setting aside my feeling about the vast improvements in technology during this time, I'd say the last five years were a continuation pattern on a long term decline that began in March of 2000. Just for fun, lets call the recent break in the nasdaq the beginning of the second leg down. The first leg saw an 80% decline in prices which we can use to estimate the size of the second leg down. An 80% decline from the October highs takes us to around 450 on the composite index. Obviously thats crazy talk but it goes to show that this market could potentially fall very far. I'd guess we will head down near the average price in 2004-2006 around 1900-ish then who knows. Things are changing so rapidly with the economy its hard to keep up so I'll just let the charts tell me what to do. Right now the charts are saying things could get very ugly.

Disclosure: I own puts on QQQQ among other things

Roubini in December

Saturday Rock Blogging: Diamonds on The Soles of Her Shoes