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Today's Market WrapUp 11.06.2007 Mon Tue Wed Thu Fri Barbera Archive Banking Crisis --
What Banking Crisis? The news from the Financial Sector continues to deteriorate as CDO, CDS, ABS, and other areas of Structured Finance continue to experience an ongoing credit meltdown. Amazingly, the stock market averages continue to remain buoyant even as one financial company after another experiences huge losses with devastating write-downs of equity. A little tour of the Banking/Financial Sector shown at the end of this article, (see “A Nightmare on Wall Street”) shows share price after share price imploding before our very eyes; and yet, the stock market remains buoyant. It is almost surreal to see the Housing Implosion assaulting key and very major elements of the US Economy while at the same time the stock market as a whole is gliding along in disconnect mode. To be sure there have been the occasional ‘bad days’ in the stock market, particularly as some of the more gross excesses have leaked out from the Wall Street Sewers. Yet, still in all, with today’s close of 1515, the S&P 500 resides a mere 3% below its all time closing high. Only 3% below the all time high and Banks like Citicorp have seen their stock prices ripped asunder. Who would have imagined resilience on such a grand scale? Of course, it is always possible that the stock market game is only in Act I. Only the fullness of time will tell the tale. For our part, we thought we'd dedicate this week’s WrapUp to a little Waltz through the major averages in an attempt to draw the proverbial line in the sand between “Good” behavior and “Bad” behavior. Call it the Owner's Manual or User's Guide to the Stock Market 101. In this vein, there could be no more important a starting point then the S&P 500. In the chart below, we show the S&P 500 along with its Medium Term MACD. At the moment, the S&P appears to be holding support at the 100 day moving average which comes in right around 1495-1490. Yet the backdrop to this chart is potentially very disturbing as prices pushed to a new high in September while at the same time MACD failed to confirm.
Yet another failure was seen in September on the Percentage Above / Below the 200 day Moving Average. On this gauge, we are simply Detrending the S&P to show the degree to which the S&P is either above or below its 200 day line. A very big miss indeed was seen at the September high. Note that once again, over the last few days, prices have come down to the vicinity but have not yet broken below the 200 day average line, which closed today at 1482.94.
Still another manner of viewing the S&P is to re-compute the index with an equal weighting. As it is conventionally reported, the S&P is a market cap weighted index, which means companies that have a higher net value count more in the index. Thus, Exxon Mobil with a market cap at 500 Billion would count 55 times as much as Clorox with a market cap of 9 Billion. In a truly healthy stock market, the vast majority of stocks should be participating in a given advance, not just a few market leaders. Where Cap Weighted Indices are involved, it is possible for an index to be held up by a few heavily weighted stocks, while within the index a large number of names are moving lower. This type of action is known as “rear guard’ action where only a few stocks mask a larger decline. In the case of the S&P, by computing the index on an equal weighting, we get a better view of the action within the broader index. In this light, we note that while the Cap Weighted S&P went to new highs in September, the Equal Weighted Index missed by a country mile. This shows that within the index, there is downside selling pressure already at work.
In the next chart shown above, we move through the S&P Index and ask the question, ‘what percentage of the 500 stocks are above the 200 day average.” Because even the most gradual uptrend, which will over time lift a stock above the 200 day average we are really asking, what percentage of the stocks in this index are trending higher. Here again, we see grievous news in that at the mid-September all time high, less than 50% of the index was actually above the 200 day average. In recent weeks after the bounce, deterioration has once again begun with less than 40% of the S&P now holding an uptrend. These are not encouraging signs, and in fact, are the signature of major trend reversals. Novice investors often wonder how a market trend moved from up to down and sometimes don’t realize that the primary trend of a market has turned down until they are hit right between the eyes with a major series of down days. Importantly, this need not ever be the case, as markets are like Ocean Liners; they turn slowly from up to down, with what is known as a topping process. This can often take months, but as a market is building a top, the indices are often held up by a slimmer and slimmer list of issues doing all the heavy lifting. To those who have seen numerous market TURNS before, this internal deterioration is always a strong warning to keep a close watch on the basic trend.
With respect to today’s market, the daily chart above shows the 50, 100 and 200 day moving averages for the S&P 500. As things stand, the index is still holding above all three averages with today’s close and is also holding above initial price support in the 1485 to 1495 zone. With today’s advance, it is very possible that the market could rally once again back to the vicinity of resistance which is overhead at the1550 level. In the weeks and days ahead, the initial support at 1485 to 1495 will be the key focal point to watch on the S&P. If this level is violated on the downside, a quick decline toward 1450 is quite likely to follow. The textbook expectation at that point would most likely be a bounce back up to the underside of resistance at the 1485-1495 level in a rally which would ultimately fail. Once a failing rally is complete and prices reverse down to new lower lows, that type of breakdown, especially closing below the 1430 August low support area, would be a huge signal that a much larger market decline was getting underway. In such a circumstance, all of the horrible problems we see unfolding in both the Housing market and the Real Estate market could become a dead weight for the stock market which we still believe is historically overdue for a major 10% decline. Granted, the Fed is lowering interest rates and is also injecting money to help prop up the shaky financial system. It is imminently possible that by monetizing debt the Fed could avert a more serious downside reversal in the stock market, but in order to do that, the degree of intervention would have to be massive and unprecedented. In such an outcome, we are no longer dealing with free and unfettered markets but a rigged market that will ultimately collapse at the end of a hyperinflation. If the FED decided they want to destroy the US Dollar, then for a time, the stock market may advance as a hedge against runaway inflation. Yet ultimately, that course of action is the road to ruin for all traditional investors as a lower currency will only induce an even larger, more pandemic crisis.
In the meantime, we make no forecasts. We simply watch the price action as it unfolds. If over time a pattern of lower highs, (tops below tops) something akin to what is shown above, AND lower lows begins to unfold, then at that point, and perhaps only at that point will we move to the next notch of defensive action. At times like that, the key element of the equation will not be the return on your money, but the return of your money. For now, the Sun is still trying to shine on Wall Street, with most market players seemingly completely oblivious to the ongoing carnage in the Financial Sector. It will be interesting to see how long that condition prevails. The Nightmare on Wall Street
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