Wednesday, August 20, 2008

more bear paws on the street

I recently returned from rural new york. while bears were nowhere to be seen, I found many droppings under an apple tree. and plenty more apples are on the tree, their feast should resume soon.

I think this is an apt metaphor for wall street these days. after a month of charging bulls, I think they're running out of energy. below is a commentary I wrote to a friend last night after returning from my upstate journeys:

I have been watching this market bounce and think it's time to be bearish again. it looks like the sp-500 is failing to hold the 50dma. on aug. 19, it also failed to hold the uptrend established since the july low. and it failed to break SIGNIFICANTLY above what I considered important resistence around 1273. if you compare it to other recent breakdowns, it doesn't look good for the longs. we broke above that resistence by just 2.5%, so I think the recent high on aug. 11 or so were a "false breakout". intraday on aug. 11, we also bounced off a trendline dating back to to the closing levels on may 19 and june 5.

fundamentally, this recent bounce off the july lows didn't make much sense. supposedly, strong foreign economies were keeping us out of recession. now that europe and japan are hurting, what's left to be bullish about? this whole "strong dollar" rally never carried water to me.

however: I see three problems now with the bear-market trade, just to view the other side of the argument:

1-the global economy gets really bad and oil collapses further.

2-lots of cash remains on the sidelines and short interest is still considerable.

3-the US economy may still has a trick or two up its sleave... first, businesses seem to be rebuilding inventories from very low levels (this is the reason we don't have breadlines now)

also, with so many people in debt, I suspect unemployment won't pick up considerably. plenty of babyboomers owe tons of money and have kids in college etc, plus their retirements to fund. they're not going to just stop working. they will find something to do.

I know that's pretty abstract stuff, but it could prevent key numbers like the monthly payroll report from falling off a cliff. that means that the dollar might hold its recent gains and keep a lid on oil prices.

still, I think we're setting up for a bounce in oil and energy in general. fundamentally, OPEC is now talking about cutting production and no one is pricing in the danger of things getting worse with russia. and, the shorts have failed to break the key support level at 110, even with a benign hurricane season.

also, many china watchers expect them to ramp their economy back up after the olympics. technically, crude has held that support level, which also corresponds to the 200dma, so that's bullish. and, the downward momentum is waning, with the oscillators looking poised for stability, if not a turn higher.

still, I don't expect a prolonged rally. I doubt we'll even challenge the recent high on oil. that means it might be time to short the airlines. I know that was a lot to say. but there are more uncertainties now than there were back in may, which was such a perfect bearish setup.

the european economic outlook is much less certain now, and that will have much more relevance to US markets than it did before because of the oil/dollar angle. this makes me less of a raging bear than I was before.

to sum I up, I'd say I think the market will try to rally some on Aug. 20. I would look to sell into strength, especially if the sp-500 gets above 1280. but then we'll drift lower, probably to retest the july low. (MER is looking pretty sick in particular.) I think the airlines might be a good place to get short as well. they are up big and might look to raise some capital.

here's another good long-term reason to be a bear... think about the fed vs other central banks. we've already cut rates about as low as they can go, and haven't even had a negative GDP reading yet. europe and other economies (like australia) are slowing down, but have plenty of room to cut rates.what it means is that, unlike the rest of the world, we can't cut rates.

any strength in our economy is a reason for the fed to raise rates, which is bad for stocks. either that or they just let inflation run away (which I think it pretty likely as well because it's the easiest way for us to get out of all this debt), which would also be bad for stocks.

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