Bear Challenge

Bears have been challenged today with news from the administration it will allow some guarantees on sub-prime loans. This effort along with liquidity measures by the Fed will allow the markets to continue to base. A test of the index's August 8th highs and a successful close above them will confirm the 07 bottom. The question of upside strength beyond current highs is the bull's challenge.

It Hurts to Think

Today's action was mainly a NQ affair. Regardless of the market direction, their continues to be a play to buy the NQ over broader base averages and industrials. The relative strength view gives what appears to be an opportunity to buy an index some 50% off it's 2000 highs. Whether the players are right does not matter as much as what it says about the appetite of managers looking for investments they might be able to sleep with comfortably. Besides large bets by funds in treasuries for both actual hedging of bad debt trades as well as directional plays looking for Fed accommodation, their seems to be doubt as to the the rallying capabilities of the stock market. It may be that the overall long play in treasuries would suit the hedge community through the balance of the year since it would entail much less thought. That's if it works. Thinking has been a problem for them.

Monthly Data

The DJI monthly July close was 13212 and marked the second consecutive monthly lower close after the May record close of 13627. During the break, only the monthly lows after April were taken out in contrast to the SP500 spot futures contract which violated every monthly 07 low except the lower spike of March. Last month's close of 1462 was also the second decline after the record 1533 close in May. The bear needs to close under March 07 lows while the bull has less work but probably diminishing overall momentum.

Today North

The DJI for the last four days is up a net 53 points. The point being, relatively large ranges and diminishing real volatility (VIX) indicate that the high/low ranges have for the most part been established. Now in this instance the ranges would be the lows of August 16th and the July highs.
Market disappointment with the Fed could provide another test but Bernanke has basically opened the teller's window. Continued support work and lack of follow through on the downside will keep the bulls hopeful for a test of the highs in the quarter ahead. Push beyond that will be tough.

Slow Slide

Well two days and 330 points lower the market seems tired. Once again the DJI slid to close under 13162 and the other indexes SP500 and NQ lowered themselves into the support areas created starting back on August 10th. The bulls will hope tomorrow will finally bring in buyers who abide by the never buy the first rally rule. Whether or not the bulls can hold will depend on the continued wink wink nod nod from the Fed. The buyers are there, but they could just a easily decide to wait

Data Watch

The market staged a low volume pull back waiting for some kind of news to trade. Data will start to be released tomorrow which could have some impact with the volatility crowd hoping to recapture some panic. They will probably be disappointed but one can never discount the abilities of so many to flail about needlessly marking closes. Regardless, trade will focus on Sept SP500 1471 and Sept NQ 1950.

So Far So

Indexes have built a first line base and have some measure of support on any corrections. The DJI, Sept SP500 and NQ100 look confirm a major bottom with closes over 13690, 1510.5, and 2006.75 which are the August 8th highs. If the market believes it has weathered the worst of the downside, there is plenty of cash to retest the season highs. Should that occur, liquidation will appear significant enough to make continued gains doubtful for some period of time.

Quant Lessons

There have been generalized observations about the ' quant failures ' since the peak of downside volatility. The conversations basically revolve around the notion that all strategist were pointed the same direction. No doubt many brand name managers and their underlings got hammered, but in different strategies. The real problem was not that they all had indentical trades, it was their spread sides to cover risk were all related to everyone elses spread sides. The direct and indirect linkage pulled in directions contrary to there purpose, magnifying losses, shrinking liquidity. Building adaptive programs is absolutely possible, but brand funds will always be vulnerable to the mass they carry because by their very nature the are a target. In the end there is no strategy like the one that gets you out before the problems develop.

Today

Yesterday the indexes held above key support areas. DJI's 13162 remains the the critical swing. Volatility as measured by the VIX has taken a beating. However, if this market has doubts about the bull side trend, a test is most likely in the Thursday through Monday period.

Rally Roll-Over

Avoiding rally roll-over this week is needed to build both a base and the confidence that the worst of the break is over. Indexes are trying to chip an upside to see if there is hard rally room. The DJI and NQ still remain the strongest with the SP500 virtually flat on the year and the clear leader of the darkside. While some could argue that there was an overall overstatement of the sub-prime problem, it has brought caution to managers and those who look over their shoulders. The market break has also forced the Fed to be more reactive and will certainly soften the M&A deals. There is however still tremendous amounts of money in the system looking to apply leverage to a slightly changed environment.
DJI needs move above and hold closes above 13162.

Rebalancing

As the markets rebalance risk, the broad oscillations in the main line indexes will diminish. Skilled traders love constant volatility because the trade opportunity is ever present and scaled losses are recouped again and again. Great markets are tiring but worth it. However, volatility never visits long and the market adjusts back into the ordinary. Despite headlines of continued drama, markets figure out the important elements and flatten out the anxiety long before the talking heads do. Various markets sectors are currently in the transition phase with the flight to zero risk instruments relieving some of the volatility pressure. More important will be determining where the trend arrow is pointing and what strategies will work for the last quarter and beyond. For the indexes the arrow is still pointing up until they close under the March lows.

Edges

On July 24th the post looked at the how the advantage might be turning to favor the bears. Selling the rallies would become easier as the market struggled off of new highs. The edge maybe returning to the bull side during this week as we probe the ranges and try to base. The volatility crowd is convinced the large ranges are here to stay which is a fade requirement needed in any attempts to round out a base. Anything beyond this week will depend on the strength of the weekly close.

Building A Base

Market will try to build a base this week, trying to avoid an end of the week sell off. The SP500 has the most work to do and has to close back over 1500 basis Sept. futures to avoid remaining the weakest average. The DJI base building will be less an effort and if the average can hop and hold above 13162 the relative strength may pull the other averages up. The NQ also needs less help with a hold above 1930 basis Sept futures.

Fed Hopes

Markets closed well today obviously, with the usual accommodation from the Fed. The lessons learned about various risk profiles may have a ripple effect on future loaded positions, at least that's what the Fed is hoping. The market problems were created by the collective geniuses putting on the same trades backed by faulty spread/risk models. Adaptive models are exceptionally hard to come by as evident by the carnage heaped upon the hedge fund industry. The claims of risk neutral and virtual zero risk positions supporting the hedge fund structure are all crap. If you can still go broke in one day, it's the same old structure.
The markets will try to continue building a base next week, and if successful, may have some actual upside surprises. However, if next week they rally and roll over again, they we will be stuck in the lower to sideways zone.

Jubilee

The easing by the Fed along will yesterday's price action, some how probably connected, has sent the bulls into the jubilee dance. The market angst, best represented in the media by whiners such Bill Gross and Jim Cramer, is not so much about the tangled relationships of the sub-prime mess, but about easy money. The cloudy features of various new financial products which have grown during a generation of a predictable and constantly accommodating Fed will continue to be a market feature.
Close of over 1436 sept sp and 1883 sept nq will build on yesterday's action.

It's a Start

The DJI did some important work today and traded up from April price area mentioned in prior posts. Technicals indicated big time buying that was well beyond short covering. Tomorrow the markets will start to defend todays action and try to build a base through next week and ultimately try to reclaim some ground in the September to December period.
SP500 came up to this morning's post resistance but NQ lagged way behind.

Triage

Warnings today that one or more of the large hedge funds have failed is keeping the lid on the market thus far. Gun shy Friday may also be a factor. The trader's prayer, ' thank God for the things I don't own ', is being recited often these days. As the Fed firetrucks start arriving the debate will be what is to be saved and what is to be marked ' do not resucitate '. The behind the scene boys are very busy right now.

Being Nimble

We have had orderly breaks since the highs for the most part. The ' wait till it gets ugly ' bears have been looking for the makings of a wash-out since we picked up downside momentum. There is no question that all markets including the commodities markets are smelling market confidence burning and the scrambling is noticeable. But all traders will tell you that while you have to me nimble around the downdrafts, at the same time one never knows where a bottom will appear. They are usually at levels lower than everyone thought, but the turn is rapid and steep. Followed by days of churning backfilling.
The bar is set a bit higher today for technicals. The SP500 futures and sept NQ100 futures need closes over 1433 and 1908 to build any solid action.

Exit Room

The Countrywide story was all over the place today. The stock was getting hammered as the rest of the market tried to rally. Then the rest of the market fell apart making new lows while Countrywide rallied 6% from its lows in the last hour and fifteen minutes of trade. As implied in the previous post, you think Merrill would ever give you a sell when a stock is 15 or 20 percent off the highs. They rarely do because they don't trade, they collect. The profits the brokerage houses announce from trading always look excellent in the quarterlies, but obviously marking asset values and determining profits can be a bit creative.
Market will have limp into next week looking for a bottom. Could lead to some record volatility again.

Nice Stop

Merrill gave a sell signal on Countrywide today which comes only after a decline of 46% off of the January highs. They had a sell stop a zero but decided to move it up. Not funny to those holding Countrywide but evidence of some great minds at work in the big brokerage firms. Together with the daily televised market pimps they provide a market analysis as useful as late night infomercials. They come at the markets from the transaction side not the trade side and occasionally have a trader on who might know something.

Some bargain plays are being made today on breaks but bigger commitments seem scarce.

Market Value

Nothing seems to be going right for the bulls right now. The DJI closes at 14000 less than a month ago and turns south almost immediately. Then the sub-prime contagion spoils everything by forcing instituions to actually come to terms with the concept of market value. There are two kinds of market value. The first market value is made up by a wall street hedgefund guy amassing a large positions so the management fee is large enough so he can buy something really big. The second market value is the price the wall street guy receives getting out of all those losing trades before the market value of his positions are just a bit bigger than zero.
The new lows for the move in the indexes is led by SP500 with DJI and ND holding up much better. The bears would like a spike lower to break away from expanded ranges built from August 1st. The best friend the bull has is end of month trade activity which will look for values created by the break.

Churning Around

Churning lower today reflects the liquidation and trade adjustment process that continues to take place. Index futures have seen a significant amount of selling as managers lock in losses against open positions which seemed to have endless downside. Despite the threat of numerous institutional trading problems, the smart money has known for sometime who was most likely to develop problems given the sub-prime market conditions. We are nearing the squealing price for some of those trades where a market for those positions will be made.

Market Confidence

When Goldman announced it was putting up $2 billion dollars into the sagging Global Equities Opportunity Fund, and an additional $1 billion was being deposited by two influential investors, a story came to mind. It seemed similar to the events told by John Kenneth Galbraith in his book The Great Crash: 1929. He described how, in the face huge selling, several titans of business stood up and showed their confidence in the stock market buy purchasing large amounts of shares of particular stocks. The sell-off stopped for a day or so but soon resumed. Confidence is still the key ingredient in all these markets With the August 15 deadline for 45 day redemption notice on hedge fund withdrawals looming, it is clear that Goldman is sending a message that it wants large investors to trust them.
Looking at the half way back numbers from the April lows to the rally highs this year the numbers look like this; DJI 13162 , lowest close 13181. SP500 spot futures 1500, lowest close 1443. ND spot futures, 1928, lowest close 1929. Of the three indexes, the DJI still has the best relative strength while the broader SP500 is suffering. The range between March and July could be the price area we will see for awhile.

Close

Market fell back from first line resistance today. The sept SP500 futures 1470, NQ100 1956 are key areas the market needs to hold. Chart bottom boys would love to declare a victory but that formation is just a little slippery yet.

Adjusting

The markets continued to adjust to Fed participation and hedge fund balancing today. Several references have been made to the August 15 notice day for hedge groupies who want their money back in 45 days. Material changes in market perception about risk will limit the ability for certain positions to recover. Those bad positions have to be hedged and or liquidated through various manners that will ultimately keep a lid on potential upside moves. The global hedge geniuses have blamed market abnormalities for the reason their long side went down and their short side went up. Which is another way of saying the relational spreads went irrational, just like the managers who originally thought of the trades. Now hopes rest on the ability to adjust positions without big downside interference.

Avoiding Scary

The major indexes will try to avoid the scary side of down this week. Bears will have to launch an assault knowing the Fed will continue to inject billions of dollars into the financial system if a break of any size appears. Bernanke is fighting against the Greenspan era of easy money which perpetuated idiot trades. The combination of liquidating and spreading out of them can take time.
The real question for the markets is determining if there any meaningful upside. Since October of 2002 these market have had an ability to digest bad news and continue the steady march upward. Overall, markets have yet to get wacked technically but could have plenty of churning downside. The DJI could stay in a range between the highs and April lows for an extended period.

The Close

Markets held in there today and closed well enough to avoid excessive hand wringing. The bear may have to give up some ground on Monday as the markets test first line upside resistance. Despite all the panic, the DJI and SPX closed higher on week. Bears will need to prove their case or be chased again.

Market Lines

Market holding in as of mid-session. Bulls need to close the Sept SP500 futures over 1475 and the Sept NQ's over 1963 to build another support leg.

Numbers

Summer 06 lows to summer 07 highs these markets have had quite a run. DJI has rallied just over 3300 points, the SP cash around 337 points, and the NQ spot futures rallied 620 points. The volatility catches the attention, but the damage is thus far limited. So if we look the 50% retracment of these rallies they look like this; DJI 12340 , SPX 1388, NQ 1767.
The markets today will wait for any words from Fed land while flipping around looking for
something to hang onto.

Friday Looming

The markets traded down into the support made on August 6th and 7th. The treasury markets, while higher, interestingly seemed to take it all in stride.
Once again we are faced with a Friday death dive scenario, so it is important for the friendlies to hold the support lines. When real fear enters a market, there is suddenly no consensus on value, and getting out can make everyone goofy. The 'just keep the cheese just let me out the trap' rationale takes over. The sub-prime contagion is a bear's dream, but could wane if the Fed and friends work a fix. Implementing the Greenspan model of fixing the problem would entail the ' whatever money it takes' method. The Bernanke policy of course is to worry about inflation first. Of course if we break hard enough it will certainly make that policy work.

DJI

The DJI has had the bulk of trading action around the area between 13600 and 13200 since the beginning of May. There have been 20 closes above 13600 and one close under 13200 made on August 3rd. In perspective, while retracement to 13200 represents half the gains of 2007, it is a mere 5.7% correction from the high. Closes over 13600 leaves the highs wide open. But while we have been volatile, it is not much of a correction. Typical corrections in any market are between 10 and 20 percent. Commodity traders of any experience have sat through many a 50% correction. Regardless of valuations and the other rationalizations, this market is fat in technical terms. It may continue to go up, but it is fat.

Another Test

Lower lows create another burden on the bulls given the all the work they have done over the last three sessions. Traders are nervous and any decent selling is magnified on the downside. Markets looking to avoid exhaustion break while building lows.

Climbing Ugly

Man that was easy. All you needed was a suicide wish to sell the rally today, and of course it worked. Then being equally clear minded you bought the break, and it worked. But of coarse the reality is that this market hunts down both the bull and bear while traveling through these ranges, keeping both camps uneasy. The bulls continue to climb out of the volatile lows made on August 3rd and 6th. End of the week trading has brought out some ugly closes. This will be an opportunity for the bulls to close it well if they can.

DJI, SP500, NDX

The DJI and NDX performing better than SPX. DJI and NDX trading above June highs but SPX trading back in April trading range. DJI and NDX need to drag SPX up or get dragged down by the broader index.

Accommodation

Talking heads miss Greenspan. They could always count on him to buckle under market pressure and give the market any accommodation. Bill Gross of Pimco cannot believe the Fed has not lowered rates despite his expertise on these matters. Jim Cramer's certitude about what the market needs comes from a career of being wired to the inside, surely Bernanke will listen to him. So far however, the Fed chairman is telling the market to 'trade it' knowing inflation is the big issue and interpret data released against that policy.

Spinning Out of the Turn

The market gave everyone a few spins today and when they rang the closing bell all one could say was that is was another great day for the transaction business. The bears had a great chance to put this market on the run when they got the DJI down over 100 and the SP500 and NQ100 making new session lows. But quickly the rally began and the short covering became a race. The chart crowd began chanting 'bottom, bottom" and all seemed lost to the bear. However, the market used up a great deal of energy today on this rally and the outcome is still in doubt.

Fed

Bernancke and other board members stick to the 'inflation threat theme'. Bears will try to a little wackage to see what is down there. Put it away if they can.

Support

Key support held this morning on the break. Support areas move up to 1464 Sept SP500 and 1958 Sept NQ. Models are rotational.
If the market is disappointed after the Fed announcement because there is no wink in the bulls direction, bears have enough strength to do damage. A serious break will bring out the usual whiners who want to be saved from themselves. Money is still cheap, so it is not the just the mechanics of a rate cut, it is more the perception that the power of the Fed is ready to help repeatedly if necessary. The bulls need to build on the price reversal of yesterday quickly.

Money's Worth

Show up and these market ranges provide opportunities that traders appreciate. No real selling showed up today and the short covering rally started in the second hour of the day session. The bulls again thwarted an attack while on the run and turned the market around a day before the Fed meeting. The trade will start again in earnest after the tomorrows Fed announcement.
Key technical areas will be 1462 in sept SP500 and 1453 in sept NQ100.
Models are rotational.

Circle the Wagons

This weeks scheduled Fed meeting comes at an interesting time for the markets. A continued shaking of the world trading cage may have to take place to get the Fed's attention. Handling the psychology of falling markets usually entails the Fed circling bank and big brokerage wagons around a central theme of liquidity for all. Defending the buy and hold crowd from the misfortunes of an environment created by large owners of debt will create some opportunities. Of course those opportunites will be for the meeting participants. Market tranquility, it is reasoned, will benefit everyone.
Comparisons to LTCM really do not matter much as the markets seek to regain a footing, though reviewing LTCM and the deals that were cut is interesting.
Last Sunday's post seems appropriate to start the trading week as it did last week.

Bear?

The SP500 and NQ100 could not hold the critical technical areas today. As mentioned last Friday's post, this was a battle week where the bulls could step forth and put the debt and fret stories to rest with a solid performance while risk was being adjusted. Some powerful rallies were launched only to be met today with big liquidation and now, short selling. The bulls have staked out a space on a ledge where it is hard maneuver. There remains a small foothold to climb back on, but a fearful downside move on Monday would leave this market in the bear's shadow.
Models are south.

Bottom or Top?

After the selling the market absorbed yesterday and the action today, the SP500, NQ100 and the DJI look prepared to build on two days of success. The bears may not be willing to give up just yet however. The test area will be the ability to stay above 1272 for the Sep SP500 futures, and 1968 in the Sep NQ futures. While closes can make a price look safe, the action lately puts any price in the potential trading range. The week has allowed the market to field some volatility and price action to levels where there was enough buying and diminishing liquidation to halt the break. The market has been tested, but visiting the lows again would be a problem.

No change in models.

Stir It Up

The market had a little of everything today. Overnight break followed by an overnight to morning rally. Volatile trade trying to make a bottom in order to prevent a raid on the remaining 2007 market gains. Traders love opportunities but even these markets provide no edges just ledges when you participate. There is no question the market is adjusting risk in various sectors and that process takes awhile. Analysis of the sub-prime problem has repeatedly emphized that it is the unknown debt problems that are creating the volatility. Actually, there is little that is not known to the large players but the ones in the right position are in no hurry to make a market for the suffering. Those holding the lousy positions will just have to trade out of them. The volatility is more a liquidity issue. No one will help you with that bad position, until they race you to an unpleasant price.
The market absorbed a bunch of selling today for the first positive technical action in weeks.
Models are rotational.