The Dead Cat Returns to Earth

What’s not good about 400 points on the Dow?

I’m usually not one for much financial TV, but occasionally CNBC delivers a real treat. For me, one of the most powerful moments in recent memory occurred a mere four months ago when Maria Bartiromo interviewed Jim Rogers on March 12, 2008.

At the time, the Federal Reserve had just pumped $230 billion into the financial system. The market, already oversold, went bananas with the Dow rallying 400 points in a single day—one of the largest single day moves in history. The talking heads—of whom Bartiromo is one of the most famous—were euphoric, praising the Fed’s ingenuity, as though pumping billions into the market required some kind of special insight.

Rogers, a self-made multimillionaire investor and former partner of George Soros, is one of the more outspoken critics of Fed policy. The March 12, 2008 interview was no different. Within 30 seconds, he had commented that “Bernanke just goes from bad to worse.” Bartiromo, shocked that anyone could see a rally in the market—even one that fed inflation, hurt taxpayers, and was aimed solely at aiding Bernanke’s buddies on Wall Street—as bad, retorted with the above quote.

For me, this moment captured all the hallmarks of financial TV, or Bubblevision, as some of my friends call it. On one side you had an attractive market commentator who knows nothing about the market or investing questioning with incredulity one of the greatest investors of the last 100 years—a man who made so much money from his investments that he retired rich at age 37—as to why a large jump in the Dow was bad.

In that instant, all the shortcomings of financial TV—the emphasis on appearance, lack of financial insight, mindless optimism, etc.—were evident for the world to see. Rogers spent the next eight minutes laying out for Bartiromo and her colleagues in no uncertain terms why the Bernanke was an idiot and why the market would eventually collapse.

I’ve thought about that instant time and time again during the last four months. We’ve now seen two major market rallies kicked off by intervention. The first was the famous Bear Stearns deal. The second occurred last week when the SEC stepped in to squeeze short-sellers and bolster financial stocks.

Both rallies were driven by sentiment, not fundamentals, and both eventually faltered. However, everyone applauded both. It made me realize that 95% of investors are permabulls—folks with a positive bias who think stocks naturally go up and that any downward movement is merely a temporary correction or setback. Yesterday’s collapse hopefully slapped anyone with this line of thinking awake.

As you can see, the S&P 500 failed to break above its 28-day moving average (DMA). This does not bode well for stocks at all. If the recent rally were to be at all sustained, stocks should have broken above the 28-DMA and moved to challenge the 55-DMA. Instead, last week’s rally proved its true colors—a dead cat bounce—and quickly reversed.

I strongly suggest covering some of your long positions and moving the money into cash or establishing some shorts. Unless stocks can break above the 28-DMA, we’re in for more bad times. And the guys who bounced highest during the rally—financials—will fall hardest.

Comments

[Dean:]

It is one of the best signals on earth. When news is getting really bad it's time to cover shorts. when news is getting really good, it's time to take profits from longs. Propfessional traders know this, and use it because they need the liquidity to reverse their positions and the 'herd' always give them their needed liquidity

2008 Jul 25 07:59 PM

[bigtime99:]

Until credit expands again, the Case-Shiller won't improve.
Until the Case-Shiller improves, the consumer won't start spending again.
Until the consumers start spending, the economy will be garbage.

Until all of these things it's catching falling knives, dead-cat bounces and "bottoming activity", and the greedy getting skinned.

2008 Jul 25 08:28 PM

[E.D.Hart:]

Regarding Socialism: America is the only country where socialism is for the rich, not the poor.

2008 Jul 25 11:33 PM

[CLH:]

Most investors are bullish because the market is bullish over the long term (75% up and 25% down). Those investors like the author are losers.

The market went down Thur. because it went up too fast. (frightened shorts wetting their pants) not because it hit the 28 day moving average (what ever that is). It should continue up but at a lower rate.

As for G Soros and Rogers, neither are investors but gamblers who hit it big and quit. (that doesnt take much brains). Rogers is brought out every few weeks to give his dog and pony show which hasnt changed in 25 years (buy lead --buy lead).

I listen to Bartiromo who is in the middle of the market while Rogers is 25 years out of date.

2008 Jul 26 07:41 AM

[metalhead:]

"Historically markets have rallied into presidential elections."

Oh really? Like the Nasdaq in 2000, falling from 5000 to 3000 during the Bush/Gore race, quite a "rally" !

2008 Jul 26 08:12 AM

[investor88:]

The excellent S&P technical chart shown above would suggest weakness ahead rather than strength. Fundamentals [inflation, housing decline, unsolved banking problems etc] suggest risk of further weakness. I would trade [long or short depending on individual judgement] but keeping these downside risks in mind.

I appreciate the observation by metalhead, a solid knowledge base helps in navigating/trading the markets.

2008 Jul 26 09:04 AM

[gordon:]

2 more regional banks(CA, NV) seized by the FDIC **AFTER ** Friday's close. A dead-cat bounce, exactly. This is a trader's market, even for the big boyz, like Jeff Saut said this morning on Bloomberg, scalp what you can, and don't worry about leaving 5-10% on the table if selling too soon. That's the worst kind of market for investors, their is no "longterm" plan for America (energy, domestic jobs, healthcare, you name it), it's Congressmen,(election cycle) or the CEOs (beat by a penny every 3 months).

2008 Jul 26 11:30 AM

[sorgmot:]

Take the chart above into Elliott Wave analysis and see the first wave down from Oct 2007 to Mar 2008 is a 1-2-3-4-5 formation.

Then look at the nice A-B-C wave up from May 2008 to July 2008.
A new 1-2-3-4-5 down began in July 2008 and shoud last through Oct 2008 with a target of 1100.

That would complete a larger scale A-B-C wave from Oct 2007 to Oct 2008.

Then, what next?

We guess that a recovery from OCT 2008 to March 2009 will be followed by another down leg to OCT 2009.

See your investment advisor before making investmenet decisions.

Good luck.

2008 Jul 26 12:16 PM

[irondoor91:]

99% of investors today have never seen anything but a general up market since the 30's. For the first 30+ years of that run, America and its corporations were running hard to build industries and people who knew how to build things, like steel, automobiles, airplanes, appliances, machine tools, computers, etc, and to export them to the rest of the world. We had a strong dollar and a growing, confident knowledge base.

Since the late 60's what have we had? Social unrest, political scandal, a lost war in Vietnam, the rise of terrorism and intolerance around the globe. We became a nation of "servicers", pushing paper and real estate in the era of digitization and ease. Where a family of 4 could live comfortably in a 2,000 sq ft home, now childless couples demand 5,000 sq ft for their primary residence, three cars, boats, a "place at the beach" on and on ad nauseum.

It was all built not on hard work and sacrifice, but on a mountain of credit at the personal and governmental level (FAN and FRED). Literally Trillions of dollars of paper that were sliced and diced and handed out all over the world to "reduce risk". Well, that debt requires something: cash flow and debt service. The holders of that debt want to be paid both interest and principal. They do not want the underlying homes that nobody can afford to pay for, insure, furnish, pay taxes on and commute 2 hrs per day at $4.00 a gallon in their Hummers and other SUV's.

Just when housing had a chance to become affordable again due to 50% discounts, the Treasury steps in a says "no, we got to put a stop to that". Can't have the marketplace setting prices!

We are in the process of turning the clock back to an earlier era. Not 1929, but 1974. That is the Dow at the 4th wave of lesser degree. Unbelieveable, but it will be DOW 400 by 2016.

If not, give me your case for the DOW returning to new highs with the credit engine out of gas.

2008 Jul 26 01:41 PM

[Hal:]

Perfect. Yes, most of the finance "experts" on TV are ignoramuses posing as experts. The females are chosen because their looks not their brains as if looks could choose the right stocks. US TV has lost any informative value, other than displaying idiots to be avoided. All the brains have gone onto the internet. Looks don't count there. Nobody cares how brains "look".

2008 Jul 26 01:52 PM

[notsosmart:]

at least put a blindfolded monkey on once a day to throw darts at a stockboard & lets see how this would work out. it might have to be checked out with the animal protection crowd,various unions,civil rights orgs.sponsors etc. it might be fun.

2008 Jul 26 02:59 PM

[Dame Daxx:]

Melissa Francis and Becky Quick are both quite sharp. I wouldn't call them bimbos at all.

I sense it kills Melissa that she has to share an hour with Trish Regan.

2008 Jul 26 03:29 PM

[bbzz24:]

DaveW,
I remind you the USSR was as well 'constitutional republic' with 'democratically elected' officials.
Given the indebtness and clear self-destructing policies of the present republican incumbent, it is not entirely implausible to see a socialist revolution in America, North America.
But on the other side 70% of the population is overweight, 80% lives in urban sprawls. I really dont see those people capable revolting as that would lead to either cardiovascular problems or serious exhaustion from excessive exercise.
So chill out, no socialism on the horizon. Most likely it will be mild form of feudalism with the Chinese the feuds.

2008 Jul 26 04:48 PM

[xsuddensam:]

This post is right on the money!

The only good things about CNBC are the tickers. I usually turn off the sound. For a station that claims to be #1 in business, it certainly doesn't perform like it; you got a bunch of blowhards like Charlie Gasperino and Dillon Radigan lead by the biggest blowhard of all time, Larry Kudlow, the self-absorbed obnoxious idiot who never lets anyone else talk. His constant interupting is so rude, you'd think he was raised in a barn (apologies to the cows and horses).

What kills me is the unrealistic optimism of this entire CNBC crew. Anyone who listens to these guys, especially that lunatic showman Cramer, deserves to have their bank account spanked. By the time he makes his Mad Money stock touts, he has already sold them to his paying customers well in advance of the show.

I always say that most Americans readily accept mediocrity. Look at our political leadership. It's no different with financial TV; people actually think that these clowns know something about economics and the market. Trust me, they don't have a clue.

2008 Jul 26 05:00 PM

[xsuddensam:]

There is no future if we don't get rid of the Fed. Reasonable thinking people should understand that the Fed is just a vehicle for banks and other financial institutions to make money. It is not regulated by the government nor anyone else. It only has a mandate to control inflation and promote economic growth. The problem is it has been given the uncontrolled power to print money. All this fiat money is propping up this financial humpty dumpty pyramid scheme.

With a weak and moronic Fed chairman like Bernanke, who will cave in to market whining (the 75 pt. emergency cut, followed with a 50 pt. cut one week later), there is no hope. All the king's horsemen....

2008 Jul 26 05:19 PM

[lonie:]

Summers is correct and if the rest of you were so damned smart you would be , healthy and wealthy by 37 like Rogers . Probably best to listen to a person that has done it instead of talk about it.

And as far as herd mentality , the professionals are the herd.

2008 Jul 26 08:04 PM

[Calvin C.:]

Maria Bartiromo is not smarter than a roll of toilet paper. Watch her on Jeopardy here:

www.crossingwallstreet.../

2008 Jul 26 10:40 PM

[sbenard:]

Bubblevision -- I love that term!

2008 Jul 27 12:10 AM

[sbenard:]

I saw the figure yesterday for the total dollar figure of bail-outs, loan guarantees, auction facilities, fed discount windows etc. since the Aug 07 crisis began. This is the total figure the taxpayers on on the hook for in one year:

$1.43 TRILLION

So far...

2008 Jul 27 12:15 AM

[JMS235:]

Socialism is not a form of government but rather a philosophy that relates to the form of ownership and management of the means of production in a state and how the products produced are distributed.


On Jul 25 12:45 PM DaveW wrote:

> barnburner, bone up on your international politics. The U.K. is
> a "Constitutional Monarchy", also known as a "Parliamentary Democracy"
> General elections (by the people, for the people) are held to elect
> MPs (Members of Parliment). The party with the most MPs can elect
> a Prime Minister. So, your point is made moot.

2008 Nov 12 07:10 PM