Not a New Bull Market for Stocks

We are still in a Multi-Year Bear Market that began in October 2007, led lower by financials.

The Bear Market Rally is based mainly on the Dollar Carry trade not on economic fundamentals. You can not have a New Bull Market when ValuEngine shows seven of eleven sectors overvalued.

Year to date the S&P 500 is up by 21.6% with community banks down 24.9% and regional banks flat. Where's the leadership?

The Dollar Index traded to a new low for the move on Wednesday at 74.86. With Tuesday’s high at 75.38, Wednesday was a potential key reversal day with a close above that level. This did not happen. Charts courtesy of Thomson / Reuters.

The weekly chart shows the up trend that connects the lows of April 2008 and July 2008 at 74.48 this week. Resistance is the five-week modified moving average at 76.35.

The Dow traded as high as 10,342 on Wednesday approaching Ascending Wedge resistance at 10,380 with the down trend that goes back to October 2007 at 10,692. A decisive move above 10,692 ends the multi-year bear market, but does not signal a new bull market, but instead a trading range with my semiannual resistance at 11,500 the upper end.

The S&P 500 traded as high as 1105 with down trend resistance going back to October 2007 at 1123.

The other major averages stayed below prior highs: The prior high for the NASDAQ is 2190 with the 200-week simple moving average at 2212.

Transports, the Russell 2000 and SOX still show double-tops at 4050 / 4070 on Transports, 625 on the small cap index and 337 on the SOX. The high on Transports is between annual resistances at 4037 and 4199. The high on the SOX is a failed test of my semiannual resistance at 337.39.

Be prepared for more bank failures - We are up to 120 bank failures year to date and 149 since the end of 2007, when “The Great Credit Crunch” began. FDIC Chair Sheila Bair predicts that many more bank failures lie ahead. My prediction has been that 500 to 800 banks will fail by the end of 2012.

This is not good news for struggling small businesses, as when a bank fails all business clients must find a new business relationship with the bank taking over the failed banks assets, or at a different bank. This is tough as banks continue to tighten lending standards.

Last Friday’s Bank Failure Friday Stretched to China - Four out of five of the bank failures on Friday bring were private banks and four out of five were extremely overexposed to C&D and CRE loans.

United Commercial Bank publicly traded as UCBH Holdings Inc (UCBH) had 63 U.S. branches, a branch in Hong Kong and a subsidiary, UCB-China, in Shanghai. They reopened as part of East West Bank (EWBC), which has a similar business model including China.

UCBH Holdings is the first failed TARP recipient. UCBH received $298.7 million in TARP money, paid a $7.5 million dividend in May, but did not make the payment due in August. UCBH had C&D and CRE loan ratios of 211% and 678% versus risk based capital, well above the ignored regulatory guidelines.

The closure of UCBH satisfied one of my long-held predictions – some banks who got TARP money would fail. UCBH was a member of the ValuEngine List of Problem banks.

Disclosure: I Hold No Positions in the Stocks I Cover.

Comments

[bbro:]

We all know there are going to be hundreds of small bank failures.....
that is priced in.....

Nov 12 06:49 AM

[Mad Hedge F...:]

xch If I’ve told you once, I’ve told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It’s a win, win, win, lose pennies trader. I know that the pros that have done for a long time put these trades on without even thinking about it. It’s all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

Nov 12 08:03 AM

[Maxe Paul:]

I reccommend doing the opposite of the hedge fund guy, you cant go wrong there IMO!

Nov 12 08:51 AM