DAILY REPORT (12/02/08)
A funny thing happened on the way to new highs in the Dow. After two 90% up days last week, optimism was in full bloom over the weekend but that's as far as it went. This morning the Dow opened 200 points lower and never looked back. As I type at 1 pm EST the cash Dow is down 450 points and folks aren't so bullish anymore. What I will be most interested in seeing tonight is whether or not today was a 90% down day or not. If it was, that indicates there is still considerable willingness to sell stocks, and that tells me we will head lower. That has been the problem all along; people's willingness to sell stocks at the first sign of trouble. Unfortunately for the bulls, the same cannot be said for their willingness to buy. I would also like to comment about the plethora 90% days, both up and down, over the last several months. Once the SEC removed the uptick rule, it seemed to open the flood gates for 90% days and by implication a 90% day doesn't mean what it used to anymore. That's one of the unintended consequences I am always harping about. Another has to do with the prohibition on short sales. The government is so myopic in their intentions of stopping the decline in share value that they sacrifice all the tomorrows for a decent today. They fail to consider the effects on volume and the inability of the market to capitulate. The end result is the market ends up going much lower than if you would have just left it alone.
Many folks comment that stocks are cheap right now and people should start to buy these great deals. Historically, stocks are cheap when the PER is at 7 and the yield is at 6% and we are still a long way from that. A good case in point is the Transportation Index, having fallen from 5536 in May
down to 2,909 just a couple of weeks ago, and yet the PER is a rich 18.81 and the yield is a low 2.19%. Just in case if you're wondering, the S & P isn't much better and the PER can't be calculated for the Dow because too many of the companies are posting losses.
Finally, for those of you who feel that the broader indexes are doing better than the rest of the market, I have posted a two-year daily chart of the Wilshire 5000 below which encompasses just about all the significant stocks listed:
The Index broke down from just under 9000 and fell to an intraday low of 7340. This was followed by a rally back up to where it broke down from and today it is down more than 600 points to trade just above 8300 and it is not oversold. Personally, I think the market is quite scary right now in that as much as it has fallen, we are not oversold and nothing has been resolved. This could open the floodgates for a substantial decline over a very, very short period of time.
You can't keep on postponing the judgment day and expect everything to come up roses. Real issues must be met with real solutions and there are no real solutions being proposed at this point in time. Obama has announced some real heavy weights for his cabinet position and everybody has adopted a wait until mid-January approach as if it will solve something. Obama's cabinet will solve nothing; it's just the same old faces with the same old rhetoric and they are as responsible as the clowns they are replacing. Both Hilary and Obama were in the Senate and they proposed nothing of substance, so the fact that they're now in the State Department and White House respectively is just a change of address. As far as I know, to date no one in a position to resolve problems has even acknowledged that real difficulties exist. Fortunately, the market will not let them off of the hook, so I suspect they will soon look for someone to blame and that is when things will get sticky.
Finally, I want to talk a little bit about the US dollar as it has frustrated a lot of investors who are trying to establish a short position. The decline in
the dollar began way back in 2002 and ran with little interference until July of this year and that caused investors to become too complacent. Everybody looks at a short dollar position as if it were guaranteed money in the bank, and the market always punishes that type of mentality sooner or later. That is exactly what happened and now recently burnt investors fail to recognize the difference between a bull market and a secondary correction. The dollar has been in a secondary reaction, no more and no less, and the question is whether or not that reaction has run its course. I am going out on my lonely limb and saying that it has for three reasons:
- People don't understand why the dollar did what it did and that lack of understanding has led to excessive bullishness,
- The RSI, MACD, and histogram all failed to confirm the last higher high, and
- The dollar has trended sideways out of its recent uptrend.
Maybe the best argument of all is that you simply cannot print all the money you want, for as long as you want, and not see the currency devaluate. The rest of the world is also printing in an effort to support the dollar, but they can't and won't be able to keep it up, unless they are willing to sacrifice their own economies. I think we are at the point when everyone is going to look out for his own self interest and distance themselves from the US. Then watch the dollar fall.
[The Dow closed down 679 points at 8149 and we are right back at that 8,146 support level. This was surely a 90% down day and confirmation that sellers abound. Is this a retest of the recent lows or are we headed lower? Until the market tells me otherwise, I have to assume we are headed lower. This market continues to prove that going down is a lot easier than going up, and that is a bearish sign. The worst has not been discounted by the market, but it will be at some point in time. My advice is to just stay short and sit tight.]
ebo@dtanalysis.com
Dow Theory Analysis SAC
December 1, 2008
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