So here goes. 

The stock market has been crashing day after day and the Dow Jones is now at 8579 on yesterday's close, down over 2300 points in seven trading days.  For the third day in a row, the market has attempted a morning gap and failed miserably. 

Another fireworks day.  The crash update from Sunday was unfortunately the correct call.  However, we did see some interesting action yesterday.  The market gapped down pretty heavily yesterday morning and was down from the jump nearly 200 on the Dow.  This acceleration continued all day until about 3pm when the Dow was down nearly 800 points.  Mind you, this was the largest intraday move down ever.  From this low, the Dow rallied 500 points before pulling back a few on the close.  There were massive reversals in the daily charts yesterday.  We will need some confirmation in the next day or two to confirm what we saw on yesterday's close; we are not out of the woods yet but it's looking better. 

There was something different about yesterday, I smelled the fear, there was quite a bit of blood in the streets.  At one point, there were 1600 new lows on the NYSE, there was a volume ratio of 100:1 down/up volume, and the VIX climbed up near 60. 

The retracement from the top last week has been deeper than I would like to see; however, volatility is extremely high with investors eagerly waiting to understand the details of the TARP program.  The market will not be moving higher in any significant way until the details are disclosed.  The market was wild yesterday; the Dow Jones opened up 120 points and then went flat, then up 100, then down 170, up 40, and then down 170 again.  The market dumped into the close yesterday, dropping 200 points in the last hour. 

Ugly close, but the bottom line is that the market is in limbo land right now.  The Low and the High from last week is going to keep this market in a trading range within those two levels until the market is ready to make a breakout.  It may take a couple of days to a couple of weeks to resolve.  If you have been reading my posts, you know I believe that move will be higher. 

Last week reminded me of July 2002, Sept 2001, and even October 1987.  The volatility was sky high as evidenced by the $VIX index and we had quite a bit of market moving news that generated multi-percentage moves.  So now that its all said and done with, what can we expect going forward?

First off, I believe the low that we saw last week was extremely important.  The markets appeared to be on the brink of disaster and found support very close to where I wanted them to do so.  As we have seen in the past; government intervention, even in a bear market, has a more sustained effect rather than a 2 or 3 day rally.  I believe that this time will be no different.  Was this the end of the bear market or the beginning of a bear market rally?  No one can give an answer to that yet, but the odds are that the market is going to run much further than most of the crowd expects.  In fact, I believe this rally will annihilate the perma-bears who have been shorting this market.  Disbelief in this rally is going to ignite this rally as shorts continue to cover. 

Market Recap

Schizophrenia is the word of the week. There is just a lot of action to digest here in the market. Very interesting times. Thursday, Morgan Stanley (MS) was in heated talks with Wachovia (WB) for a merger. Washington Mutual (WM) is looking for a suitor. There was a report Thursday that Treasury secretary Paulson is considering an RTC type of entity that was formed back in the 80s to tackle the S&L crisis. This type of entity would basically absorb bad debt and free up cash for these troubled banks. Short selling was banned in the UK and naked short selling has now been stopped in the US markets. Basically, any naked short position must be returned to the broker/dealer before settlement occurs on this security. You have about 3 days to cover your shorts before your broker liquidates the position prematurely.

Written on Monday, Sept. 15

The close today was very telling. Last night, I mentioned that I wanted to see how this market closed today to make any further conclusions about this market. The market spoke very loudly today and closed down over 500 on the Dow and almost 60 on the S&P 500. The waterfall decline that I was looking for last week has begun. Today actually marked the highest point drop in the Dow Jones on a closing basis since September 11, 2001. The Dow is extremely close to taking out the July lows while the S&P actually took out the lows from July at 1200 on a closing basis and the NYSE continues to get hammered. Very ugly tape action.

Wow!  As I write this, the S&P futures are up 33 points with the Dow Jones futures being up nearly 300, and Nasdaq 100 up 38.  The market is all cheered up over the news that Freddie Mac (FRE) & Fannie Mae (FNM) are going to be taken under conservatorship by the Federal Government.  It appears that this news was leaked in the final hour of trading on Friday as the market, and especially the financials started rallying pretty strongly into the close.  Daniel Mudd and Richard Syron, the two CEOs, will be replaced and I am sure that many more senior executives will follow the same fate in the weeks to come.  With this move, mortgage spreads should tighten and the US dollar should start to tank which is bullish for gold.

Conservatorship is basically similar to Chapter 11 bankruptcy and will render the shares nearly worthless.  The two GSE's had their credit ratings dropped to junk status on their preferred stock and we should see both companies trading on the pink sheets shortly.

Labor day is over and the same should be true for the summer doldrums.  The big boys should work their way back into this market this week and definitely next.  Volume should expand over the weak levels that we have been witnessing off the bottom in July.  The markets have become very volatile and it would be a great time for the bigger players to capitalize off of this rally and jam this market down fast to load up for the final bottom that should be put in within the next 4 to 6 weeks. 

The last few weeks have been like watching paint dry.  The choppiness has taken the market nowhere.  No leadership has been taken by any large amount of money and this needs to happen before we see a sustainable rally. 

The market continues to meander nowhere.  It is stuck in a sloppy trading range and we are witnessing whipsaws almost every single day.  The light volume trading has kicked in and is making the market vulnerable to sharp swings in either direction.  I am still in the belief that the broad markets will work their way down to the lows of July before we see a more substantial rally.

For the short term, the Dow & S&P are setting up rising wedges from the lows put in from July. 

Barron's is portraying a "curtain call" in store for shares of Fannie Mae (FNM) and Freddie Mac (FRE), which fell over 20% each Monday on concerns of insolvency.  Barron's suggested that the government would be likely to bail out the two government sponsored entities [GSEs], wiping out its equity holders, preferred, common and even subordinated debt holders.  Both of these stocks are near multi-decade lows and have dropped over 90% since 2007.

There is a concern over Fannie Mae's ability to withstand further losses in their sub-prime, Alt-A, and interest only loans.   

The stock market is nearing what I think to be a very important bottom. I believe that last week's options expiration-related short squeezing rally will lead into a pullback that will test or even break the recent lows at S&P 1200. If we get down there, I will be a heavy buyer from 1200 on SP all the way down to 1182 for an intermediate term (9 months to 18 months) hold. Some major buy signals are lining up here.

1182 represents the 50% retracement of the 5 year bull market run from the March 2003 lows to October 2008 top on the S&P 500. This market could run as low as 1165 but this move would be fast and most likely occur on an intra-day basis.

The coming week will be interesting for sure. Freddie Mac (FRE) and Fannie Mae (FNM) were the story stocks of the last week with talk of insolvency sending their stocks tanking to multi-decade lows.

There is talk of the Fed invervening and availing the discount window to the two GSEs to prevent a failure. Freddie will be issuing debt to shore up more capital and this cannot be a good sign. Short term volatility aside, one or both of these entities looks like they may be assumed by the government. Remember, without GSEs like FRE and FNM, the housing market will collapse and the Fed knows this. Worst case is that the stock moves to 0 while the entities remain.

Since our last update on the banking sector, this market has continued to free fall with no end in sight.  As markets continue lower, the financials are showing the way and with the credit problems that continue to put a damper on things for the banks, the worst seems yet to come. 

From what we have been reading, only 30 to 40% of the actual write-downs have been made by the banks.  The market knows this and is expecting some of the banks to go bankrupt or be taken over at bargain basement prices.  We know the US banking sector is in deep trouble and we know that these stocks will continue to head lower but the show must go on. 

Since our last update on the 3rd, the Dow has moved swiftly down, nearly 300 points, and the SPX about 27 points at todays low. Last Friday marked one of the largest down days in the markets in over a year, even larger than the January lows and March lows. The troubling part of last Friday's action was the volume in which the markets went lower and with the relentless selling that was going on within the market. There were no substantial retracements intraday and today's small retracement showed just how weak the bulls were. This was true distribution and another indication that the rally from the March lows was corrective in nature, a bear market rally!

I continue to beileve that one should expect all surprises to come on the downside here. The banking sector continues to falter and show no signs of life. Other than the fact that most of the bank stocks are back at their March lows or even lower, momentum continues to show further downside action around the corner. I have yet to see any divergences that will put me on guard for a more substantial rally in this sector. LEH, MER, JPM, WB, and a whole slew of other bank stocks continue to look weak and vulnerable for futher losses. My post on the bank stocks back on June 3 was dead on.

The markets took a hit on the open due to poor economic data being released. The Dow did a straight bee-line down a bit over 200 points this morning and finally recovered to close down 134.60 or -1.06%. The Nasdaq closed lower by 31 points while the S&P 500 lost nearly 15.

What happened today? Well, even though the markets went lower, we need to look at it in the context of the past few days. Here is what happened:

One of the main reasons that I am taking an intermediate term bearish stance on the market is due to the banking sector which continues to get hammered.  There have been some banks holding above their January/March panic lows while others have been setting new lows.  I was first turned on to the idea that the market topped when I saw that the banking sector topped and started heading lower.

The banks led us down in January and March and led us back up to the recent high we just set.  Now, they are again taking leadership to the downside.  This is NOT what you want to see.  We haven't seen the Financial ETFs (XLF) or (UYG) challenge their respective spike lows from earlier this year, but we want to be on guard because we see a lot of individual stocks breaking.  Let's take a look at a few charts.

In taking an in depth view of the Dow Jones this weekend, I have come to a firm conclusion that the rally off the March lows was corrective in nature and not the start of a new bull market.  The Dow Jones had a major head and shoulders breakdown as you can see on the chart that I have displayed below.  The rally perfectly backtested the neckline and price rejection came last week.  You can also see that the DOW staged a false breakout to the upside over a major resistance level near 12700 (horizontal line labeled in blue) and smashed back through it last week.

I want to take a minute and discuss the oil futures situation. It seems that they continue to rise with no end in sight and that gas prices at the pump are destined to continue higher. Do you want the good news or the bad news first?

Well, I'll start with the bad to get it out of the way. The crude oil futures contract looks like it is in the beginning phases of making a parabolic move of some sort. Even with all the chatter about a top in oil, structurally, it is still bullish and continues to move higher without any significant pullbacks. Technical indicators would tell you that this thing is extremely overbought and it is, but overbought markets can stay that way for quite some time (i.e. stock market bubble from 1998 to 2000). At this point, crude futures are driven primarily by speculation and this being said, I am looking for a blow off top to put an end to all this insanity. This means that we will probably be looking at a move to 150 and potentially higher in the near term. 150 will be a psychological magnet for the crowd.