Market Outlook for October
by Stephen Tetreault, T-Waves | September 30, 2008
PrintI apologize that I was not around the whole day (due to illness) but the day planned out as suggested!
Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride! The question is do you want a ticket to partake of this amusement ride Remember folks when in doubt CASH is always King/Queen.
I am once again expecting a 60:40 chance of some bullishness the open as we ended this day on as dismal note and very oversold so the dipsters should attempt to come in…(I bought calls into the close as the selling was FEAR Driven and we saw that with a massive spike up in the VIX spike above 48, VXO above 55 and the VXN above 50 indicating extreme levels of FEAR); and with a 98% down volume wash-out selling event we have historically traded up-back up to the start of the downtrend…only time will tell! Since I’m a contrarian investor, I took a hedge today by buying calls into the close as I expect that we are close to a near term bottom….and I started to leg into the markets with calls and I will sell them into any substantial pop….as my last batch soured as I held a day to long! Let’s keep our focus on the price of crude as a continued drop in price would be a mixed positive for equities (the SPX will see downside pressure from the energy patch, if we see a pull-back in crude, natural-gas etc.) …, I will also watch the bond market as a retracement here could result in a further rotation out-of equities in the short term. Once again I’ll be watching the Transports, Small/Mid-caps along with the SOX for early directional indicators; they have been hit hard of late, and these signals and clues along with the overnight Asian markets could be crucial in the initial tonality of the markets….after hours I sent out an IM a little after 1730 hours suggesting that traders Buy (go long) on a speculative basis the SPY and ES/YM …I took a small lot of SPY at $111.47 in after hours trading and poked 4-ES contracts at 1115.25 with a price target of 1129-1133 and 4-YM contracts @ 10,444 with a price target of 10,550 as I believe due to the technicals that I follow that we move up overnight and into the early morning hours (my best guess)!!
A likely scenario is that we awake to the futures running up pre-market and we gap up after the massive selling event…and run hard for 30-90+/- minutes…then I’m guessing that the profiteers and smart money will take the opportunity to unload into strength (technology should be the leader tomorrow) at 9:45 we get the Chicago PMI report and expectation are for a reading of 53.0 after last months reading or 57.9 thereafter at 10:00 we get a reading of consumer confidence expectation are for a reading of 55.0 after last months reading or 56.9 (I believe the number will sorely disappoint I am expecting a reading of 47.8) so we do have a little bit of economic data on tap. It is very possible that the markets will attempt to shake down and extort a bailout package from Washington with continued selling tomorrow…as all they have to do is step away from the bids and fold their arms! They may even attempt to take the Dow down to 9700, the Nasdog down to 1900 and the SPX down to 1022 before they look to buy (likely a Thursday event) The drop could continue into the start at our next major/major turn-inflection period forecasted to start in and around 10/3/08 +/- a few days as the timing of such events get skewed at times where we have massive volatility due to political/geopolitical events like the looming issued surrounding the credit-crisis and subsequent taxpayer bailout of wall-street.
I am also looking toward an FDIC depositor rescue on Wednesday/Thursday as well wherein they will look to attempt to quell depositors FEARS by increasing the insurance threshold to 500,000 to 1-million my best guess!
The Dow's 777-point plunge today was the worst since the Crash of '87. But that doesn't mean automatically that today was a selling climax or that the stock market decline is reaching an absolute bottom/end. Quite to the contrary, I still believe that the overwhelming majority of mom & pop have been paralyzed and they like many hedge funds are still holding on to their shares. They're hoping that Congress will ride in on their white horse (more likely an ass) and will still pass some kind of legislation to bail out sinking banks, lenders and the stock market. They're hoping that the Fed-heads led by B-52 Bernanke will some how continue to inject massive and I mean sums of liquidity into the credit markets to prevent a panic. And they're assuming that these efforts will somehow turn the market around for good….this is a wishful premise for the long run, but we are closing in on a massive relief rally (can’t say short squeeze anymore as they have taken so many shorts out of the stimulation role in such a manner!
I expect that we will definitely see some more extreme volatility this week as we encroach into the end on the third quarter especially an d we can not rule out a late week relief rally as we start the 4th quarter as this type of scenario could spark rally as so many are leaning and filling the boats of extreme despair. I believe the bears and bulls will wage a bloody battle these next few days. I still believe that investors are skittish, and the path of least resistance on any weakness or signs of trouble will be to trigger the sell-buttons however we are nearing capitulation levels…..Determining market direction for this week is no easy task (we are set up, coiled tightly, for a relief rally which could be violent as we are deeply oversold on a near-term basis) and on the other hand there are many growing conflicting factors which taken together could cancel each other out. The bear market in financials is becoming worse.
As I sated this weekend….should prices drop decisively below our recent lows, (10,460) which they did in today’s reactionary environment then it would likely mean that wave {2} had topped, and the most devastating drop-off (selling) in years has likely started to ensue (we have/had several factors that could delay the drop-off and these need to be watched [wall-street bailout and elections] Expectations are running extremely high that the bailout will be approved and work {I believe it will be approved but will not work, as this is only the tip of the iceberg, of this debacle}. If anything goes wrong with this proposal and delivery and wall-street pitches a fit or tantrum, due to not getting what they demand (extorting) from the taxpayers…..we could see a quick kick off a stock market purge on the disappointment/fear. This suggests there significantly more pain ahead for the markets; add into the mix that the pending earnings warning and confessional cycle will be in full bloom this week and next it could become a very-nasty landscape to navigate for the bulls and many funds may just sit this battle out. We all know that the consumer is more than struggling as we saw this past week that bankruptcies; foreclosures and defaults numbers are increasing.
The last 1-2 days of a quarter and first 3-5 days of a new-quarter are generally bullish especially as retirement funds are depositing new funds and putting the money to work so we need to remain watchful of these inflows and any PPT action!
Congress delivered a stunning defeat to legislation designed to rescue our nation's troubled financial system, as republicans swept aside a call from President Bush to "send a strong signal" of confidence to markets at home and abroad. Their 228-205 vote Monday exposed deep uneasiness among lawmakers in both parties with what would be an unprecedented intervention in the private sector (For what its worth I agree with their rejection of the bill but for many different reasons.). We lost $1.48-trillion in market value today and this was utterly amazing! After the House voted against the bailout package….they voted down a plan that was different than what the Bush administration had originally proposed. There were restrictions allowing Congress to limit how much of the money goes out the door at once. It also included caps on CEO pay packages and top executives as well as assurances that the government also would ultimately be reimbursed by the companies for any losses. The Treasury would have been permitted with this bill to spend $250 billion to buy bank’s risky assets, giving them cash infusions. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off on it.
The Dow plummeted a staggering 777.68 points, its biggest one-day drop in history; it ended down a whopping 6.98% at 10,365.45; all 30 of the components traded in the red as the selling was extremely broad base as Wall-Street attempted to send a very self-centered message to Washington. Support on the weekly chart was tested today at 10,355 and it sure looks like the Dow is heading back to retest the October lows of 2005 (10,155-10,175)….the near-term charts are grossly oversold but could remain there for some time in this credit debacle environment that is littered with political and event-landmines; if the bulls return tomorrow they will need to come back and retake a lot of today’s lost levels OHR will now come in at 10,525 thereafter 10,677
The Nasdog dropped a staggering 199.61 points, one of its biggest one-day drops that I can remember in many years; it ended down a whopping 9.14% at 1,983.73…. all 30 of the components traded in the red as the selling was very broad base as Wall-Street attempted to send a message to Washington bend over and give us what we want or we will stick it to you politically. Support on the weekly chart was tested today at 2013 (the 7/17/06 lows) and it failed to regain or close above this level as it ended the secession at the lows today and it sure looks like the Nasdog is destined to head back to retest the March lows of 2005 (1905-1920), though maybe not immediately; the near-term charts are grossly oversold but could remain there for some time in this crappy trading environment that is littered with political and event-landmines continues to play out to the downside; if the bulls return tomorrow they will need to come back and retake a lot of today’s lost territory OHR will now come in at 2,035-2040 thereafter 2069-2076
The SPX coughed up a very nasty furball today as it choked up a staggering 106.85 points, its biggest one-day drop in over 8-years; it ended down a whopping 8.81% at 1,106.42; as only one stock out of the 500 (Campbell’s Soup) traded into the green today, this was amazing) all the rest traded in the red as the selling was extremely broad base as Wall-Street sent a very sharp and dicey self-centered message to Washington; bailout the financial markets or suffer the consequences politically was what I saw. Support on the weekly chart was tested today at 1,100-1,105 and it barely held it looks like the SPX is heading back to retest significant support at (1065-1,075)….we have significant stronger support at 1,022……the near-term charts are grossly oversold but could remain there for some time in this credit debacle environment that is littered with political and event-driven landmines; if the bulls return tomorrow they will need to come back and retake a lot of today’s lost levels OHR will now come in at 1,131 thereafter 1,157
Traders/investors and of course Wall Street's worst fears came to pass toady, when the government's financial rescue plan (taxpayer-bailout) failed to pass in Congress and stocks plunged precipitously thereafter…the credit markets, whose turmoil helped feed the stock market's angst, froze up further amid the increasing belief that the country is headed into a spreading credit and economic crisis that is starting to spiral out of control. I was very sick today but came back late in the day to watch on my screen the vote tally in the House as they voted down the bailout package to and as soon as the numbers showed that the vote was a no-go we saw frenetic and frenzied selling as the orders blew in like a force 5-hurricane.
The Dow told the story of as it dropped by 198 of points in a matter of minutes, and by the end of the day had passed by far its previous record for a one-day drop of 685+/- points seen after the first trading day after the 9/11, terror attacks. The selling was so intense that just 162 stocks rose on the NYSE and over 3,100 dropped; this is in-itself a contrarian buy-signal as a huge Tsunami wave of selling smashed the markets. It takes an incredible amount of False Evidence Appearing Real to set off such an intense reaction, and the worry now is that with the rescue plan's fate uncertain, no one knows how the financial sector which is already hobbled by hundreds of billions of dollars in bad mortgage bets can recover.
Banks' Subprime-Related Losses Surge to $591 Billion The following table shows the $590.8 billion in asset writedowns and credit losses at more than 100 of the world's biggest banks and securities firms as well as the $434.2 billion capital build up to deal with them.
While investors didn't believe that the plan was a magic potion, as many understood that it would take months for its full effects to be felt, most market watchers believed it would be a very viable start toward setting the economy right after this massive credit crisis unfolds that began more than a year ago and that has spread overseas. Clearly something needs to be done, and the market dropping 350 points in 10 minutes is telling you that if something fails to transpire very soon they are going to continue to bleed red….trading these markets is like juggling chainsaws blindfolded while walking on the edge of a high-rise building one false move and you lose a hand or worse yet you plunge off the building and as today’s action depicted this isn't a market for those with weak stomachs.
Today’s defeat overshadowed for the most part more reminders of how troubled the nation's financial system is as before the bell sounded we saw that Wachovia one of the biggest banks was being rescued (sold out to) Citigroup. It followed the recent forced sale of Merrill Lynch and the failure of three other huge banking companies like Lehman and Bear Stearns…..Washington Mutual and Lehman Brothers Holdings; all of them were toppled by bad mortgage investments.
These large bank failures raised the question: which banks are next, and how many other shoes are to drop? The Federal Deposit Insurance Corp. has a list of over 110 banks that were in trouble in the second quarter, and its speculated that the number surely has grown by triple that number.
The markets are contending with many contagionous issues against the backdrop of a credit market debacle and implosion where bonds and loans are bought and sold and this market is barely functioning because of fears that anyone lending money will never be paid back. The evidence of the credit market’s contagions could again be found as the Treasury's 3-month bill; as investors were stashing money there, willing to take the tiniest of returns (when factoring in inflation it equaled negative returns) simply to be sure that their principal would survive. The yield on the 3-month bill was 0.15, down from 0.87, and was approaching zero, a level reached last week when fear was also running extremely high….better to put your money in a tin can and buy it in the back yard!
We also saw a panic drop in the price of crude today as crude prices were another sign of the price action chaos. Light, sweet crude dropped $10.52 to settle at $96.36 on the NYME as investors feared that energy demand or lack there of would continue to slide amid further economic weakness. (Recession)
Today we also saw that the Commerce Department said consumer spending dropped in August to its lowest level in over six months. With consumers already uneasy and the uncertainty from the financial markets likely to spill over to the rest of the country, the outlook for spending remains very bleak as we head into the heart of the holiday spending season, and we all know that consumers are the biggest driver of economic growth. Spending by U.S. consumers was unchanged during the month of August, dashing hopes of a gain, as many cash strapped households retrenched in the face of rising unemployment and just plainly a lack of confidence.
The Federal Reserve's preferred measure of inflation rose over the last 12 months by the most in 13 years.
As consumer spending is faltering fast as the boost from Father Bush tax rebates faded and Americans grapple with mounting job losses, declining home-equity wealth, soaring commodity costs, escalating heating bills and just pure-malaise about the health of this country’s economic well-being all this is coming in at a time when A MASSIVE credit squeeze that in recent weeks has turned into a financial meltdown on Wall-Street, and the negative news-headlines continue to grow. Economists forecast spending would rise 0.2%, after an originally reported 0.2% increase in July, and projections ranged from gains of 0.5% to a drop of 0.2%; meanwhile we saw that incomes increased 0.5% after a 0.6% drop in the past month (just about a wash), today's report showed.
- The report also indicated that inflation is eroding Americans' purchasing power (wow a revelation) and the price gauge tied to spending patterns rose a whopping 4.5% from August 2007, after a 4.6% gain in the year ended in July.
Disposable income, or the money left over after taxes, decreased 0.9% after declining 0.8% the previous month; and this is a very dismal trend today's report showed inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, increased a mere 1.6% after falling 3.2% last month while we saw that purchases of non-durable goods decreased 0.3% and spending on services, which account for almost 60% of all outlays, dropped 0.1% the first decline since February.
Due to a desperate need for funding we saw today that Morgan Stanley, needing to shore up investor confidence that is sorely lacking after borrowing costs rose and its stock was given a major-haircut (dropped 50-65%) agreed to sell a 21% stake to Japan's Mitsubishi UFJ Financial Group for a mere $9 billion they will buy $3 billion of common stock and $6 billion of convertible preferred stock that pays a very-nice 10% dividend.
John Mack in my opinion looks very desperate to raise capital (as was Goldman last week), seeking to boost deposits after investors lost confidence in his firm that depended on the bond markets for financing. I believe that they really need the capital now more than they are leading on despite the talking butt-heads stating that it's more perception in the markets I doubt that this move will really calm the nerves of real-value investors as yet.
The transaction differs from a letter of intent to pursue an alliance the two companies announced on 9/22. In that agreement, Tokyo-based Mitsubishi UFJ planned to acquire 10-20% of Morgan Stanley for about $8.5 billion.
The Federal Reserve is printing more money out of thin air (hyperinflation-rules) as they sated today that they will pump an additional $630 billion into the global financial system (they do this with out any congressional action and without answering to anyone, the fed-heads have way to much unrestrained and unbridled power and its this reckless usage of this power under Dip-stick-Greenspam and B-52-Bernanke that was the catalysts for this massive credit crisis [they in essence gave known arsonists {greedy bankers, brokerage-firms and lenders} a box of matches and all the fuel they wanted {easy-all-most free-money and prayed that they would not set fire to our country….they the Fed-heads turned a blind eye to the contagions}) now once again the FED-heads led by the inflation creator himself Bernanke began again flooding banks with cash to alleviate the worst banking crisis since the Great Depression that they themselves were primarily responsible for creating….its no wonder for decades, the Federal Reserve has published data on the money supply, and for many years the Fed set targets for money supply growth. In the past two decades, a number of developments have broken down the relationship between money supply growth and the performance of the U.S. economy. In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth. In March 2006, the Board of Governors ceased publishing the M3 monetary aggregate…again keeping the Average American in the dark as to their manipulation of our currency; and they were the primary creator of inflation!
Today we saw that the Fed increased their existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide (these are our dollars being debased). The Term Auction Facility, the Fed's so called emergency loan program, (they must be seeing a huge emergency now) will expand by $300 billion to $450 billion.
The Fed-heads reckless expansion of liquidity in my opinion, is massive the biggest since credit markets seized up last year (and they are hardly done in my opinion), and this action came as Congress was preparing to vote on the $700 billion tax-payer bailout for the financial sector. The credit crisis is reverberating throughout the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.
Today's massive H-Bomb blast of short term liquidity may settle the funding markets down (but it could also spook them as well), and the fed-heads are hitting their knees hoping and praying that it allow trust to slowly be restored between borrowers and lenders….however on the other hand, the Fed's balance sheet is about to explode as the bubble grows and it’s going to become irrelevant very quickly.
Stocks around the world plunged the most since 1997 today and credit markets deteriorated further as lamebrain authorities scrambled to save more financial institutions from collapse.
Banks and brokers have slowed lending as they struggle to restore their own capital after $586 billion in credit losses and writedowns since the mortgage crisis began just a year ago (this is the contagion that worries me as how can we be assured that after any bailout that will not just pad their own capital base and shareholder wealth.
By committing to provide a very massive-massive quantity of term funding, the Federal Reserve is hoping that their actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk, according to their statement, however I believe it could have an opposite affect in infusing FEAR into the markets.
The Bank of England and the ECB will each double the size of their dollar swap facilities with the Fed to as much as $80 billion and $240 billion, respectively. The Swiss National Bank and the Bank of Japan will also double their dollar swap lines, while the central banks in Australia, Norway, Sweden, Denmark and Canada tripled theirs. All the banks extended their facilities until the end of April 2009.
The Fed is also increasing the size of their (3) 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans to these very-greed and overleveraged primary-dealers, banks and lenders. They will keep the sales of 28-day credit at $75 billion.
Now the Fed-heads will hold two special TAF sales in November totaling $150 billion so these very banks can have funding available for one or two weeks over their year-ending and closing of their books. The exact timing and terms will be determined later, the Fed stated today.
Copyright © 2008 Stephen Tetreault
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Stephen Tetreault | Southern Maine, USA | Email | Website
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