Manipulation Control?
http://www.ft.com/cms/s/0/efa8a32a-a31a-11df-8cf4-00144feabdc0.html
And The Fed to Downgrade the US Economy?
http://www.ft.com/cms/s/0/dedcb986-a316-11df-8cf4-00144feabdc0.html
I think someone has been reading WOWS :)
Interesting developments-Thank you to our member who just sent me one of the stories.
Sunday, August 8, 2010
I've been doing some reading this weekend (which is not something I usually do because I don't like outside influences creeping into my analysis-it happens). I was shocked that I couldn't find anything really written about Friday's mystery rally. If you are new to WOWS then let me explain a bit. Wednesday of last week, I published a post about the employment report to come out on Friday; my findings based on 3C analysis of the market was that the market had been recently going through a distribution stage. It felt like the market rallied all last week (it felt that way-especially if you have short exposure), however, if you take Monday's close through Thursdays close, the S&P gained exactly 0%. Of course it gapped up on Monday, but it spent the rest of the week in a resistance zone between the closing high of the June rally at 1117.51 (S&P-500) and the intraday high of 1131.23.
A breakout above the close should have led to follow through that took us above the intraday high, but nothing, it just sat there with volume falling off every day. It was in this zone where I saw distribution with 3C.
The white box is Monday-Thursday on a 30-minute chart-while there are many divergences, the red arrow is what we are concerned with. At breakout highs, the market failed to move, except sideways on lower volume which in itself is indicative or at least a hint at the probability of distribution (smart money selling). Why would they sell at this juncture, a chance for a breakout? Simply and as I posted on Wednesday last week, the Friday jobs report appears to have been known to them in advance, they were getting money out of the market, maybe going short, but one thing you can say with certainty when someone sells, “they usually don't believe the market is going higher”. This is exactly what caused me to call for a bad earnings report on due out Friday a.m.
But something strange happened... We saw the sell-off in the morning as we'd expect. By 11 a.m. the market was down between 1.5% (Dow-30) to 2.34% (Russell 2k). By the time I posted an update at 1:04 p.m. Friday, I said the charts were showing a bounce coming, a pretty strong looking bounce that could take the SPY up to $112, however, I didn't see any reason to think that it wouldn't resume back down by the end of the day. I unfortunately had a meeting that kept me out the rest of the day, but when I got home I was shocked to see the rally that I warned of, which started about 45 minutes after my update, never looked back. I immediately knew something was not right after all the horrible economic news, this jobs report was to be the final nail in the market, it was the last thread of hope for the bulls and it came in worse then expected. To give you an idea of how bad the situation is, first understand that the government releases the U3 number for jobs. If we counted unemployed the way we did during the Great Depression, we would release the U6 number (there's U1-U6). The U6 number is much higher. Here's how it works:
U1 unemployment: Those who have been out of work for 15 weeks or more;
U2 unemployment: Those who have lost jobs or have only been able to find temporary positions;
U3 unemployment: Those without jobs that are available for work and actively seeking it. This is the official definition of unemployment — the one we read in the headlines;
U4 unemployment: U3 + “discouraged workers,” or those who have looked for jobs but feel they cannot find employment because of economic conditions;
U5 unemployment: U4 + “marginally attached workers,” or those who would like to find jobs but have not looked recently;
U6 unemployment: U5 + part-time workers who cannot find full-time jobs for economic reasons. This is the widest definition of unemployment and gives the most accurate picture of the total number of under-employed people.
There's much more to it, and it's skewed to the positive side. However the U6 number is around 16.5%, during the Great Depression it peaked around 25%.
Remember the GDP report-we saw a disappointing number, 2.4% in addition they revised a lot of numbers, such as the year of 2008 which showed the recession was a lot worse then previously thought. However, the killer was the revision of the prior Q1 2010 quarter from 2.7 to 3.4%. You may think, “Well it's a better number, higher GDP, how can that be bad?” Because the comparison between Q1 and Q2 looks that much worse. With all of the stimulus we saw 1 quarter, Q4 2009 which was also revised from 5.6% to 5%, come in at 5%. So the revision was bad because it showed they threw everything they had at this and the best they could get was 1 quarter at 5%. What does this have to do with unemployment? You need 4 consecutive quarters of GDP at 5% to bring the unemployment rate down by ONE PERCENT! The point-the economy is not just slowing, but it looks to be heading for a double dip and many of the measures to combat it are exhausted. So why the mystery rally Friday?
I looked around and saw charts like this from PG (which is an earnings play I used 3C to correctly predict that week-the stock came out with bad earnings).
Note the ups and downs of the arrows in the decline-this is how a market trades normally, whether in an uptrend or a downtrend, there are a series of highs, pullbacks, new highs, etc. However, when you see a rally like this one in PG where prices go straight up with no pullbacks, you can be fairly assured there's a computer program buying-that' what it looks like when it happens. PG is a fairly influential stock on the DOW, certainly after earnings not one that I'd think people would want to invest a lot of money in.
Looking over the averages, there were a number of stocks that traded in this manner: KO, HPQ, AMGN, FISV, EBAY, SBUX, EXPE, MCD, DGX, GME, SEE, ANF, and BAC are just a few that exhibit behavior, at some point in the rally that suggests computer aided buying, which is not a strange event in the market, but many seem to have had an early computer-aided kick start.
The market went from what you'd expect, what 3C implied, to a complete change in character somewhere around noon time. It's almost as if a favor was called in or information was leaked-don't forget about the Fed FOMC meeting Tuesday. 3C went nuts, leading divergences in multiple timeframes that would never have been touched, not in a day. Many of the longer timeframes 30-60 minute can take weeks to change character, that is because accumulation doesn't all happen at once. The point is to accumulate shares cheaply and then sell them into higher prices, that is what 3C finds, the quiet accumulation or distribution, but Friday it was turned on it's head for lack of a better expression, I'll say it was because of “Panic Buying” by someone with some firepower.
Remember, the government still has ownership in some form of many financial institutions stemming from the TARP bail out. You could say the government has a few of these like- Citi Group and AIG both being notable members, by the proverbial (you know what).
A little about BAC-according to Wikipedia …
“Bank of America Corporation (BAC) is the largest bank holding company by assets and the second largest by market capitalization in the US. It has relationships with 99% of the US Fortune 500 companies. In 2008 BAC acquired Merrill Lynch, making it the world's largest wealth manager and a major player in the investment banking industry. Of course we know the Federal government gave BAC a big helping hand with TARP funds and other bailout money. Even with the numbers right in front of you, it's difficult to understand how much Federal aid BAC received. The NY Times reported in 2009 that they received $5.2 billion channeled through AIG-this in addition to $45 Billion and guarantees of $118 Billion. Supposedly they have repaid the TARP money, but with the number of Wall Street insiders within the administration, clearly ties are established throughout Wall Street, the financial media and just about any other place their long tentacles can reach.
What is my point?
If indeed a favor needed to be called in, there are plenty of Wall Street players that have some debt either in the recent past or currently to this administration and there are plenty of former Wall Street members within the Obama cabinet-take chief of staff Rahm Emmanuel for example, who could easily make a call.
Why Would The White House Really Care?
The list is exhaustive and I couldn't begin to do it justice, but take a look at this chart.
If Friday closed below the level of support (annotation on the chart), then we'd go into the weekend with not only a bad jobs report, the latest bad news in a string of bad news including the GDP report, the CBO report as well as bad earnings from major companies on Friday, but headlines of market panic as the market would have been down around 3%, similar to the June 1-day sell-off we saw. Over the weekend, this news would fester in the minds of traders and undoubtedly Monday morning the sell orders would be lined up setting up another crash day. If Monday took the market down below the last reaction/pullback low-(marked as “Breaks up trend”) then we would have a technical reversal with the market making lower lows, which would trigger more selling.
It's clear from recent polls that Obama's popularity is at all time lows or nearby depending on the poll. We are going into the mid term elections and the Democrats are in serious trouble, this would be another sign and one that ordinary people would not read, but feel, that suggests this economy is headed for a double dip.
But there's more. Do a little reading about State “unfunded pension liabilities”; Alaska, Connecticut, Illinois and California are good places to start. Illinois pension funds are funded at less then 40%. It is speculated that their unfunded liabilities could be double the state's total annual budget. Most states use an 8% growth calculation with regard to the investments they have made with the pension funds. As of June treasuries were yielding 3.6%, obviously pension funds have been investing in riskier assets, the stock market is an example.
It's not just states, counties and cities-it's public companies as well. The median S&P-500 firm is also counting on 8% returns with regard to their pension fund investments. Whether you take 3, 5 or 10 year returns in the market, they are all in the negative. Ken Hackel of CreditTrends.com says these are just a few hurdles that public companies' pension funds face:
-Investment performance
-the pension act of 2006 requires all funds to be fully funded by next year
-assumptions of 8% returns are not realistic
-The cost of benefits
-the aging work force ready to claim benefits
-and with the economy and jobs in the dumps, the ratio of retired to active employees
Another negative outcome public companies that trade on our exchanges face is the cost of all of this will negatively impact earnings. While the market is being propped up in every manner, some of which are obvious, some clandestine; all of this is leading to a boiling point in which the market and economy will implode. As I say to my readers, “when you find yourself in a hole, stop digging”-well none of the above mentioned ever stopped digging. The states, counties and cities all facing this crisis did and continue to do something that defies all manner of logic-they borrow against the funds that are actually in the pensions-which are clearly at deficit already.
In Hackel's analysis he mentions Goodyear Tire and Rubber. His estimates are that their unfunded liabilities are $2.7 Billion dollars. Goodyear is expected to earn $.22 a share this year and $1.49 a share next year. To catch up, GT would have to take a hit of $1.76 a share for each of the next four years. Again, with yields on treasuries far below the consensus of 8% being used, where do they expect to make that 8%? Obviously the stock market is part of the plan. I don't know exactly, but I understand from reliable sources that these pension funds have up to 50% of their capital in the market.
In any case, this is all background and a lot of speculation, but based in fact. You can see now why there are those out there that feel it to be absolutely essential that the market doesn't collapse, because as I showed you, one break of support, leads to another and it causes a snowball effect. Look at this:
Markets sell-off faster then they rise; it's the snowball effect because FEAR is a stronger emotion then greed.
So what is my analysis....
The Fed use to protect the market from plunges around the end of 2008 when the market was in a consolidation that threatened to take it lower. DavidDT from Trading to Win and I were both trading together during those days and stayed in touch with IM. Eventually after seeing the Fed announce new plans every time we were close to breaking support, we were able to call Fed intervention within 10 minutes. All you needed was price breaking under the last level of support heading toward new lows and within 10 minutes the Fed would come out with something that would rally the market. The Fed is meeting Tuesday-if they had done something like this on Friday (intra-meeting policy action) with the meeting only 5 days away, it would have panicked the market even more. It would have shown the Fed was so worried that they couldn't wait 3 more market days and make no mistake, they are worried. Bernanke's testimony before the Senate was a very big event. The Fed is exceptionally careful about what they say, even the difference of the placement of a comma moved from one policy statement to the next is enough to move markets. What Bernanke said about “unusual uncertainty” was a bombshell and the fact the markets did not drop even more was certainly because they were tipped off in advance as I showed you the day of the senate hearing. Smart money moved out quietly all morning and the drop that came at 2 pm was the little guys. Had smart money not been able to move out quietly in the a.m. and had they heard at the same time the rest of us heard, then the sell-off would have been extreme and that's why they were tipped off. I showed you the charts that proved it.
Right now 3C is thrown into total upheaval because it is sensitive and meant to detect quiet accumulation and distribution. What happened on Friday was not quiet, it was big money in the light of day buying up stocks. The effect this had was akin to 3C being a very sensitive microphone used to listen to the earth's tectonic plates moving and having someone light a firecracker on top of it. Accumulation takes place over time, this happened all at one so it has distorted the readings. Here's an example:
3C is making a huge leading divergence to the upside on a day that closed lower then the surrounding days. The one minute chart will fall back into line quickly, as early as Monday morning. The 5-10 min charts will need time to adjust. The 30-60 minute charts weren't able to be moved as dramatically so they are still giving halfway decent readings. Despite the buying on Friday, the volume was low so in comparison to the amount they have distributed, the net effect is they are still on the distribution or bear side of the market.
Now, the question remains-what's the course?
I can't honestly tell you that I believe the Fed won't come out with some new policy statement Tuesday that attempts to move the markets higher. I think they will. However, I also believe that the economy is in such a bad state that at some point, firms will have to say “It's every person for themselves” and the weight of the evidence will sink this market. The Fed could say something Tuesday and the market could still say “not enough”. There could be other reasons that big money sent prices up-including to get better short sell positioning, to unload inventory they accumulated for the July rally that may be left over, I don't know for sure.
I do believe that the federal government can't spend much more without having negative effects on the market-the CBO made this clear with their last report. The Fed I believe has few good alternatives, but to turn on the printing press, but again, that may backfire. We are caught between a market that has no business being this high and unprecedented manipulation of the markets. For now, big money can make their money in either scenario, but I seriously doubt they are willing to do much more then they did on Friday. Remember, volume was light on Friday, the traces of their computer buy programs seemed to be used to kick start a rally, not to drive it the entire day, just get the kindling going until dumb money jumped onboard. Also there are signs that they did some selling into the close.
Not only do we have a negative divergence in MCD at the end of day, look at the volume-the red volume at the end of the day. All of that volume in the second white box led to a $.02 gain, that is what is known as churning or in our vernacular-distribution/selling/short selling. Just eyeballing the chart, without actually tallying every minute's volume, I'd say that the end of the day was easily the biggest portion of the day's total volume and it took the stock nowhere. This suggests a favor, but a reluctant one at that, meaning whoever was doing the buying was doing it for the purpose of holding the index up, not to own shares of MCD, which of course tells us something else... those who did the buying, do not have confidence in this market either.
It also leads to one more possibility. “IF” the Fed plans on trying to move the market with some release and presumably to get the market's benefactor (big money buyers) to go along, they'd have to let them in on the “release” from the Fed on Tuesday, then why not hold onto those shares? If you have the advantage of that knowledge and supposedly that knowledge would support the market and send it higher, then why not make and hold the investment? This raises the “every person for themselves” idea again.
Being that MCD staged a technical breakout (and recall this was a stock on my earnings prediction list we got right and the market reacted badly to earnings), it will be very interesting to see what happens with MCD on Monday-does it follow through now that it's at an all time new high-a blue sky trade with no resistance above? Keep an eye on MCD for hints, does it stage a follow through breakout? Is the volume heavy if it does? Does it fall back below $71.50? Does it set up a bull trap?
I wish I had the answers to this for you. I can just tell you that something very strange happened Friday. We could even take the contrarian point of view and say that this is a leak that wasn't actually intended to reach the ears of smart money. For example, lets assume that a leak hit Wall Street that the Fed intends to say a few things, but make no policy change of any consequence and Wall street is expecting the market to sell-off based on that news; don't they get more bang for their buck if the market is elevated and stocks like MCD are at breakout highs thereby creating a bull trap? It's very difficult to understand what this all means and thus it's difficult to plan for it. Remember one thing though, a majority of the time, whatever the response is initially to Fed policy statements, it is almost always reversed within a few days to send the market in the other direction, it's a strange event, but a fairly reliable one.
I personally would not be making any big bets right now. I would be looking to limit my exposure to the market. Remember, we only go in hard when we have probabilities heavily on our side and our only edge over Wall Street is that we can choose to sit out the market, to not invest, where they must. I would also look to hedge some positions. If you are heavily short, maybe consider taking a position in a triple leveraged long like UPRO (3x leveraged long on the SPY)-just enough that I was hedged against my shorts and if the market tanks I have one stock to sell-UPRO and my shorts are ready to make money.
Most of all, watch for updates as I will be looking for any signs in this market. Most notable would be negative divergences in a relatively stable market which would indicate that big money is moving back out of the Friday investments.
The market is likely to close higher on Monday as the daily TRIN reading is at 1.60. The Vix however is at a new closing low of 21.74 which suggests we are close to a downside reversal check out the inexpensive longs on the list and in recent posts, they may pop.
Another interesting hint is the $USD which generally trades the opposite direction of the market. All the speculation I've heard that would effect the $USD has been that which would send it lower, such as the Fed printing more money. The last time I saw the $USD in a bullish descending wedge like the one below, it was at a time where there seemed to be no possible reason for the dollar to go higher, yet I stuck with my chart and indicators-as you see below 3C is in a leading divergence on a 60 min chart which is exceptionally bullish. It made no sense to me, but in December of 2009 the dollar broke out and hit the exact target I published for it all the way back in October when I first saw it developing. You see, I don't argue with the charts, everything you hear is disinformation to make you believe something that isn't true, only the chart shows you what smart money is actually doing. So I disregarded common sense and followed the chart all the way to the breakout. It was during this time period that the market stopped moving higher and went sideways into what by all standards looks like a top of serious consequence. So if the Dollar does breakout, it's another sign that is not good for the bulls in the stock market. It will also negatively effect commodities like oil for example and international companies, like MCD for example.
For right now, if you have a specific question about your holdings because everyone is different, let me know and we'll look together, I'll give you my opinion and you make your choices. I am going to publish short-to mid term (swing trades) right now in an effort to keep capital flowing for our members. The larger perspective of the market, I feel is already a done deal-it's a matter of time and how much support the powers that be can expend on the markets. There will come a point of critical mass because honestly, this market is a house of cards. There's only so far they can take this if they can take it anywhere at all. The economics are so bad, even a layman knows that this economy with all that has been done already, is falling apart at the seams. The house of cards can't be held together when the wind starts blowing harder and there's no more hands to hold the cards in place.
So contact me if you have specific positions or portfolio concerns. The bottom line is we won't know more until we see more tomorrow. Thank you for all the emails and ideas. I'm sorry this is so late, I've been working non-stop all weekend. The trades will be posted a little later tonight on the July/August Trades spreadsheet.
