DJIMstocks.com- DJ Interactive Markets

Is the day and change rally sustainable?.  Guess, the thinking here is simple considering we were going short the SPX end of day.  The good thing is we get any fantasies of an extended run out of our heads quickly as the market does all it's talking in a very fast way, as in 10% gains in hours.  Our emotions don't need to be build up over weeks only to be let down once again.  It hurts more that way, this is better. The only thing that could sustain this is the fact it's a holiday week and most may just rather wait,  maybe even let this market climb a bit more into some potential bad news till next week and than go short.

The past few days, the market is just glowing from a strings attached save the bank bailout and a new 'dream' team administration.  Our question to the market is how fast will you dim this light of hope.  Besides,  we know the market has short term memory and likes to just go on to the next piece of news.    Life simply goes on around here and it becomes realistic once again, sooner than later.    We've just witnessed this in October as 2 day rallies became useless,  this one should too.    We have more recessionary data on the way this week, starting with GDP and consumer confidence and that should sober up the market quickly to the severe downturn in the economy.

Just keep it keep it simple the rest of the week with major indices ETF's,  but that includes keeping away from those FAZ ball's 3x.  Did you see some those today?.lol.   As far individual stocks,  don't get suckered in buying because you see your watchlist glow green with stocks up 15-20% and think you missed something.  These only look good because they are so cheap.   Remember what you really missed is the huge drops for days and weeks that allow such gains now. 

Normally, as in recent years,  going into a holiday week in November would mean a paradise like setting for the traders.   At least, that is the case when we were in a bull market.    This year, well, most traders probably want a full holiday week as oppose to a four day trading week.

Has anyone heard of the term "bad bank" prior to today?   We haven't, not until tonight!   The big news this weekend,  other than the naming of the new economic team by the next administration, is that the current administration is trying to work out a bailout deal with Citi bank.      The concept is pretty simple,  shove all of the bad assets into a separate entity called "bad bank" so the bank(Citi) can get rid all of the toxic assets and claim itself as a champ.    This deal, according to WSJ, is only targeting specific companies on a case by case situation and there's not a whole lot of details available yet.   So what's the catch?    Basically, no matter the specifics of the plan, you, the taxpayers will have to share a bigger burden if those bad assets turn sour,  if the credit situation worsens.    Oh well, bailing out Citi is kind of expected from the government,  the final blueprint will probably emerge in the morning.

Back to this market!   We had a pretty rapid fire kind of rally during the late session on past Friday.  Oh, what else is new?.   This was triggered by reports of the next Secretary of Treasury.    Basically, traders were using that as a catalyst to cover shorts and flip off a very oversold market.   Any excuse for a relief rally when the market is so oversold for the week.   Looking at the final box score, we were still down an unbelievable amount for the week!!.    Just a couple of days ago, we wrote that we were tired of the useless reversals.    We feel Friday's reversal, might turn into another useless one.   It is much easier to short on strength these days than to chase bounces.    If you look at the weekly closes of most of the plays that anyone cared to track, they have been going down by a big percentage every week.

Technically, we are near, but not quite close to the previous year low, which can act as a strong resistance.    For this short week, we have quite a few economic reports to digest.    Most analysts are projecting some bad data and we'll have to see how strongly this market reacts to these numbers.     It's pretty clear that Citi is on top of the agends agenda of policy makers' this week.   One way or another, something will happen to Citi and market will react to it.   The Auto debacle, will probably wait till after the holiday to be dealt with.

We've had the feeling that once both Citi and GM have been dealt with, this market may finally find a place to rest.    We are probably very close, it won't hurt to wait a little longer.

It may look grim as hell, but the markets ain't going to zero, even at this insane pace of 5-6% daily declines.  What is going to 'zero' and what may save this market is a zero interst rate policy for as long as it needs to be.  Deflationary recession is shouting out.  The FED has to make a statement to go zero for as long as it takes.   We don't have anything juicy to add tonight,  the numbers below speak for themselves.  We don't need to speak of another potential relief rally.  It was late October that we said..."the U.S markets are lagging the crashes in percentage terms seen all over the world markets and may need to get a dose of their own medicine".   Well, it's been a hard pill to swallow..

Equities           Level      1Day        Week       Month      YTD
S&P 500            752      -6.7%     -17.4%        -16.1%    -48.8%
NASDAQ           1037     -4.7%     -16.5%        -16.2%    -50.3%
DJIA                 7552     -5.6%     -14.5%        -11.3%     -43.1%
FTSE                3875      -3.3%      -7.1%          -4.1%     -40.0%
Hang Seng     12299     -4.0%      -7.0%         -13.8%    -55.8%

This is the ' ZERO' call from JPM tonight..

Deflation could incent inventory liquidations...Fed needs to say "low for long" w/ZIRP - ALERT

The S&P 500 closed at 752, closing below 800 for the first time since October 2002 and putting us back to 1997. In May 1997, the S&P 500 closed 800 on its eventual rise to 1576. Deflation and a Fed at Zero Interest Rate Policy are only the most recent ofthe multitude of concerns raised as the recession gains in severity.

• Deflation will have an impact on the Industrial supply chain. Already, our Industrials analysts have noted that companies are leaning towards liquidating inventory as their expectations of price declines in commodities and products disincent inventory builds.
• In other words, the deflation that is talked about has broader implications, and would put further downside risk to our $75 S&P 500 EPS estimate for 2009. Already, our $75 estimate looks like a reach, suggesting that Street bottoms-up of $88 is even more unrealistic.
• The implication is that the Fed will need to make sure businesses and households do not develop long-term deflation expectations. Our Fixed Income teams and Economists note that it will be important for the Fed to say “low for long” to prevent this negative inflation bias.
• Since mid-September, we had to alter our view on equities as this turned from a potentially minor bear market to a major/more severe decline. And given the lack of visibility of the depth of the macro downturn, we see a folly in trying to call “a bottom” at this time. But at the same, a lot has been discounted given the now 53% decline in stocks, but we just do not know if the whole recession has been discounted.
• Finally, there are some positive developments. It seems that short-term markets have seen broad and material improvements. Demand for short-term paper has moved from overnight only to one-month and three-month products. The ZIRP would potentially expand demand for government, agency instruments, further aiding shortterm markets.
• Elsewhere in credit, the news is still grim – CMBS now in the 40s, High Yield now reflecting 58% implied default rates.

Bottom line. Stay defensive as we lack visibility on the ultimate magnitude of the economic downturn and we still do not know whether redemptions and forced selling are distorting prices. It has not paid to be a contrarian (annihilated months ago) nor focus on valuation. The VIX at 81 now implies at +/- 28% move in the next 30 days (as a less than 1 std. deviation event). In other words, an S&P 500 range of 541 to 963.

As much as we wanted to see a meaningful rally,  the ill fated reversal attempt of late just had no go. Today,  those who were playing the reversal at 820-830 SPX were saying "uncle" at the end.   Oh yes, the latest mighty low has finally been broken on all front.    Basically, what happened today just occurred a day later in that, "Unfortunately, it seems most are now complacent, lackadaisical or just would prefer to accept the fact of going lower".     It was way too much to ask for back to back days of reversal rallies, exhaustion just sets in sooner than later.    You name it, DOW, SPX, NDX RUT... all had a new closing low for multi years.   As noted, the after gap down reaction was going to determine the trend for the day,  it was a lower trend emerging,  no follow through was going to occur today.  In the end, everything got destroyed.   It's important to always learn and take something away.  Yesterday, we noted there was hardly any movement in the stocks, groups we monitor during the rally.   Today's action answered the question of why...it was simply a 'BS' the day before.

At DJIM,  we have been debating that it is not "IF", but "When" we break through the recent low.  You can't bottom because the intraday low- hi ranges have not receded enough if you average it out over say the last 15 trading days.   In a way, we are glad that it's coming sooner than later.   Honestly, nobody can take those idiotic bounces anymore.

Right now, all bets are off!.   Is there going to be a new wave of selling coming or is it going to be a quick washout?    At this point, we don't know.   We are still very much in a what may turn out to be a bottoming process,  we feel we may have just entered the final phase of this process.    And please,  Mr. Market,  no more reversals until the financials stocks stop foaming at the mouth.    If people wonder why we aren't getting the the kind of bounce we're hoping for?     As we have said many times before, without the participation of financial stocks, any bounce/rally will be so short lived that any long trades are just not worth the effort.

Things are changing quickly on both the economic news and corporate news front by the minute.  The situation with Citigroup and GM/F lately are of great concern to traders.   The relief may be here in these names, but it's hard to imagine what news the market will like or need.   The upcoming holiday sales events are also of great importance to us.    One thing is for sure though,  nobody is expecting any good news.   Therefore,  any change turn of events that spell good news can give us a perhaps tradable rally from whatever the low we will set in the next little while.    This market isn't as "nail on the coffin" dead as many would think.   All it is right now is that it's tough to get a good long trade going.      We do have the bearish ETF's at our disposals, if you can live with the possibility of reversals at any point.     Be neutral, traders' mood and psychology is very lousy.

Well,  we have two more trading days this week to bring us back meaningfully over 8k DOW.  It may be meaningless in the big picture,  but we're sure a lot of people would find comfort knowing that we won't be spending a long time in the 7k range.    We'll be at significant support levels (AGAIN!) at 790SPX...who knows what reversals gets spawned or not from here.

Entering the trading day, pessimism was abound as the SPX  futures touched 829 overnight and no matter what early upside was shown,  you had the gut feeling we were going to test that level at some point intraday.   It became more clear we were going down due to the lukewarm reaction to HPQ's guidance in the SMH, Nasdaq etc.     A feeble attempt around noon to make highs piled in the shorts and by 3pm we had touched down to the overnight 829.     Even though it seemed buyers had become lackadaisical after 2 days of distribution,  seemingly ready to just let the market begin another leg down....but,  instead they stepped up to plate and drove the SPX 40 points just after close to 868.   The saving grace to us was that the market was only down 150-200 Dow points and so was not in panic mode at the retesting levels.   If we had opened and gapped down,  it might have been a different story.    Maybe, we've all become immune to be scared, we've seen almost all this market can cook up and calmness seemed to rule at the bottoms today.    Maybe it's just acceptance we are going lower one day or another,  maybe just not right now.     One positive for the next little while is everyone now knows buyers come out of the closet at these levels, support is being shown and so once, twice...three times a 'bottoms up' day, may emerge once again down the road.

Most likely,  we gap down some in morning as the late gains are digested,  at that point the market will begin to show if a follow through day is possible.    If this is the case, an upside trend bias should emerge into expiration date.   The market won't wait for Friday to make a move,  it would just carry through late Wednesday into Friday morning, simply it would make the biggest move Thursday in our view.

As far as individual stocks there was not much movement into the close,  it seems all are fixated on the SPY-SSO-SDS as we've been here.

More last hour, last minute breakdowns,  SPX approaching recent low, sour market mood...... oh boy!  

While economic news lately is all about rapid deterioration in key macro indicators,  the stock market is acting in a familiar fashion.    Unfortunately,  the familiar fashion of this market is not something we like nor any of us want to see much longer.  However,  we are here again, at SPX 850 set for a potential breakdown or at least a visit to last weeks 818 intraday low.    Few months down the road,  undoubtedly we are going to ask ourselves "what we could've done or should've done?",  kind of questions.    Right now,  we are not capable of seeing where we are going to be 2-3 days, sometimes 2-3 hours now.   Fundamentally,  we are all playing the same game here.   Whether you are a big or a small player, we are all basically facing the same set of game parameters and rules.   The thing that is happening right now, is that the trading rule set and the forces that affect the trading, are definitely being rewritten as we speak.    Can you imagine playing the game Monopoly without any rules?    Oh yes, you can make up the rules as you play along, but with so many players involved,  who's going to get it right at the end?

Staying neutral and unbiased, perhaps?    Yes,  that is probably the most sensible mentality, but it's just sometimes so tough to act and follow, especially if you are a full -time trader.    A familiar "opportunity" these days can turn into a trap.   A good setup can turn into an ugly one.   All these turning points can literally happen in a matter of minutes without you reacting to it fast enough.    This is just extremely tough on traders, mentally.    There is no quick cure, though.    We think patience is required for both the market and traders' sense of rationality return to a somewhat normal spectrum.    It can take weeks or perhaps months more to get there.   We have to be prepared for it.    Right now, there's no need to beat yourself up if you took a loss or a bad trade.    Since 99% of the traders are facing the same dilemma, it is just normal to feel that way.

So what do we do here at DJIM?   At this moment, we are simply trying to out survive other traders, as oppose to out trade them.    By the way, you can still lose big time while out trading most of the other traders at same time.  The most comical is when they say this or that fund is outperforming the SPX this year, it's only down 20%..lol..

This possible re-test again is on the agenda and the outcome this time will either create just another leg down or spawn another 'bottoms up' day.    Unfortunately, it seems most are now complacent, lackadaisical or just would prefer to accept the fact of going lower.  It's too calm out there in many respects, maybe it's just part exhaustion or a shoe is about to drop on the Bull or Bear.   We have no conviction as to which of these 2 potential scenarios plays out here,  we just feel it's a trap of some sorts this lead up,  who gets poached is to be seen.

What looked like a stellar day forming late afternoon with a possible follow through on Thursday's rally left everyone in the dust in the last 30 minutes of trading as the indices tanked 5% across the board in less than an hour.   If you witnessed the event you were left scratching your head into the weekend as to what the hell just happened.   Well,  what happened doesn't need a reason, it just reinforces the volatility is back/ and or just never left.   There will be no bottom in this environment as no institutions,  fundamental investors will step into a wide low-hi intraday trading range,  no matter,  if we just did had makings of a successful retest starting off 10/10 lows.

Considering there was no news for the sell- off,  it is best to assume it's a plethora of things from the 45-day redemption we discussed playing into any rally to anything else your imagination can draw up.   If nothing concrete comes out over the weekend that could have been the lead for the destruction,  we should have traders come back and make Monday a green day as heads clear.  A tinge of green end of day is almost essential for some confidence in this market.   Many also may see the final score as a constructive pullback from a technical prespective, we'll see.   All that matters is what we said in the last Journal,  this isn't a buy and hold market, still!. 

We also can't get to high off a rally like we had Thursday, or to low off a huge sell- off.   It's almost impossible to do,  but it's the only constructive way to deal with the market or you'll lose your marbles.

Guess saving the release of the "Bottoms Up" facts Journal was timed just right and hopefully, it got you on your toes for a possible retest today.   We already noted Wednesday,  Paulson's reversal, may lead to a rally once digested and it coincided with markets seemingly wanting to test 10/10 lows very soon by Wednesday close.    So, was it the retest probability and/or Paulson and/or Hedging redemption fears subsiding?..who cares!

If, we had another hour of trading, there's no telling how much higher we would have shot up.    There's really two ways you can look at today's events.   One way to look at this is that it tested the recent low and even though we broke it to 818, we reversed fast back over 839 and than took off in a pretty powerful way.   Judging by the volume bars for at least 30 minutes on the SPY,   it was institutions stepping up and not just retail gambling.  Why would the retail risk such action at such a critical juncture?   Another way to look at this is that how many more of these retest are we going to face until we ultimately bottom?.   Unfortunately, we all can't wait for such as we could miss opportunities to make money.  Furthermore, we know we won't truly have a bottom until the intraday volatility is back within reason, so for now we can only look at it as a rally to start and nothing else.    A morning pullback, a slight gap down may lead to further gains on the day.   This would be much better than a gap up.

When Intel did not gap down that much in the early morning,  it was probably a tell sign that people may have started pricing in the worse in the markets.    Morning action was very strange, it was as if traders were waiting for a wash out to happen.     When we got to the lowest points of the day, volume was very extreme and you almost felt that we were close to the turning point.    When we alerted at 2pm,  there was indication we had plenty of time and plenty of room to run higher.   Simply, you have to think a true rally off a bottom was not going to whimper out and be a flat close end of day, especially since we know the market can do 500-1000 point moves.  By 3:30,  it was inevitable that everyone just did their thing to cover/ long the market to get that trade in, including the retail trader.

So what's going to happen tomorrow?    Well, we are hoping that we don't get push for another five hundred point gain day, but rather take things a little slower.    Sure, last half hour of trading brings out your animal spirit,  but we rather do things in a calmer way from here on in.     This isn't a buy and hold market, still.   The best way to play still is the SPY-SSO-SDS and taking on the pullbacks in stocks we are following as witnessed by the action in MYGN, FSYS, EBS (even had an offering).

There's only one thing on every traders mind going into the late week trade....Is this a retest of 10/10 coming and will it be successful ?.

Here's some facts,

86% of bottoms have a retest.  75% of retest windows will pass by 11/23/08.   A large number believe the “low” was set on 10/10, when the S&P 500 fell to 839 intraday, representing a 46% decline peak to trough.   If 10/10 indeed proves to be the low,  a retest is almost a certainty.   Since 1900, retests are the norm, occurring 86% of the time.   Applying those past retest windows to the 10/10 “low,” we arrive at some dates that could be important.    By 10/26, we passed 25% of retests.   By 11/23/08, we should have passed 75% of retest windows.  The furthest out to see if 10/10 holds is to 1/22/09, which is the 2002 lows. Three bottoms had no retest, 1917, 1942, and 1949.

If history of retests can be used as a barometer,  it supports a mid/ late November rally.   This also coincides with the probable receding in the intraday hi-low ranges that is essential in calling a bottom.  Why?.....The surge in intraday volatility above 3% has been associated with the major lows of 1987, 1998 and 2002.  We've been in the 6% range since October and only recently have seen this drop off.  Is it enough to bring the institutions/ fundamental investors off the sidelines?.  That's the big question and we'll only know after a successful retest.

Finally, the 45-day redemption window for some hedge funds is 11/15 and this can play a role into any rally.   This issue has been discussed constantly this week putting fear in many.    Investors have been watching this window carefully for obvious reasons.  To the extent that funds have anticipated redemptions, this explains some of the selling we are seeing.   Additionally, no investor wants to add risk during a time when there is such an imbalance of sellers.  Thus,  investors are likely to wait for this window to clear before adding risk.   Unfortunately, a large number of hedge funds have 30-day redemption windows,  which means additional redemptions could be seen then.   Judging by the beatings taken by Solars and many material/ commodity today, liquidations are ongoing.

Let's hope history is on our side....

There is a very good reason why many institutions are staying away from this market.   From what we read and what we hear from friends in the hedge fund industry, the consensus is that many people are simply going to sit idle (wait) until this market returns to its normal fashion of behaviour.   Some of them would go as far as not doing anything until 2009,  regardless what happens the next couple of months.    In a way, we totally understand them since most of them are old school of buy good stocks and hold them for a while kind of managers.     Therefore, what's left in this market these days are trigger happy funds that either rely heavily on computer black box or a gambling intuition to trade this market.     This is what frustrates most of us freelance retail traders.    Basically, without the buy side institutions' support,  you'd never have stocks or sectors that can run up for weeks or months straight.    Instead, what once was a few months worth of a stock move can be accomplished in mere days.    Yes, it can be agonizing just to think about it.

Market again showed some shakiness during the day as the "good news" of China's stimulus package was further dismissed as anything to do with the US market.   If you noticed,  many Chinese ADR here took a big beating today as people realize most of those companies are just not going to have anything to do with that stimulus package.    On the home front,  financial companies once again led the way down with lots of pressure focused on GS, C, MS etc.  overshadowing the government foreclosure plan which gave the market a blip move to the upside late in the day.   We feel the entire market will remain pressure until people stop selling those financials.

Our EPS plays had a relatively calm day.   You just really can't expect them to do much on a day like today.    However, we are monitoring their health closely as any severe penetration of 9 ema would trigger our exit.    We have been adding little back today, but only with small sizes.    Remember, on a day like today,  price is always on your side so you can literally bid at a steep discount and it may get hit.    We are sticking to our trading plan with these EPS plays, still.     We also have some ETF hedges just in case market gets too nasty all of a sudden.     Right now, it seems market is stuck in the big range of between 860 SPX and 1000 SPX.    Of course,  we are currently near the lower end of that range so we have to keep an open mind that we'd retest previous 10/10 low.   

Well folks, this is how the market is these days, we try to do everything we can to rationalize things and implement our trading strategy as efficiently as we can.

Cheers,