Ridiculous Gone Wild!

I listened to a DOJ wonk give their reasons for blocking the ATT/TMobile merger and it was the usual drivel about being bad for competition, will under serve the poor and result in a lower quality product. Wireless comms is a cutthroat business and all you need are two big players to keep each other in check. Think Coke and Pepsi. Are the products really going to suffer because there are not a dozen inefficient carriers? And which one wants to lose Apple's carrier deals?

And then there is the very serious attempt to pass affirmative action rules for ugly people. Seriously! First of all, who would put that on their resume?  Please check your race, gender, age, sexual preference and whether that preference even matters because you are butt ugly.

The spectre of QE3.  If Benny and Barry think this is going to save the country then they meet the definition of insane.  You know, doing the same thing over and over and expecting different results.

How about the NLRB requiring companies to post union information? Or telling Boeing where they can build a new jet?

Lazy Crazy Hazy Days

Roll out those lazy, hazy, crazy days of summer
Those days of soda and pretzels and beer
Roll out those lazy, hazy, crazy days of summer
Dust off the sun and moon and sing a song of cheer
- Nat King Cole, 1963

The stock market has a reputation of being boring this time of year. Volumes are indeed lower, most of the time, but that does not mean important points are reached.

Over the years, I've quoted Peter Eliades' observation that big reversals and inflection points happen this month. For me, the bear market of the beginning of the millennium started September 1, 2000, which was still August in my book since it was before Labor Day.

Put up your own chart. You will see quite a few turns over the years.

Therefore, don't dismiss the direction September takes us. It will tell us which - a turn or inflection - August brought us.

Big Ben Speaks! (soon)

The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part
- Tom Petty, 1981

What do you do when the world is hanging on a speech? Aside from the profound implications of how this unelected official can hold so much sway in the financial lives of billions of people, there is not a whole lot to do to prepare.

It is also a good chance to exercise restraint. In the market's we should not predict, we should react.

What is oversold in a bull market?

From a reader:

Can't remember what TA book I read this in, I was wondering your opinion on the RSI. During a strong trend the overbought or oversold levels tend to shift. For example, since the March '09 lows, the +70 level on a daily chart was breached routinely, and on the other hand the 30 handle was respected, even during the flash crash.

With this most recent correction there is a very clear breach of the 30 handle on daily RSI. Obviously the market has the potential to bounce here, but I was wondering your thoughts; is this is a signal the market has changed it's character?

This is covered in more advanced TA books, specifically one by Connie Brown, CMT. In rallies, RSI tends to move between 40 and 80 while in declines it moves between 20 and 60. Of course, there is more to it than that but the point is that oversold in a bull market is not the same as oversold in a bear market. In bull markets' you buy the dips. In bear markets, you have to get more deeply oversold in order to get a tradeable bounce.

So, does a recent sub 30-reading mean the trend has changed? Can't say for sure based on just this but it sure fits.

Facebook request

There are several hundred visitors to this blog each day yet only 179 "likes" on the Facebook page. Why not navigate over there to see what sort of conversations are happening. Oh, and hit the "like" button while you are there.

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For newbies

Here is something I wrote for Scottrade in April 2010. I figure the statute of limitations on an article for which I was not paid anything has expired.

Give Yourself a Break!

By Michael Kahn

The debate continues on whether navigating the financial markets using charts is an art or a science. Those of the latter belief work with equations, trading systems and models. Those of the former belief, and I venture that most investors fall into this category, use basic charts, a trustworthy source of opinion, and their own experienced eyes.

Let's leave the rocket science to others. For most of us, simple charting tools work just fine whether you use them to complement the fundamentals or all by themselves.

Just as some writers use journalistic license to bend the rules of grammar and facts, some chart watchers selectively ignore various chart points to attempt to create a meaningful and, more importantly, useful analysis. They do not get hung up on pennies when they are trying to invest for dollars.

Strict interpretation of technical charting rules can yield academically correct analyses, but they may only loosely describe what is going on in the real world. What more do you need than your eyeballs to tell you that in a bull market, prices on the chart move higher over time?

Assessing whether the market is in a bull or bear trend is more than half the battle. If you know if there is a bull market in progress, then you can take your list of sound companies and buy their stocks on weakness. If you know it is a bear market, then you might limit yourself to special situations where the fundamentals are so compelling that the rest of the market is not an influence.

Many traders spend huge amounts of time pouring over their charts to determine idealized buy points. And to find them, traders draw horizontal lines connecting points on the chart that represented price lows in the past. The theory is that if demand surged at that price before then it is likely to do so again.

But then they make a mistake and connect those lows with a fine point pen. They might not buy a stock because it traded at 36.25 and the line connects previous price lows at 36.10. More times than not, 36.25 is close enough to create a good risk vs. reward purchase, and the picky trader will miss it.

Fine point pens have nothing over a fat crayon when looking for these price levels. "Close enough" may be good enough for many investors with multi-month or longer investment horizons.

Of course, there will be times when precision is needed. And there will be times when even a fat crayon line will be broken to the downside by falling prices.

Investing is far from a guaranteed endeavor, and losses can and do occur. But investing should not be brain surgery. We are allowed to make mistakes, and as long as we use proper risk controls, such as stop orders, then we're doing what we can to learn from those mistakes and mitigate their impact.

Down Home Country Thinkin'

On the way back from a long weekend with the family (Hershey Park - man, the chocolate so much better less than a mile from the factory) we looked for a place to have some dinner. We are used to rest stops on the Interstate where we can fill up the car and fill up the bellies, albeit the latter with gourmet sensibilities suspended. But on I-78 in both NJ and PA, forget it. We had to rely on exit signs showing us food and fuel with both brand and local names. Hmmm, Pizza Hut or Marge's restaurant?

There was a sign for Cracker Barrel and I said, "let's try it?"  Believe me, taking a suburban NY family with a child, two teens and a wife who is not exactly an Andrew Zimmern fan to this type of place required me, as the driver and, deludedly in my mind, the head of the household, to make an executive decision.

I've had no experience with this brand except to imagine chicken fried steak, biscuits and ham hocks, whatever that is. Admittedly, I mixed this up with Hickory Farms and their nut covered cheese logs sold in malls. But after verifying that we could get a simple plain grilled chicken we stopped in.

I won't bore you with the details of the meal but the food was comfort food at its best (I had beef stew for the first time in 20 years).

How does this this fit on a markets blog? It confirmed that we have to try new things even if they are uncomfortable.

What's new in the stock market? How about thinking some stocks are actually cheap? I don't mean "if you liked them at 80 you'll love them at 60 cheap (thank you Wall Street analysts). I mean cheap now based on a model that said they were expensive a month ago.

Talk about a tough road for the psyche, especially since I think this is a bear market that is far from over!

But let's talk cheap as is the company is still making money and is no longer ridiculously priced. Or, from my side of the world, the charts look compelling in the long-term.

Here's the part that makes this difficult - prices may still get softer, even for companies that are going to be just fine. Do you buy some now to get a toe in and if they go up buy more? Or do you buy some now and if they go down you average it with more shares at the lower price?

I'm not going to talk specific stocks or actions here. My point is to shake you from a singular mindset so you do not miss any signs the market may give you that perhaps it is time to play the long side, at least for a little while. And this is coming from an all out bear.

Break Time

For three strange days
I had no obligations
My mind was a blur
I did not know what to do
And I think I lost myself
When I lost my motivation
Now I'm walking 'round the city
Just waiting to come to
- School of Fish (1991)

I am going to take three strange days away from this market. Even when we know the trend (down) it is still hard to prudently play thanks to the extreme volatility.  My advice is to keep things light with smaller positions. I don't think the initial plunge in the market has been worked off completely.

Double dip? You betcha!

Off to Martha's Vineyard!  (well, not really, just a family trip to a theme park).

Dollywood

Here you come again
Just when I’m about to make it work without you
You waltz right in the door
Just like you done before
And wrap my heart ’round your little finger.
- Dolly Parton, Here you come again (1977)

Talk about the siren song of the bulls! Just when we thought there might be a little relief left in this relief rally the Dow gets clocked for 500 points Thursday morning.

But we already knew it was a bear market and the little dabbling to be done on the long side was fighting the trend.

We got a free report from a well known analyst this morning (we won't say but it was up on our Facebook page - shhh!) saying that stocks are much more attractive than bonds. Why yes they are. In the same way, I snarked, that I'd rather break my hip than get a hot poker jammed in my eye.  And for some reason, I'd rather be a sparrow than a snail.

I want none of these options. Cash is king and unfortunately not US cash.  Maybe food is queen. Did you see the CORN fund at new all-time highs this week?   And while other grains and ags are well off last year's highs rice just broke out to the upside.

Greece as a buy?

I am not advocating it but opportunity is like a phoenix from the ashes. The question is whether the ashes are fully cooked.

Again, there is no technical reason to say it has bottomed but at some point.....

Why Wal-Mart is always a lousy investment

One of my favorite analyses is Wal-Mart vs. its suppliers. This is sort of like gold and gold stocks only Wal-Mart is usually a lousy investment.

Here we see Wal-Mart in black and the ISE Wal-Mart suppliers index. Even a technical mouth breather like me can see that it is much better to sell to Wal-Mart than own it. That low price guarantee makes for lots of sales but not so much profit.

Anyway, look at the divergence. And it's been going on for years. Until Wal-Mart does something to close this gap I'd rather look at the suppliers index components.

Meee-ouch!

 This actually is from the 2008 decline so I'd say we are two cats earlier than the "here-o-gram" shows.

La Cruz de la Muerte

I am trying to be like the rest of the media with catchy headlines but in Spanish or English, the stock market now has a black, or death cross in place in a growing number of sectors. The S&P 500, Nasdaq and Russell 2000 all crossed to the downside just today. The Dow is close.

Wednesday's column covered sector crosses. Let's step back for a second to explain what the heck I am talking about for those of you who are new to technical analysis jargon.

A black or death cross occurs when the 50-day moving average crossed below the 200-day average. Conversely, a golden cross happens when the 50- crosses above the 200-day. The point of using two moving averages is that the signals are fewer but much more reliable.

But as moving averages, they necessarily lag the market and will never, ever, catch the top or bottom. That's for other indicators. The crossover, however, does a nice job of getting you on the right side of the major trend and when I say major I mean cyclical bull or bear market.

Right now, the crossover tells us it is a cyclical bear in its early stages.

The next question should be "So how come it failed miserably last year."

As my source said in the column, nothing works all the time. That is why we never depend on one indicator. However, the price for being wrong was minimal. The price for not heeding the message if it is correct is huge.

I looked back through time and there were other small whipsaws. But when I switched to exponential moving averages the track record was better. For example, they were not fooled in 2006 when the market looked like it was lapsing back into the bear.

Which do you believe? As with other battles of indicators (linear vs. log is a good example) you use both. Then figure out which one has the weight of evidence behind it from confirming indicators.

FWIW - the exponential version has not yet had its death cross. But even a total reversal of the entire month's decline will not avoid the mathematics that say it is inevitable.

 Only you can prevent portfolio fires.
Smokey the Bear, CMT

Well, now what?

Last week, my column was entitled "Will the Market Selloff Continue?" and I talked about an oversold market, ripe for a bounce but already in the grip of the bear. The original title before the editor got to it? Stocks Peer into the Abyss." Usually, the editor's changes are much better than my suggestions. Not this time. That was nearly 1200 Dow points ago.

I am not going to tell you to buy 'em cheap here or sell 'em before you lose it all. If you want that sort of advice, well, let's be honest, you have to subscribe.

Now that the shameless marketing plug is over, I can say that even though we covered our shorts Tuesday before the 400 point rally and the market closed below our cover point today, I am sleeping quite well at night. I've avoided what used to be full bull and bear markets but compressed into a few days.

Even stranger, I sold a portion, not all, of my gold holdings in the low 1700s. Yes, too soon but look what happened to silver when it started to go parabolic. You had to be mighty nimble to get out once it past its peak. I still have a day job and would have easily missed it in April. The same is true for a wildly overbought gold market now.

What if the raise margins? or the bubble poppers are right? For better or worse, I had far too high a percentage of my assets in gold and had to pare some back. There is something about a 14-day RSI at 86 that makes me nervous. And if I am wrong, I still have a good chunk left to participate in the melt up, should it occur.

These are indeed strange times. Without getting political here, the market is telling us it does not like a lot of things and many of them originate in Washington.

Reset

It’s times like these you learn to live again
It’s times like these you give and give again
It’s times like these you learn to love again
It’s times like these time and time again
- Foo Fighters 2003

It looks like the market has reset its expectations. And it looks like the people have reset their expectations for their government. I am not going to comment on the President's speech but something Timmy Geithner said recently was unnerving to say the least.

He said, with regard to Standard & Poor's downgrade, "They’ve handled themselves very poorly. And they’ve shown a stunning lack of knowledge about the basic US fiscal budget math.”

Does this not scare the bejeezus out of you? There is such a thing as "US fiscal budget math" and it is different from regular math? 

I'll end it there as it stepped over the line into politics.

As for the stock market, it is gearing up for another Bernanke put.

Harry Potter and the Elusive Market Target

Chat room traffic got very subdued last week as it seemed as if everyone was hunkered down and not trying to analyze the charts. Over the past few days, traffic has ballooned. Why? Everyone is setting targets and putting out Fibonacci levels. They look for past precedent. The number of new lows is spiking! The downside objective is....! We're oversold!  Obama! Geithner! Tea Party! Gang of six! 

Well, I prefer the Gang of Four, a post punk British band in the 70s.

The point is I actually stopped reading the slew of emails I get all day long as nobody, not even my favorite and most respected colleagues, can put short-term structure on a market crash.

There, I said the "C" word.

My Downgrade .02

Let's start with the premise that the ratings agencies know what they are doing. Yes, I took my happy pills this morning.

A downgrade may not mean anything to the bond market itself. Here is something I posted in a discussion with a friend:

Speaking as someone involved in the financial markets, the rating itself is tempered by perception and demand. Therefore, a AAminus Treasury bond may very well trade exactly the same as it did as a AAA. that means the borrowing costs of the Treasury do not change. Neither will car loans, etc... I will let you decide if that means the govt will see that as a reason not to change its ways.

Now, back to the ratings agencies.

1. They messed up the housing crisis and are overly concerned with being too late here
2. They messed up before and have seriously changed their ways to become reliable
3. They messed up before and we now know they are irrelevant.

Think about this, one committee at S&P took a business action and brought down the world's markets and tone. What makes their view better than Moody's or Fitch's? I can see how one rogue trader took down Barings Bank but he played with Barings money. S&P does not play with USA money yet somehow we panic when they put out a report. This is listening to a Wall Street analyst on steroids and we know how well Wall Street analysts do. I hark back to the first bear market in 2000 as analysts upgraded their opinions as individual stocks went lower.... and lower.... and lower.

Perception is reality so this downgrade means something. But it says more about how we as a society pass responsibility to others and wonder why things go bad.  Do your own homework.

Deep Yogurt

I don;t have much time to day as I am hitting the road very soon but let me leave you with these charts:

 Steel

 Machinery

 Aluminum

  

More industrials

This is not a good sign for the ecomomy.

Don't worry, be happy

If you are an investor, sorry, chief. But if you are a normal person just going about your life, check these charts.

 

 

Can you hear me now?

You asked for the truth and I told you
Through their own words
They will be exposed
They've got a severe case of
The emperor's new clothes
The emperor's new clothes
- Sinead O'Connor 1990

The tide is out and we can see who is swimming nekked. QE is gone, cash is flowing out and with them both go liquidity. Whatever propped up the market for the past two years is toast.

Perhaps now the psychology of crowds and organic supply and demand for stocks will return to "normal," whatever that is, market analysis will be what it once was.

For now, the technicals are singing their sweet song - well, sweet for the bears, anyway.

Oopsy!

Lots of talk of 200-day average breaks. This is worse.

More things that make you say, huh?

From high to low, the Dow swung 234 points today yet the VIX dropped 6.30%.  I could have sworn it stood for volatility index, right?

Yes, I know, it is implied volatility but still. How is that sort of drop supposed to tell us that fear was up today, presumably on the lousy ISM report?

Since I am not a vixpert, let's talk PIIGS. Fully aware that Europe closed before Wall Street made its march back up to the flat line (almost), the net losses there were staggering.

Italy down 3.9%
Spain down 3.2%
Portugal down 2.5%
Ireland down 2.3%
Greece down 1.8% (how's that bailout working for ya?)

How about Germany down 2.9% to break support?  Unless something happens overnight, there is some bouncing to do to catch up with the American intraday rebound.   But those are ginormous intraday losses.  (Can you believe the spell checker did not barf on the word "ginormous" but "intraday" it did not like?)

And speaking of barfing, did you see health care and drug stocks in particular?  A breakdown worthy of heavy doses of Cymbalta and/or Prozac. Good thing these companies make that stuff.

So much for a safe haven sector. At least there is still Goldschläger (booze and gold flakes in a glass).

Fun recipe from the Wikipedia page:

Goldschläger can be mixed in equal proportions with Jägermeister and Bacardi 151 to make a shot called liquid cocaine.