capitulation or not? and Dr. Doom - true to his moniker.

No charts today. Only Rants.

We are getting close to our possible (mini ?) turndate on Mar 11th (+/-).

I would advise shorts to be extremely careful. There is just way too much negative sentiment and the D-word is being used without care. 

We see that there is lot of talk of the coming capitulation on message boards to mark a bottom - well do we capitulate a second time? While anything is possible , it is key to note we already had the big capitulation in 2008. 

More importantly, we are nearing a strong rally phase in all the indices very soon. We would rather bet on the coming rally than the capitulation and try and time every penny out of the market. So many names are attractively priced for a 50-100% move. We are also beginning to see some odds of a 1000+ pt rally in the next week or so. We would rather catch that than the capitulation bottom.

As an aside: For those who watched  Dr. Doom (aka Nouriel Roubini) today on CNBC - We are appalled by his ability to connect the dots sometimes and really wonder if he is really worth the salt as an university professor and economist. We simply cannot get over his government interference policy to save America talk. He has correctly ascribed the problem to excess liquidity, but fails to take the argument to its origin  - who created the excess liquidity in the first place - the government. Why should they be relied on to fix this mess? Similarly his logic that - no one wants to buy, if things are cheaper tomorrow. If this was the case, then conversely,  why would anyone sell when there is inflation and everyone knows prices are going to go much higher? In our opinion, this is totally against econ 101, there is a price where buyers will step in, similarly there is a price when sellers will step in. To say things will spiral back to the neanderthal age, if left alone is just as nonsensical, as saying in a growing environment, we will just keep growing unchecked. 

Remember, cheap resources are good for companies with strong balance sheets. The companies who are sitting on massive cash will eagerly lap up these resources when they become attractive. These are the companies which will be lean and mean enough (due to the cheap resources) and likely emerge the leaders of tomorrow. In short, this recession is a blessing for the sector leaders. All the dumb companies, who were competing with the market leaders for resources will be garbage collected, effectively leaving only the best and brightest in the business. Remember, mankind as a race is optimistic and progressive. This deflation is all about optimism for the future and we are preparing the base for a new start. This is not about spiralling back to the stone age as Dr. Doom puts it. Maybe he is taking the name, CNBC has given him too seriously.

Likely target/Scenario

Above is a long term chart of the dow jones transportation average. This average was the first amongst the major indices to break its Nov 20 low. As can be seen, the average is very close to 2000. For elliott wavers, this is the apex of the previous Wave 4, which is usually the target of a correction. Plain technical analysis says, we should expect a strong bounce from this region. I fully expect us to visit this region (2000) sooner than later and a bounce to 3000 at least.

I have drawn a possible scenario, which can unfold in the coming 4-5 months, giving us the strong 50% rally in this index, and the subsequent resumption of the bear market trend, before the year end.

Sadly, if this head 'n' shoulder plays out (I rate the occurrence of this scenario very highly) - we are going to have an extremely brutal 2010/2011, we can expect it to be much worse than 2008, especially when we break the neckline (sometime later this year/2010). 

Hopefully, we will have somewhere to hide then - probably gold, agricultural commodities ?? (if they are not banned by the govt). I don't know yet.

Side Note (feel free to ignore):- Politically, if this HnS does play out - We will be at the bottom of the bear market during the re-election time. The social mood will be so bad, that Obama's chance of an extended term seem very slim.

Not there yet :-(

We are not there yet :-(. We don't think 700 will hold. Although, we are looking a temporary respite bottom around the 680 level tomorrow/dayafter. We may get a 10% deadcat bounce (vicious?) into Mar11th. But we believe the final bottom will be around the Mar 15th-27th.

As for us, we are happy with our XOM March 60 puts, we took > 200% on a few of them and let the others ride. We fully expect XOM to reach 60 or thereof.

If one is not already short, it is best to sit on ones hands. It is now only a matter of time and patience is the key. This is a golden opportunity where good dividend paying stocks like COP (conocco-phillips) etc. are reaching their long term monthly support trends. The trader sentiment is very bearish and we are beginning to feel the crowding on the short side.

The bulls are waiting in the wings

We believe there is some light now shining at the end of the bear tunnel. We are looking for an intermediate term bottom for this market. By intermediate term, we mean a bottom which would hold for 5-8 months and provide a strong rebound rally, where individual stocks could go up 300-400%. We believe this BOTTOM should be in the next month or so. Very tentatively, we are looking at the date surrounding mar 27th.

Leaving all technical analysis aside, lets look at the psychological perspective here. From a bull-bear perspective, the last bastions of the bull are about to give way. By last bastions meaning - the final few bulwark stocks which have held up relatively well - healthcare (e.g HUM), Oil (XOM) and chains (e.g. WMT, MCD). Almost every other stock has been obliterated. Basically, the bear has declared victory over the bull in every battle(Stock) i.e the bear is satisfied (at least for a while). In the previous bear markets, we researched - we found similar behavior. When the final few bastions fall, there is indeed a bottom.

Accordingly, we have trimmed out of all index shorts. We are short a select few names like XOM. We believe XOM could test the double bottom area again.

Addendum: March 11th is another important date we missed. This could also be the potential turn date. It is really late in the short game now. We are searching wide-eyed for long buy triggers. After all, bottom fishing is dangerous.

Turndate

We are going out on a limb here. We believe the markets are very oversold. We are looking for a 10-15% bounce which should start by the 25th. Our targets on the SPX is around 830-850 region. The target date is march 13th.

Lets see if we will come to repent this call.

Addendum:
We are looking at this as a scalp long opportunity. We don't believe the down move is done yet. The downward pressure should resume by Mar 13th. This is our best guess given the market action thus far.
As for XLE, we are waiting for a 'kiss-of-death on the triangle boundary to short some more.

XLE

The above is a weekly chart of the XLE (energy spdr). Energy companies form some of the largest components in the SPX; XOM (Exxon) itself accounts for close to 5%. These stocks fell off a cliff and had a steeper fall than many others in a short period of time (July  - Oct). Since then, as has been in our stance in our previous post, a time correction is going on. Accordingly, the XLE (and the XLU - utilities spdr not shown here) have been in a sideways triangle pattern. 

So the bad news - Triangles are continuation patterns, meaning another downleg is very likely.

The good news - Triangles are almost always occur  just prior to the "last" move in the direction of the trend.

So, when the triangle breaks down(our guess within the next month) and there is a downward thrust from the triangle, we should see a large recovery rally. Usually these recovery rallies tend to retrace the whole "last" leg and then some more.

We will be watching very keenly for the breakdown and signs of downward exhaustion, since there is money to be made both ways. The triangle is invalidated if XLE rises above 53 or so.

Stock update - Jan 23

The above is a weekly chart of the SPY (an ETF which tracks the SPX). We believe that the scenario as shown above will play out.

Our rationale is as follows:

1. oversold on the daily timeframe

2. neutral territory in the weekly timeframe

3. oversold in the monthly timeframe

We already had the big crash (capitulation) in October and November and now the market is just going sideways. This sideways meandering is sort of a reflation trade, because all the asset markets became extremely oversold in Nov. 

o In the first up leg from Dec-Jan, some of the sectors reflated. e.g. shipping, commodities, energy.

o In the next leg up  lateJan-mid Feb, we expect some of the tech names to reinflate e.g RIMM, GOOG and probably some of the commodities which missed out earlier like oil.

We expect this action to frustrate both the bulls and bears for a month or two. From a psychological perspective, this is essential action. Since the dot com era, screaming stocks have caught the imagination of people worldwide. Stocks moving 5-10% in a single day is now considered normal. Similarly, the crash of last year, made the bears extremely rich.

From a technical standpoint, we believe the 20, 50 day moving averages and the 20, 50 week moving averages should create enough confusion and wild whipsaws to frustrate both the bulls and bear for a while. From a sentiment standpoint, bears will keep claiming "commercial real estate is the next shoe to drop" as they have since December and the bulls will keep claiming that "everything is factored in". 

From our perspective, the market lost a lot in value in a short amount of time. We are now making up time. Hence, the rangebound nature. This frustrating experience is essential to wean individuals off the stock market. When the bear market is finally over, we bet the number of people with distaste for the market will be overwhelming (yes that may include us too). Ofcourse, one may assume not to get shaken out and wait for the bottom to buy boatloads. We fully expect the market to grind everyone. On a lighter note, the quicker people lose love with the market, the quicker it bottoms. 

Case in point: The oil yahoo message board.

http://messages.finance.yahoo.com/mb/USO

or a visit to the comment section on Mish's blog (one of my favourite writers too).

http://js-kit.com/pop_comments.cgi?ref=http://globaleconomicanalysis.blogspot.com//&path=http://globaleconomicanalysis.blogspot.com/2009/01/unprecedented-crisis-in-us-uk-australia.html&label=Add%20New%20Comment&title=Mish's%20Global%20Economic%20Trend%20Analysis&admin_bg_color=%23DDDDDD

"Mish, I just listened to your Howestreet interview. I can't wait for your blog on US China relationship! I think one of the biggest risks to US Sino relationships is now Geithner's big fat mouth!" 

So now every trader is an economist, some even austrian at that? From a moral/ethical perspective traders add no value. Trading is a delta stealing strategy. We have a nation full of financial people. So much for sweating hard and earning money.

 

That being said, we believe there will be another crash on the cards. Our best guess as of now is in the March-April timeframe. 

The purpose of this post was to illustrate the point that before this bear market is over, the periods of grind will increase probably to an year or so (2010-2011)? and a lot of volume, both green and red will leave this market and distaste will grow.