As we entered the week, we were neutral on the short term direction of the market - certainly a 5% up move was as plausible as a 5% down move. However, this week thus far has made it increasingly clear we are going to test our mid October lows - the inability to react to outside stimui (Chinese $500B+ stimulus Monday; new and improved homeowner bailout yesterday) made this very clear.
The inability to rally on "good news" screams loud and clear - personally I'd argue that it's a lot like a drug addict - all these interventions lose their effect at some point; stronger and stronger doses of the drug are needed to get the same effect as we build up tolerance until at some point the drug (interventions) are rendered useless. That may be the point we hit this week - I mean how many more interest rate cuts, or government bailouts can we announce, and would it change anyone's view on where we will end up? The UK cut interest rates by 1.5% last week and it led to a whole 20 minutes of rally. Etc.
Again, this bottom of our range is S&P 850 and the whole investing world now awaits to see what happens when we get there. In a "relatively healthy" market you'd expect a cursory bounce at least on the first thrusts down to 850 - but this market is far from healthy. Further, this is not a double bottom - we are now making a triple bottom.
For long time readers you know our calls on triple bottoms - they almost always break to the downside. Each one over the past year has not held and led to further downside. Maybe this will be the first time it won't but until a pattern breaks you keep playing it. Hence, I feel quite resigned that we are going to be testing 2002 lows on the S&P sometime in the next few weeks/months (days?!) This would take us to S&P 760s/770s. That would be 10% down from S&P 850.
The only thing that gives me pause on this scenario is that it seems too obvious - and when things are this obvious, the market has a way of doing the opposite. But if you turned this chart upside down it would look like a bull market breakout ready to test all time highs - so you have to simply respect the fact we can make a very large move to the downside. There simply appears to be a buyers strike - that trade I attempted for a whole 20 minutes yesterday in CME Group represented what I think must be happening across the Street. Why bother with anything on the long side when fundamentals are not respected and your time line has to be 2-48 hours at most on the long side to be a success?
More important, where are the buyers? Many hedge funds have moved to high cash and the value mutual funds have lost 40-50% in the past year - they are in no position to make a sustained buy. Individual companies mostly are not doing buybacks because they see what happens to their brethren who have low cash on their balance sheet. So why risk using up cash on buybacks when balance sheet strength is job #1? Further, a lot of individual stocks - as we mentioned yesterday - are already back to October lows; if those lows don't hold that telegraphs another large move down in each name. So we've potentially got a big problem coming.
The news flow continues to be horrific - Best Buy (BBY) was the latest to warn today; more important than the numbers if the commentary from management. It paints a very "historical" context - as we've seen in all parts of our economy. We said last year 2008 would be the worst year in auto sales in 20 years - and the worst Christmas in a long time. Both these look like home run calls. Whatever confidence Americans had left, Paulson did a great job of shattering so he could get $700B to bail out his friends.... I mean save the financial system.
- Best Buy Co. on Wednesday sharply cut its fiscal 2009 earnings outlook below analyst estimates amid what the electronics retailer called the toughest retail environment it has ever seen.
- Best Buy's same-store sales dropped 7.6 percent in October. Chief Executive Brad Anderson said "seismic" changes in consumer behavior have created "the most difficult climate" ever seen by the company.
- "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year," Anderson said in a statement.
- Best Buy said that same-store sales between November and February may drop by 5 percent to 15 percent, resulting in an annual same-store sales decline of 1 percent to 8 percent.
- The overall retail industry is facing what many observers expect to be the weakest holiday season in decades as consumers scale back on spending amid a weak labor market and tighter credit. (bingo - now people are getting it)
Back to the foxhole.
That would mean Dow at 12000 in April
You cannot hope the DOW higher, it will go up when people believe we are "back to normal" in the economy. Wait it out...