Option Queen Letter for October 12, 2008
Today–even the biggest bears on Wall Street are ready for a rally. We believe that this rally will begin either on Monday or perhaps Tuesday and take the markets on a wild ride to the upside. Does that mean that the problems are over and that the bear market has run its course? Absolutely not, the recent low that was seen on Friday will be tested. The question is will it hold, or will there be another whoosh to the downside. Right now, the market is feeling selling fatigue.
It is clear that the global financial world is transfixed with fear and waiting for the rescue idea to emerge. We will have a rally within a day or so, but that rally will not be the end of the market siege–That rally can last several days before turning lower to test the recent lows. Is this market going to remove those recent lows or will the market go near the lows without removing that low? This is a very important question which will tell you if the market is going to crater further or begin to attempt to defend that low. Should the low hold, we will not be out of the woods until and unless this economy begins to steady itself. There is a very real global liquidity and trust crisis and until or unless that is resolved we will continue in this downward spiral. We have the worst of all worlds, increasing costs of food, real estate taxes, utilities and real decreased income. That is called stagflation. It is true that the cost of stuff should recede with the slowdown in the economy, but that reduction of expenses takes a while to filter into the consumer’s pocket. So, in the short-term, there will be a drain on spending power along with decreased income.
Should the Federal Reserve step into the market and act as a go-between banks facilitating liquidity, we will see some support arise. One of the main drivers of this market crash has been the interbank liquidity crisis and the crisis in confidence between banks. Bank A refuses to lend money to Bank B because they don’t know that bank B will be there in 3 days. Naturally, this is an over-simplification. The entire lack of confidence behavior began when Lehman Bros failed leaving their loans without resolution. You many well ask why Bear Stearn’s failure didn’t cause this behavior and I truly don’t know the answer. We do know that the failure of Bear Stearns did cause fear and eroded confidence and trust, but there was more liquidity available at that time. Today, the liquidity in the system has all but dried up which is in part why, the stock market is under so much sales pressure. When cash needs to be found, stocks are the most liquid of assets and are used to fill that order.
Wednesday: September retail sales are released (hide under a rock somewhere for that one), September PPI (another ugly number), August business inventories at 10:00, Federal Reserve’s Beige Book will be released at 2:00 (another ugly survey) and earnings from eBay, JPMorgan Chase, WellsFargo, etc.
Thursday: September CPI is released at 8:30, September industrial production and capacity utilization is released at 9:15, October Philadelphia Fed Survey is released at 10:00 and we continue to have many earnings reports.
Friday: September housing starts are released at 8:30 and Michigan Sentiment is released at about 9:45.
If you have courage, you might want to sell the US Dollar Index by Tuesday, with a tight stop. This index has closed above the upper Bollinger band is looks totally exhausted.
The Stochastic indicator continues to issue a buy-signal at grossly overbought levels. The RSI continues to point higher and our own indicator is in agreement with that finding. Only the Thomas DeMark Expert indicator is going sideways at neutral. The 5 day moving average is at 81.778. The top of the Bollinger band is at 83.012 and the lower edge is seen at 75.368. The US Dollar index is overbought on all time-frames. As you well know, we can remain overbought, that is bullishly overbought for quite some time. We would expect to see this market retreat to 82.09 and 80.90.
We have seen the market decline for the past eight trading sessions. We believe that we will see a bounce in either Monday’s trading session or by Tuesday’s session. That bounce should serve to take this index up, 17% to 23%. We actually could go higher, we will see pressure on the market as it rallies and investors and to sell the rally to “get even” or just get out of the trade. Should the market find enough footing to withstand the waves of sellers that it will, no doubt find, then, we should see some money piling into the market. We continue to believe that the best we can hope for is a rally inside a bear market. We believe that this rally will end and the recent low of Friday will be approached if not tested. Should the test fail, we will again waterfall lower. Much of the trouble in this market has been caused by a liquidity pinch. Fear is on the front burner. The chart of the S&P 500 looks like Niagara Falls regarding the steepness of the decline. The stochastic indicator and our own indicator are both issuing a fresh buy-signal. The Thomas DeMark Expert indicator is going sideways and the RSI continues in oversold territory going sideways. The 5-day moving average is at 968.87. The top of the Bollinger band is at 1343.32 and the lower edge is seen at 926.89. We have never seen the Bollinger bands this wide….wow! We do have a 9-count on the daily chart. We are oversold for all time-frames. This should be an interesting week.
The NASDAQ 100 has a doji candle as a result of the Friday session. As you know, a doji candle indicates that the market is in transition and could change directions. The stochastic indicator and our own indicator are both issuing a buy-signal. The Thomas DeMark Expert indicator is going sideways at neutral and the RSI is going sideways at an oversold level. The 5-period moving average is at 1323.50. The top of the Bollinger band is at 1887.74 and the lower edge is seen at 1252.87. We have a 9-count on the daily chart. The daily chart closed above the lower Bollinger band. For those with courage, this index looks as though it will rally in the Monday or Tuesday session and should, do better than the S&P 500.
Wow, did you see the Russell 2000’s rally in the Friday session. This index closed positive on the day! The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal. The 5-period moving average is at 539.76. The top of the Bollinger band is at 800.30 and the lower edge is seen at 509.80. We would not be surprised to see this index return to the 580 area.