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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.

Source: The Dead Cat Returns to Earth