With Numbers Like These, Is Bullishness Possible?

Would somebody please take Goldman Sachs (GS) out back and shoot this dog?  Drip, drip, drip.  It is like a slow water torture. 

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And Citigroup (C)?  Do we have to start putting this thing on death watch too? 

How about Morgan Stanley (MS)?  Could someone please buy the company and get it over with? 

Bank of America (BAC) looks like it is about to take out a new low.

All four look like they are going lower. Can the market rise if these dogs are hitting new lows? I have my doubts.

Meanwhile, JP Morgan (JPM), Wells Fargo (WFC) and US Bancorp (USB) continue to move sideways - the market is sniffing out quality.

Perhaps if Goldman Sachs goes belly up, the government will stop appointing guys from that firm to run the Treasury. The models that permeate throughout Wall Street got us into this mess. We need some original thinking from outside lower Manhattan to get us out. 

I continue to have a bullish stance near-term, given both the tremendous negativity in the market and extreme oversold levels. But days like we had on Monday make it tough. 

I contend that what would surprise money managers the most is not the S&P 500 hitting 750 but rather the S&P 500 hitting 1150. The unrelenting bearishness I am hearing is deafening.

The last time we had a 35% decline over two months as we did from the close on August 28 to the close on October 27 was in 1937. In fact, there have only been 13 occasions since 1928 when the market fell by 35% or more from any given daily close out of 20,305 trading days.

The first eight occasions all occurred around the crash of 1929, with a two-month decline of 35% occurring on October 29, 1929, November 6, 1929, and each day from November 11 through 18, 1929. 

A month after October 29, the market was up 2.5%. The nadir was on November 13, with the market having been cut in half from its peak in August. Stocks then rallied 23% over the next month. 

On October 5, 1931, the market was down 34.9% compared to the previous month (thus not making it one of the 13 in the sample). Stocks bounced 23% a month later. 

On May 3 and May 5, 1932, the market had also fallen at least 35% over two months. However, returns were negative a month later, with declines of 22% and 14% respectively. Two other 35% declines occurred on May 31 and June 1 of that year. The market was flat a month later, with a loss of 0.7% and a gain of 2.5% respectively.

The final two-month decline occurred on October 18, 1937.  A month later, stocks were up 6% - for what it’s worth.

The positive news from Monday?  NYSE Composite volume was 4.38 billion, down from 4.79 billion on Friday. That is the lowest volume since September 24, and one the lowest volume days in months. Also, breadth was 2.3:1, the lowest negative breadth on a down day in nearly a month. Generally, the selling as of late has been program driven, with negative breadth on down days more likely to be 10:1 or 20:1. 

More good news? The 2-year swap spread ticked down to 1.07%, although it was below 1% at the open Monday morning. 

LIBOR was down. However, the TED spread ticked up because 3-month T-bills hit a yield of 0.20%, nearing the multi-year lows set in September and October. 

I asked our bond guys why the T-bill yield was so low. Short-term interest rates are hitting lows seen during the panic in October. We are not panicking now - in fact, spreads are narrowing. So why are short-term interest rates dropping like a stone?  They called around the Street to ask but nobody seemed to know. 

We came to the conclusion that the low yield is probably because of cash hoarding to meet redemptions. As I understand it, most hedge fund investors have until November 15 to ask for their money back at the end of the year. Rather than selling after the fact, funds are liquidating pro-actively.  Mutual funds have also been selling to meet expected redemptions.  Pension funds, which have been caught in highly illiquid asset-backed commercial paper in their cash accounts, are over-invested in T-bills. In other words, large investors are sitting in the most liquid asset available to meet expected capital calls. 

This leads to an interesting proposition - what if redemptions are not as large as funds expect? One contact told me that their prime broker is saying that hedge fund redemption requests are coming in a bit higher than expected. However, there appears to be a great deal of liquidity floating around.

Staying on fixed income, here is a graph of the yield curve:

Usually, this means that the economy is going to be okay. The bears will argue that is because the long-end of the curve is either a.) discounting inflation, or b.) deluded and will eventually fall.

The VIX is interesting here:

It may be in the process of tracing out a lower high. Perhaps the chart is forming the right shoulder of a head-and-shoulders pattern those technicians like to see. Or maybe it is the process of re-testing the highs. We will know over the next few days.

Speaking of the technicals, we may be seeing positive divergences in MACD and RSI for the market.

The RSI at the top may be hitting higher lows while MACD at the bottom is nowhere near the levels experienced last month. Make your conclusions accordingly.

Comments

[Christopher...:]

You do SA a service by presenting all this data and thought together . . . kudos

2008 Nov 11 10:58 AM

[CARMEL:]

EXCELLENT COLUMN WITH VALUABLE INPUT. THANK YOU

2008 Nov 11 01:38 PM

[300mph:]

Be bold, make a call.

2008 Nov 11 01:51 PM

[jepittman:]

OK here's one for you: The stock market is forming an intermediate term bottom. The Oct low on the S&P 500 of 830.80 will hold and there will be a tradable rally into January beginning sometime this month. Specific enough?

PS: no one pays me so its OK if I'm wrong
PPS: no one pays me if I'm right either


On Nov 11 01:51 PM 300mph wrote:

> Be bold, make a call.

2008 Nov 11 03:27 PM

[Urbane Gori...:]

Those charts don't look so gory if you don;t use 'red'. Try a cheerier color. Good article..

... jegan ;-)

2008 Nov 11 04:49 PM