Post Traumatic Crash Disorder?

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 (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 (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

Comments

[Michael Clark:]

I guess we'll know when the rally is really over. Good news will not move the market; and bad news will create a crash.

This rally has been the opposite: bad news (beat the street expectations) has resulted in a spike up; and good news...well, there really hasn't been any good news, has there?

Now, green shoot news is being met with a shrug of the shoulders. You're right: buyers are exhausted. And the cheerleaders are also worn out.

Sep 02 05:36 AM

[Roger Knights:]

"The sell off pretty much came out of nowhere ..."

Not exactly. Reuters reported over the weekend that China announced that its business entities that were deeply in the red on their derivatives hedging were not going to honor them. This could send ripple effects through the financial system, and could be a portent of things to come from Eastern Europe, etc. The sell-off started on Monday, and accelerated around the world on Tuesday as people digested this news. Today (Weds.) will probably be a breather.

Sep 02 05:56 AM

[Moon Kil Woong:]

The run up was not so much buying as no one seling since it rose on such low volume excluding HFT. The selling yesterday was more realistic in terms of real people selling. I am curious to see who will really be burned if the market tanks. Goldman better not be expecting any more government welfare.

Sep 02 07:01 AM

[peterthepai...:]

i was lonely in august...

sept. feels better so far...

nobody likes to be be confronted by the improbable...

Sep 02 07:14 AM

[CautiousInv...:]

A number of the technicals were starting to scream sell; a strong sell came from the McClellan (AR) Oscillator which has been descending and was just touching zero (sell at zero when the signal line comes from ablove) late last week.

Your comments on the traders playing out the sentiment and momentum play are interesting because there are in for a day on a day trade or a couple of days on a swing. This is is exactly why the four junk stocks have acounted for 30% or so of recent volume.

Without delving into the fundamentals of this market, which in a manner of speaking do not exist or are either weak, the moves since the 666 lows of March have been characterized by low volume, imbalances between large cap and small cap, low grade issues enjoying big moves and serious and unrestrained excesses in valuations.

Sep 02 07:16 AM

[Perry B:]

Good article. September is when the money comes back to town and they dont want to ay unrealistic prices. We will see what those who have stolen the dumb money from this rally really think.

Sep 02 09:46 AM

[Mad Hedge F...:]

sdfgh. Don’t kid yourself into thinking that the real estate collapse is over. Yes, you can be forgiven for thinking so with July new home sales up 10%, the Case-Shiller home price index up two consecutive months, and homebuilder stocks like Toll Brothers (TOL), D.R. Horton (DHI), and Lennar (LEN) through the roof. Nationally, home prices have fallen back to their historic average of 3.2 times earnings. The problem with all of this is that crashes don’t end at the averages, they overshoot. Some cities like Los Angeles, New York, and Washington DC are still historically expensive. Take away the life support of ultra low interest rates, the $8,000 first time buyer tax credit, the $6,000 California tax credit, $1 trillion in Fed purchases of securitized debt, and toss in another five million expected new foreclosures, and that might give you your final bottom. But that isn’t happening this year. Rent, don’t buy.

Sep 02 10:29 AM

[Albertarocks:]

So true about AIG. This dog should have been put down long ago... yet it thrives. Not only does it thrive, today's action as seen on a 10 min. chart is outright maddening. It shows a classic 5 wave "impulsive" move up today. If that's followed by a typical Elliott correction (which started late in the day), and then heads higher... that's just gotta be one of the most blatant examples of market gaming we could ever ask to see. Not one of the market indices showed that type of action today. This one was gamed all the way.

And it's right out in the open... available for all to view. The greedy pigs are doing this right out in front of the entire world and don't give a damn how many people get screwed in the process.

When will the market take this dog to the slaughterhouse? It's long overdue. By the way, the slaughterhouse can handle pigs too.

Sep 02 05:48 PM