Post Traumatic Crash Disorder?

Includes: AIG, C, FNMA, LEH, SPY
by: The Housing Time Bomb

You gotta wonder if the longs experienced a little bit of this Tuesday as September arrived. As most of you know, last September was when the market began its unprecedented fall as it ended the year losing about half of its value.

As I watched CNBC Tuesday, I couldn't help but notice how uneasy the talking heads looked as the market plunged nearly 200 points. I had to laugh because everyone that I saw on the financial networks looked like they had seen a ghost as Mr. Market tanked in a matter of minutes after more "good news" was announced via the PMI.

The fact that the sell off pretty much came out of nowhere had to rekindle thoughts around the nightmare of last Sept/Oct. I bet there was a lot of Paxil popping during the commercial breaks on CNBC. The bulls must be asking themselves: " Green shoots and the market still went boom? Whats going on?".

Folks, when the bulls are all in, you often see large moves to the downside when there there are no shorts left underneath the market to stop it from dropping.

Last year, the sell offs were usually triggered by some horrific event like a Lehman (LEH) bankruptcy or a much larger jump in the unemployment rate.

I think what we saw Tuesday was simply an exhaustion of buying. Most of the longs that are responsible for this bounce are mostly traders. Many of them are professionals and just trade the sentiment/momentum. They know all too well that going long AIG (NYSE:AIG) makes no fundamental sense. They don't care because the trend is the trend.

I always recall a veteran trader telling me "Jeff, its just a numba!". Traders in the pits for the most part don't care if the number moves up or down. They are in it to make clients money. IMO, the last several months has been pure momo trading folks. The buy-and-holders are still on the sidelines for the most part.

The problem with this type of trading is it's not sustainable. Once insolvent or poorly run companies like Citi (NYSE:C) or Fannie Mae (FNM) rise to a certain level their P/E's start to look ridiculous. AIG is a perfect example. Somehow this piece of garbage ran up to $55/share. Remember folks, this stock was under $10 before the government propped it up!

The valuation on AIG was ridiculous given the hundreds of billions in losses that are still on its balance sheet. Finally, an analyst came out Tuesday and stopped the insanity by slapping a price target of $10/share on this dog.

The Bottom Line:

We have known for months that the economy was continuing to deteriorate despite the rise in the stock market. When the banks were allowed to play with the houses money via funds from the government bailouts, it was easy to run the market up. It appears this little game of pump and dump is about over. Once the market got to 1000-1050 on the S&P it pretty much flat lined.

Just a quick warning, if we see any follow through on the selling we saw Tuesday things could get ugly in a hurry because there is nothing sustaining the market at these levels.

The problem the bulls have right now is fundemantals. Sustainable earnings growth is a MUST in order for stocks to hold their prices after such huge gains.

We all know this earnings growth isn't going to happen in this bailout dependant economy. The lack of short interest in the market sure won't help things either. High short interest underneath the market helps actually can help the longs because if the market moves higher, many of the shorts are forced to cover which can exacerbate a move higher.

On the flip side, short interest can also help prevent a sell off from turning into a plunge because many shorts may decide to cover at various levels.

If the short interest is light or non existant, there is nothing there to stop stocks from violently dropping deep into the red.

The ADP jobs report Wednesday is going to be a critical number for the markets. Investors are starting to question if stocks are overvalued, and if the job losses from ADP come in much higher than anticipated, a big sell off could ensue. On the flip side, if the number comes in better then expectations, stocks may pop because the news was fairly positive Tuesday, and a better jobs outlook may embolden the bulls to believe that the recovery is for real. Futures are flat for the most part now. Stay nimble Wednesday. Equities could get very violent on a big ADP number in either direction Wednesday morning.

Disclosure: No positiions held on any of the names above. No new positions added Tuesday. Holding longer term SPY PUTS