Friday, October 23, 2009

The Music is Playing..... Are you Still Dancing?

I want to bring your attention to a chart of the S&P tracking stock the Spiders, ticker SPY. (chart above). I have adjusted the chart to a color function which will show the up days as black and the down days as red. Just as, if not more importantly, the volume is also color coded for you.

As my notes indicate notice how the volume expands on the down days (red) and contracts on the up days (black). As Art Cashin always says "volume equals validity" and as I was always taught, it takes a lot of volume to put a market up and a mere lack of volume to put a market down.

Further if you look at the entire volume trend of the market since the lows in March, it has been steadily declining. This can only go on for so long. I realize I am the ultimate simpleton focusing on such uselessly mundane items like lacklustre volume. It is much sexier to focus on how cheap the market is against metrics like 'operating earnings'.

Oh yeah, just in case you forgot, operating earnings is the funny little thing concept that got popular in the tech bubble to justify valuations which excludes write offs. You will never hear any of these cheer leading, book talking, stock selling shills on CNBC give the reported earnings because the hair on your neck would stand up.

You can listen to the stock jockeys on CNBC, the purported experts everywhere and always touting that buy stocks. The same ones who were singing the same song back at Dow 14,000, 13,000, 12,000, etc. All the way down.

I would also remind you, as I have blogged before on this, that both Intel (INTC) and Alcoa (AA), have gapped and crapped on their earnings. Both are now below where they were prior to the earnings release.

IBM and Goldman Sachs(GS) both ran up prior to their earnings release and have both since gapped down lower.

Rising unemployment
Rising foreclosures
Rising commercial real estate vacancies
Rising bankruptcies
Rising credit card delinquencies
Rising debt to income ratios
Rising government hubris that more heroin (credit and debt) will fix the addicted patient (this could be the most dangerous of them all)

Ignore these little nuggets of facts and subscribe to the hope and fantasies of the vested interest parties (politicians for votes, Wall St. and NAR for commissions) at you own peril.

This has been an extraordinary rally, the type dreams are made of with the SPX trading just shy of 1100. I would counsel that one think back to how they felt back in March when the S&P was trading under 700. My guess is you were saying things like, if this sunavabitch ever gets back up to (fill in your number here) I am out of this shit. Am I close? Did it sound something like that?

I would strongly urge you to ask yourself how you will feel if you sit tight and we ride back down to 700. I have counselled many friends and associates (who have asked and believe me, given the buoyant run many have stopped, which is standard operating procedure in rallies) that selling into this strength might be an opportunity we might not see again for a very long time. Its too bad I cannot bring over some Japanese retail momma san and papa san investors from the late 80's who might be able to offer one some counsel on their experience with the Nikkei since then. In case you are not aware the Nikkei was just shy of 40,000 back in 1989 and currently stands at 10,300. And yes, you are reading that correctly it is not a typo!

Speaking of how you feel. Think back to 1999-2000 when the tech bubble was frothing over. Was anyone talking about gold, crude oil, commodities? I thought so. Think back to the surrounding circumstance of that era. The "story" on tech stocks and stocks in general was phenomenal and no matter what the naysayers had to say, of which I was one, stocks powered higher and higher, defying all logic and reason. Eventually it ended.

The first leg down of the markets in this return to equilibrium if you will really roughed up the individual stockholders or what was left of them after the tech bubble. The current rally that CNBC rams down your throat, is very similar to the relief rally the market experienced in 1930 after it's first leg down. Like the rally in 1930 drew in the professionals who thought the coast was clear to buy stocks, this relief rally will take care of the professional investor once again. Back then they were called trusts and today we call them mutual funds. These along with pension funds and various hedge funds are the ones buying today, on your behalf mind you, for they have nothing to lose as they get a pink slip more quickly for missing out on a rally than sitting though a decline.

So yes dear reader, loathe the banks, loathe the private equity boyz, loathe the insurers and whatever else has benefited or is about to benefit from your benevolent administration, (republican or democrat mind you!), you most probably own em' anyway. The irony of this is almost too much to bear.

The point here what all my mumbo jumbo about how you feel is this. This current rally, no matter how much the vested interest, commission chasing, my livelihood depends on a vibrant stock market shills and hacks repeat over and over to you, is not how major, true blue, bonifide, lasting bull markets are born.

Rather they arise out of abject pessimism. Under the environment where you have to be loonie toons to buy them. Where people swear off stocks for good. Where the employment ranks on Wall St. plummet. Where applicants for broker licensing and CFA designations plummet to nothing. Hey, kinda like we saw at the bottom of that energy market back in 1999-2000. That flush out decimated both the skilled and unskilled labour in that field and what the economics didn't do time did, as those who did survive and stick now are passed on or retired, hence the massive shortage of skilled labour in the field as things recovered.

It took some serious onions back in late 1999 to buy gold in the mid 300's or crude as it was trading around $12. You would have been flying in the face of legendary performing names like Nortel, JDSU, Qualcomm, Razorfish, Foundry, etc, etc... Surely you remember how Microsoft's market capitalization was larger than the entire publicly traded gold sector. How many paid attention to that type of extreme? Few I can assure you.

It is of course possible that this was and continues to be the start of a new mother of bull markets. I just do not see the parallels regarding sentiment, participation a general swearing off off or revulsion to stocks for good by the public, which generally occurs at MAJOR bottoms.

CNBC and that NASA employment candidate Dennis Kneale did me a huge favour the other day, as they were discussing the number of bank failures. Mr. Kneale was emphasising how few there have been to date compared to the prior S&L crisis. To which I say; "my point EXACTLY!"

How can you come out of the mother of all credit and debt bubbles and have only, what, a hundred or so bank failures? How many home builders have failed so far? How many loaded to the gills with commercial real estate insurers have dropped? You can count em' on one hand which just fails the smell test on a true bottom, for me that is.

Wall St. like Vegas, needs a constant flow of sheep to shear. Please don't fall victim to the virus that affected many like the legendary Chuck Prince, former CEO of Citicorp who said so memorably back in July of 2007 the following;

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

Everyone always thinks they are smart enough to find that chair when the music stops. Please take care of yourself and make sure you have a seat when the music stops because none of the shills on CNBC ever will.

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 1 unit Direxion Small Cap 3X Bear ticker TZA @ $11.35
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $6.05
Long 1 unit Direxion Financial 3X Bear ticker FAZ @ $19.09
Long 1 unit Ultrashort Xinhua China ticker FXP @ $8.32
Long 1 unit Ultrashort Real Estate ticker SRS @ $9.82
Long 1 unit Ultrashort Russell 2K ticker TWM @ $27.50 stop @ $26.40
Long 1 unit Uranium Energy ticker UEC @ $3.60 stops @ $3.09

Short 1 unit i-shares Russell 2K ticker IWM @ $61.70 stop @ $63.80
Short 1 unit Vornado ticker VNO @ $68.30 stop @ $70.71
Short 1 unit Bed Bath ticker BBBY @ $37.75 stop @ $38.41


StockManiac2008 said...

I agree with you on the volume front, i.e. when liquidity dries up, market falls, but still have a question on it. Could the high volume on down days also mean there are more buyers buying the dips? I mean, mathematically, shouldn't every sell order be matched with an equal buy order. Isn't that so?

One again, thanks for blogging. You have helped me learn a lot about the markets.

Harleydog said...


thx for the note, much appreciated. In general, one wants to sign volume swell into rises and decline into corrections as it is a sign of a healthy rally. as per Art Cashin volume = validity.

as for high vol on down days meaning buyers buying the dips, it is common practice for institutioanl $$ to buy dips, but it could also be shorts buying as well.

for me vol. tends to signify aggressiveness of the operation, the direction just tells me who is winning. heavy volume on down day then sellers won and vice versa.

hope this helps and thx for reading