The Investment Banking Sector Is Taking The Stock Market Down

by Richard Gorton, The Resourceful Bear Blog | March 28, 2008

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I. The Investment Banking Sector And The Banking Sector Are Taking The Stock Market Down

The ongoing Yahoo Finance chart of the Russell 2000, IWM, relative investment bankers, KCE, shows that the bankers are taking the Russell and the S&P down.

The five day chart shows KCE taking IWM and SPY down.

Today's Stockcharts.com chart of KCE shows the fall of the capital market providers.

Today's charts of Merrill Lynch, MER, and Lehman Brothers, LEH, show that these two investment capital providers are toxic to the whole stock market; their deleveraging is causing a stock market devaluation across the board, but especially in the Russell, 2000, IWM, which is dependent of a functional credit, finance and lending system.

Today's chart of JPM shows it falling through a broadening pattern of 44; this value of 44 goes back to a greater broadening top pattern whose megaphone mouthpiece was established in the weekly charts in September 2006.

The ongoing Yahoo Finance chart of the Russell 2000, IWM, relative to the banks, KBE, shows that the banks also are taking the Russell and the S&P down.

The five day chart shows KBE taking IWM And the S&P down.

Today's Stockcharts.com chart of KBE shows the fall of the banks.

And The ongoing Yahoo Finance chart of the Russell 2000, IWM, relative to Mortgage REITS, REM, shows that this sector is also another factor taking the stock markets down.

The five day chart shows REM taking IWM and SPY down

Stockcharts.com chart of the ETF REM shows the fall of the mortgage reits.

The government sponsored lending enterprises, GSEs, Fannie Mae, FNM, and Freddie Mac, FRE, continued their fall today; falling 4% and 2% respectively.

Surety company Ambac, ABK, continued to dwindle, loosing 5%.

Proshares 200% inverse of the financial sector ETF, UYG, fell 3.2% nicely rewarding those who were short.

Surprisingly, the Stockcharts.com chart of Volatility $VIX shows this metric has fallen to 25.64; I would have thought that with stock asset falling, this would be rising; but no; it has fallen below its 50 day moving average of 25.88.

Today's Chart of Volatility, $VIX.

What is truly stunning is that volume on the Russell 2000 has dwindled to almost nothing. In as much as the chart of the Russell shows ten days of rising prices on falling volume, I believe that a critical fracture -- a fractal break lower -- a gap down is coming to the stock markets: get ready for some "financial shock and awe".

Today's chart of IWM showing relatively low volatility

A number of stocks show topping out; these represent a great short selling opportunity:

Caremark, CVS, a pharmacy.
Digital Ally, DGLY, a security instruments manufacturer.
TNS Inc, TNS, a communications equipment provider.
Netflix, NFLX, movie provider.
LKQX, LKQX, an auto parts wholesaler.
Investools, SWIM, a software manufacturer, manifested bearish engulfing on falling volume.
Brazil Telecom, BTM, it's been the Yen Carry Trade investors darling.

Corey Rosenbloom of the Afraid To Trade blog shows that GE has come back to life yet manifesting bearish harami at support and after going straight up, short selling it will produce good rewards for the short seller.

Apple, APPL, was a Nasdaq, QQQQ, loss leader, it fell 3.3%.

Intel, INTC, was also a Nasdaq 100 loss leader, it fell 3.5%, turning semiconductors, SMH, XSD, and PSI lower; Intel's fall today suggests that the overall markets are going lower.

Today's Stockcharts.com summary chart shows the NDX 100 falling more than the Russell 2000 this is likely due to the sell off in Apple Google and most importantly Intel.

The EUR/JPY turned lower as indicated by FXE:FXY manifesting bearish harami; this generated a small unwinding of Yen Carry Trade Investments, rewarding those short via EEV.

The HUI precious metal ETF, GDX, manifested the bearish lollipop hanging man candlestick below its 50 day moving average.

The chart of the gold mining stocks relative to gold, GDX:GLD, manifested the lollipop candlestick as well; this chart is one of the most bearish charts I have ever seen, and gives clear, cogent, and convincing evidence that the leverage of gold mining stocks over gold failed in early November 2007; gold stocks have disconnected from the price of gold; the age of profiting from natural resource stock investing is over.

The Livestock ETN, COW, turned parabolically lower falling 1.2%.

Jack Chan's Chartsite presentation of the S&P, SPY, manifested bearish harami at the apex of and ascending wedge pattern right at the point where resistance and support converge; this is very unfavorable for the bulls.

Jack Chan's Chartsite presentation of the Proshares Bear S&P ETF, SDS, shows a breakout in a cup and handle pattern; this is very favorable towards the bears.

II. Prices People Pay Are Inflating And Financial Assets Are Deflating
Today's chart of the yield curve in terms of rates, $TNX:$UST2Y, is seen steepening; this is highly inflationary and suggests an investment in gold.

The Financial Ninja in his article The Lost Decade presents the chart of the monetary base; this is financial asset deflationary; stocks in real terms are loosing value.

Today's chart of gold, $GOLD, shows the lollipop hanging man candlestick which is bearish; but, the speculation, and yen carry trade dollars have been flushed out; gold will inflate in value as a run on the dollar takes it over the cliff into abandon; today's chart of the US Dollar, $USD, shows it perched perilously at the edge of a head and shoulders pattern.

III. The US Treasury Bond Marketplace Is Calling Government Bonds Lower And Interest Rates Higher.

We are witnessing a historic investment "sea change" -- a landmark change in the US Treasury Bond marketplace, as today's chart of the Treasuries ETF, TLT, fell for a second straight day, despite today's and yesterday's stock market decline: the bond market independent of Federal Reserve action is calling bond values lower, and interest rates higher; additional evidence for such a conclusion comes from today's small rise in the inflation protected bond ETF, TIP, as well as a topping off pattern seen in the chart of 30 Year Treasury Mutual Fund, BTTRX.

Additional evidence for the investment "sea change" in US Treasuries -- interest rates lower and investment value lower, comes from today's chart of US Treasury Bonds in the futures marketplace, $USB, shows a parabolic turn lower, and fall below its 50 day moving average; this definetly makes a bearish case for the US 30 Year Treasury.

The $USB weekly chart shows that it has gone up and above full retracement and has fallen to a level of two years and nine months ago.

The fall that is coming to the longer out -- the 30 Year US Treasury Bond is going to be faster and harder than that seen in the financial sector over the last six months: one should be invested inverse of the 30 year government bond with the Rydex Bear Market Mutual Fund RYJUX: we are going to see "financial shock and awe" coming to the US Treasuries.

III. A Financial Emergency Is Coming

A "financial 911" -- a "financial armageddon" is coming, likely due to a "systemic margin call" related to the credit default swaps -- the CDS, or ongoing Treasury market repos, the result of which will be a run on the dollar, a stock market meltdown, and a sell off of US Treasury Bonds.

The dollar's continual decline will be coming from a decline in stocks as the current rally ended yesterday: foreign investors are going to pull out of dollar denominated stocks reeling from deleveraging investment banker and real estate assets. In as much as gold trades inversely with gold, it will be going up. Another reason for gold increasing is that Bernanke is going to testify April 2, 2008 before Congress: the currency traders are likely to run up the Yen, FXY, and the Euro, FXE, as preemptive punishment for his actions in debasing the US currency.

The ongoing chart of the US Dollar, $USD, shows that it has fallen to near an all time low at 71.70.

The stock market's continual decline will be coming from two sources. First, Eddy Elfenbein provides the chart of borrowing from the Federal Reserve, which suggests that the banks such as Citicorp, C, are insolvent. Secondly, yesterday's and today's financial sector downturn over credit downgrades of banker's debt suggests a type of "systemic margin call" is imminent.

The result of the coming "financial emergency" will likely be that that cash accounts such as money market accounts, money funds, checking accounts, and dollar denominated short selling accounts at brokerages cannot and will not be honored at face-value in the event of a "financial emergency".

IV. Gold Based Short Selling Preserves One's Wealth

The daily chart of the gold ETF, GLD, shows that it's gold price could easily fall to $920 or $900 before moving higher.

A corporation's resources, and an individual's retirement wealth will be preserved by investing in the gold ETF, GLD, and by investing in the currency Euro ETF, FXE, and the Yen ETF, FXY; and with these margin credit obtained for short selling via one of these means:

1) The Whole Financial Sector Is Worthy Of Short Selling At This Time Because Of The S&P Downgrade Of Goldman Sachs and Lehman; This Can Be Done Via A Sell Of The ETF UYG.
The on going Google Finance chart Of UYG and UYG's ongoing Yahoo Finance Chart and UYG's ongoing Stockcharts.com chart, all show the financial sector's recent dramatic rally and its ongoing bearish fall.

2) Closed End Municipal Bond Funds Are Worthy Of Short Selling As The Municipal Bond Market Is In Distress

One should establish a short position in these: BTA, VGM and CXE.

The weekly chart of BTA shows it has popped and is viable for short selling.

3) The 30 Year US Treasury Bond Is Worthy Of Short Selling
The US Treasury Bonds are only as good as the Federal Reserve's Balance Sheet.

The general population of investors sees the US Treasuries as a "lifeboat of safety" from falling stock prices; and banks have been buying the 30 Year, as a safe thing to maintain their capital requirements, so they can maintain their lending, and don't go out of business; so the US Treasury as reflected by BTTRX has gone up in value; and RYJUX has fallen in value.

The trend is now reversing BTTRX, representative of the 30 Year US Treasury is going down and bear market Treasury Bond Fund RYJUX is now going up.

The disadvantage of RYJUX is that it is a dollar denominated investment; this means that when one cashes RYJUX in, one will have less purchasing power than one has today; so that is why I recommend gold, and that one obtain margin to do all short selling. Risky, one might ask? Yes, such a strategy is risky, because gold could fall further forcing one out of one's margin, if one is totally margined up; so the moral is to not be fully margined up, and to dollar cost average a short of RYJUX.

One can follow RYJUX in Google Finance and in Yahoo Finance as well.

4) Semiconductors And Technology May Actually Fall Faster Than The Financial Sector As UYG Has Sold Off For Two Days Now

One should consider selling Semiconductors, INTC, XSD and USD as well as Technology, ROM.

V. The Chart Of The Russell 2000 Shows The Ongoing Decimation Of The Elliott Wave 3 of 3 That Commenced December 11, 2007

Tim Knight in his article Looking Better provides the chart of the Russell 2000, IWM, from the October 8th, Citigroup CDO Bust through yesterday's trading, and how the Russell 2000 has been decimated by a deleveraging financial sector, and the futile actions of the Federal Reserve actions to liquefy insolvent banks, through lowering of the Central Bank interest rates, and facilities -- framework agreements of TAF, TSLF, and PDCF only serves to debase the US currency and inflate the price of gold.

Copyright © 2008 Richard Gorton, The Resourceful Bear Blog
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Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

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Richard Gorton 360-756-5431 | Bellingham, WA USA | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.