This Is a Trader’s Market, Volatility Demands It

Includes: DIA, IWC, QQQ, SPY
by: Bill Cara

[The following is excerpted from Bill Cara's Week-in-Review from September 7, 2008]

Technical analysts looking at the major equity market indexes of various countries this weekend must be stunned to see a consistent pattern where prices are on the verge of simultaneous collapse.

I hope my opening paragraph captured your attention because it also means the end of the Bear is one step removed. Just one more leg down – probably 10-12% -- is what the sellers will take to complete the bottom, I believe.

That’s good news, but it’s not to say that the next Bull market is going to soar from the beginning. In fact; unless and until Humungous Bank & Broker writes off all or most of the dead assets, and replaces lost reserves or restructures/amalgamates with other financial services companies, I think the next Bull for equities will be a rather quiet affair, hamstrung by ongoing credit market problems.

A week ago I wrote in this space,

The fact is that the growth rate of the global economy is rapidly slowing, with large pockets of recession, and the rate of producer and consumer inflation is far higher than the comfort level of any respectable central banker. The major financial services companies (banks, broker-dealers, insurance companies) are still to write down their so-called asset backed commercial paper holdings to market values, which is the reason these companies are illiquid and have limited funds to lend to producers and consumers. This credit crunch leads to a quandary for capital managers, producers and consumers alike. Where capital has been flowing has nothing to do with Bull markets or bullishness and everything to do with a desperate attempt to find safe havens… Some capital managers are in denial; others are cranking out their excuses because they fear that the Other People whose Money they have been managing improperly are about to become an ugly crowd of litigants.

After the close a week ago Thursday, which was up +213 points in the DJIA index and +329 points over three straight days of gains, I noted early the next day: “Traders have not started a Bull market; they are not even bullish. They are scared.” I stated that my 10000/2000 opinion was still in place, reminding you, “it’s not a forecast; it’s a guess” and one that I made Feb-10-2007, and again in March, then June, and December of last year and again earlier this year.

That Friday the DJIA sold down -172 points, most of it in the late afternoon. This week the DJIA index dropped a further -323 points. That’s a loss of -500 points in five sessions (Monday was Labor Day).

At about 11:20am ET on Friday, the DJIA stood at 11038. Just because the index was pushed up +200 points in the last 4½ hours, which happened after European and Asia-Pacific markets were closed, I continue to opine: Where’s the Bull? Traders are scared.

To repeat, every major international equity index is on the verge of a breakdown. Look at Canada’s TSX Composite, the UK FTSE 100, France’s CAC, the German DAX, the Italian MIBTEL, the Spanish IGBM, the Japanese Nikkei 225, the Shanghai Composite; the Hong Kong Hang Seng, the Australian All Ordinaries, and Brazilian Bovespa. They are all testing primary support levels, apparently ready for one more leg down, but also within 5% to 15% of their ultimate bottom.

The closer an index gets to its cycle bottom; there will be some sectors and industries that bear watching. It could be that in some of these cases, the July 15 lows will prove to be their long-term cycle lows. Talking Heads (on behalf of Wall Street) coming to you via Mainstream Media would have you believe that those July 15 lows are clearly the bottom for the Financials. I disagree with respect to the majority of the Financials, but I am saying that there are probably some other industries and groups that will not drop lower than July 15 lows.

This is a trader’s market. Volatility demands it. A week ago, I summed up my concerns for the Buy-and-Hold crowd with these words, “Doesn’t this situation go to show that the mutual fund model no longer works? There are times that traders cannot afford to be 100% long, even with large cash positions.”

This week, the DJIA and Russell small cap indexes dropped -2.8%, the S&P 500 fell -3.2% and the NASDAQ Composite plunged -4.7%. That was another tough week for those who are long only traders and very long-term position holders. As markets zero in on a cycle bottom, however, and there are low-risk values starting to pop up, traders have to remain poised for the final dump. That’s going to be the best point of entry.

Will the DJIA drop to 10000 and the NASDAQ Composite to 2000? I think so, but I have no crystal ball. When I first made that call, I thought it would happen in 2007, but the Financials were really goosed after that, which extended the Bull. So I made the call again in June, July, September, after I saw how the XLF/XLY had run into problems.

Bill Cara: Week #06 (2007-02-10) in Review [FINAL]
10 Feb 2007 ... In any case, I am looking for Dow 10000 (2007) before Dow 15000 (2009). ......

I repeated it again a few times this year because I was getting sick of listening to CNBC TV call a bottom halfway through the Bear. Anyway, the point is you need to take a big picture view so that you can set strategies. Then you watch the data series evolve, which plays into your setting up tactics.

You know, there is seldom a day go by when a Talking Head doesn’t make some mocking smart-ass remark like “I’m not smart enough to time the market.” What should be mandatory from regulators whenever some so-called professional makes that remark is to require the TV network to flash on the screen the person’s 1, 3 and 5 year performance record. Then we’ll all see the idiot is not smart enough to do anything.