Storm before the Calm

A growing number of struggling companies are opting to liquidate rather than trying to restructure in bankruptcy. Bankruptcy lawyers say many are caught between a slowing economy, a lack of bankruptcy financing, and loose covenant-lite bank agreements that allowed their financial situations to worsen before creditors could intervene. -WSJ

This is what the WSJ had to say concerning the Bennigans and Steak and Ale bankruptcy filings. I believe Linen and Things is liquidating along with of some others I can't name at the moment. Mervyns, a department store, also just filed a chapter 11 but intends to reorganize. This liquidation trend is clearly an out growth of this credit crises. I can't recall anyone liquidating in the past 2 decades. They'd just file for bankruptcy protection, reorganize, and come out swinging again with a cleaner balance sheet. It didn't matter that these also ran competitors had poor returns on capital. Hardly any unprofitable bankrupt company liquidated. But that's changing. I have a feeling that a bunch of well known franchised restaurants and retailers are not going to make it and will not be resurrected either. The end result is that although it's a near term lose for the economy, the survivors will be much more profitable. Sounds like an investment opportunity. Capitalistic Darwinism the way it used to be. This is just like the 1930, I suppose, when tons of business went under.


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Another market rally catalyst might be these vulture funds buying up more of the toxic paper from sick institutions such as Wachovia, Washington Mutual, AIG, or some other insurers who have refused to write down this garbage so far. Don't forget about the institutional imperative and the lemmings who run these places. They'll watch and see how the market reacts to the so-called Merrill cleansing (yeah right). A wave of the magic wand and these clowns have found a way out of their self inflicted debacle. Their shareholders of course get screwed (like they aren't already) through the dilution of their shares. If these vulture deals start coming at us in numbers, CNBC will be screaming at the top of their lungs that the bottom is in, and the market will get all excited for a while any way.


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On Wednesday the NYA rallied late in the day taking out the weekly pivot range with a close of 8565. The ultra long SPX (SSO) ETF closed above its weekly pivot range (59.40 - 60.40) at 61.65. So far so good I guess. Its hard not to be cynical about any sort of move with these hedge fund lunatics running the asylum. Positive economic data Friday should keep the bulls in charge. However a really bad jobs number will absolutely crush the market -- probably 300 to the downside. A bad jobs number will present a quick short SPY, QQQQ type of trade.

Pop and Drop

So far this session looks like a classic pop and drop. The market rallied early on the unexpected +9000 jobs ADP report beating the -48,000 job loss estimate. I suspect that there was some early short covering carry over from yesterday as well. Sure this two day rally beats the usual 200+ down days which has become the norm, but nothing much is really happening here. The hedge funds are still making a mess of this market. There's no follow through on winners - so selling the rally is the rule. That's why these rallies are so short lived with such sharp reversals. Nobody trusts it! Can you blame em? Will tomorrow bring more of the same with the fear of the financials returning to the spot light again? Us human beings learn by our experiences and for the past year its been wise to sell out into rallies. Now the rallies are getting shorter and shorter. In the not so distant past the rallies lasted for several weeks, now we're lucky to get a few days. This is classic bear market action. This won't last forever and maybe we're even getting close to a change. When the market can finally sustain a rally of some duration, that's when the fireworks will really begin in earnest.

The Weekly Pivot range is 8425 - 8495. The NYA is currently in the pivot range at 8450. Not a great rally. Essentially we just got back what we lost on Monday's plunge. Plus we're right at the weekly mid pivot of 8460.

8910 r3
8740 r2
8565 r1
8460 mid
8290 s1
8185 s2
8010 s1

1. We're well below the 200d mva which is horrible place to expect sustained bull market rallies.

2. It's holding the 8100 low and upper half of the bollinger band. This market needs to remain in the upper half and above the 9d ema if its going anyplace. Otherwise the selling will beget more selling.

3. The rally 6 days ago carried to around 8633. The July 1st high is 8666. A very good sign if the market takes out those points without falling back. A terrible sign if it breaks below 8100.

4. The market isn't overbought so a strong rally from this level is very possible. What's the catalyst? Friday's jobs #. The ADP report is notoriously unreliable when compared to the government figures. The May jobs number absolutely crushed the market. Some of the recent data suggests that employment is holding up and big recessions don't happen without lots of people being unemployed. I know the numbers are skewed, but they are what they are and what counts for us is how the market reacts to the numbers. The non-farm payroll estimate, for Friday release, is -68,000. If this comes in anywhere close to +9000 like the ADP figure, I think the market can get a real rally. The estimate for the unemployment rate is 5.6% so anything lower than that will add fuel to the fire.

If this scenario were to play out, I'd be looking for a strong rally up to the r2 8740 level at least.

5. On Thursday we get the revised GDP figure which is estimated at 1.8%. Doubtful that will surprise to the upside. The economy is sluggish (just look out your window). I think 1.8 is pretty good all things considered.

6. Friday is August 1st. Often the first of the month gives us the H or low of that month. In July the H was 8666 (remained the high all of July) and the Low was 8491. Mark Fisher along with talking about his ACD system and pivot ranges, brought this interesting statistic to my attention. The funny thing is that it seems to hold up more often than not.

NYA Pivot Range

It receded all the way back to the weekly pivot range ( 8277-8395) today. There are concerns that WaMu, Bill Nygren favorite for many years, is unable to attract unsecured credit and may see a run on its deposit base. The NYA closed at 8369.91 which is still a bit above the mid pivot at 8335. We could get a bounce off the pivot range here, but a close below 8277 in another negative dished out by this market. If that happens this week's rise will turn out to be nothing more than a very short lived, and vicious, sucker rally.

I saw an interesting note from Morningstar yesterday. According to their research director, "banks with strong balance sheets like WFC, JPM, USB, HCBK are printing money because they have capital to lend while others don't. The poorly capitalized banks need to keep their capital on their balance sheets to meet regulatory requirements and prevent against future losses".

I think that a good place to look for long trades in a rally are in the rock solid banks. They all are not going to implode as appears to be the case with the WaMus of the world.

50% retracments

The late day frenzy were the jittery shorts running for the exits. New bull market? I'm not falling for that one - especially after the past 12 months of one horror followed by another.

At least the weekly NYA held it's 200d sma. I wont get bullish until this longer term view gets through the midway point at 9000 where strong overhead resistance should be anticipated. For the record Dow Theory is mired in heavy bear territory and I won't get really bullish until it gives a bullish signal.

As for the Dow Composite (utilities, trans, and indus. wrapped up in one), I'm looking for strong resistance in the 4325 area.

A real plus in this rally has been the leadership by the small cap indexes. The Russell 2000 has been on a tear and out pacing the other major indexes. You want to see leadership from the small caps in any new bull market.

The XLF has rallied all the way back to its 50% retracement level. Don't get all giddy over these financial. If its the real deal there will be other opportunities to get in.







KEY 50% RETRACEMENT LEVELS TO WATCH INCLUDE:

1. DJI 11950
2. SPX 1320
3. OEX 605 - i'm still riding that oex position although i did exit 1/2 the position late last week. This one is working out well.
4. COMPQ - 2360
5. RUT - 705 (already breached)_

Pivots

With poor earnings from American Express and weak guidance from Apple, the futures are signaling a lower open Tuesday. Let's see if that weekly Pivot range holds. If it does, it may set up a good long trade in the mid pivot area.

NYA Pivots

8840
8710
8582
8335
8205
7960
7830

Weekly Pivot Ranges:

NYA: 8277- 8395

SSO: 56.88- 58.55

Weekly Pivot Range as a guide

The Weekly Pivot range is 8370 - 8410 which the market has not penetrated. This morning it tested this major resistance level before falling back. It is imperative that this level be taken out if this rally is going to go anyplace. The weekly pivot range is the "meat of the market" and are the price levels that the majority of trading took place last week. It's outlined in the book the Logical Trader by Mark Fisher. The Weekly Pivot Points based on last week's volatility are :

8890 resistance 3
8709 R2
8530 R1
8390 - mid pivot
8208 S1
8070 S2
7890 Support 1

We are still right around the mid point level even after yesterday's 260 point Dow gain. Not that great. My upside target is R1 at 8530 which would be a real nice accomplishment, but unless we first take out the weekly pivot range, and soon, it's probably not going to happen. And the longer we hang at the mid pivot point, the greater the odds that this market falls back again. The issue is whether the bulls can take control right here. If they can, I think we've got a pretty good shot at a nice rally. Note that for the past several weeks, the market has traded below the weekly pivot range just about the entire time. In fact it hasn't even flirted with taking it out to the upside. Also we've been hitting the S1, and S2 levels each week. It would be real nice to see it go the other way for a change.

I've still got those OEX calls but the clock is starting to tick on this trade. If the wkly pv is taken out great, I'll stay with them. If not, I'll likely cut back 1/2 my position by the close.

The weekly pivot range for the SSO (leveraged S&P 500 etf) is 58 - 58.75. It's currently trading at 58.55 so a close above 58.75 is key.

OEX CALLS

With the sentiment so sick and market oversold at recent extremes, I decided to start buying the Aug 600 OEX calls yesterday. I started out small and have been adding to the position.I hope to buy some more for a 1% of equity position. A speculation only but it passes the smell test.

I also dove in this morning for some beaten down names like CME, TROW, BIDU, RIMM, HCBK. Watching others like GS, MA, and V. Let me say that HCBK has nothing to do w/ Cramer (a man whose methods I do not endorse because I don't like the way he just magically exits stocks, that got creamed, and no one else is aware he "supposedly got out"). It's BS. "Oh we don't like AAPL anymore" (after its down about 30 points). The same thing is going to happen with his nat gas, steel, ag, and energy picks. He simply presses where the momentum is strong and hopes they keep on rising. Has nothing to do w/ value, homework, or analysis. Just watch and ignore that guy. I was a depositor at HCBK long before the bank converted and went public. If anyone knew the financial virtues of Hudson better than me, than I'm not aware of that person. One other thing, I had my business and trust accounts at Hudson from 1990 so I view the stock offering as payback for having to deal w/ them for a decade -- if you know what I mean. BTW, another great potential $2Bil asset conversion savings bank, similar to Hudson, is Columbia Savings Bank. A very fine institution which I hope, no pray, decides to convert someday.

Let's hope this rally has some freaking legs for once. If it does, I think I can pile on some money here. Thanks for taking the time to stop by!!

Investors Intelligence Survey

Confirmed! The outlook is extremely gloomy.

As expected Sentiment has worsened. The July 8th Investors Intelligence #s are % Bulls 27.4, %bears 47.3, B/B spread -19.9, B/B ratio .58. Bespoke Investment Group mentioned in Barrons that the market is poised for a 5% snap back rally. I'm thinking along the same lines from a trading perspective. These #s are just so darned bearish to ignore.

On July 1st %Bulls 31.9, %Bears 44.7, B/B spread -12.8, and B/B Ratio .71.

Investors Intelligence (II) July 1st visuals. As you can see, the sentiment readings extremely gloomy. All that means is that the 140 financial newsletter writers surveyed by II are leaning toward bearish opinions to their subscribers. Of course this is a contrary indicator meaning that the tide is so negative that everyone is on the same side of the market. True, but as the experienced market watchers already understand is that very overbought or oversold conditions can last for a very long time.

The DJI put in another new low. This market just doesn't want to rally. Period!! What's keeping it down. Oil and recession fears to a point but it's really about this on going Financial mess which was self inflicted from the top. This thing just won't go away.

So the bottom line is that these sentiment surveys have been very negative for a couple of weeks now and the market is still making new lows. No one said it was going to be easy.

The Intelligent Investor

The market is getting annihilated this morning on exacerbated fears related to the credit crisis. The fear, at this moment, is Mr. Market's perception that Fannie and Freddie are insolvent. Based on the gross mismanagement and low debt to equity standards employed at both institutions the past decade, they probably are. I wouldn't be so quick to discount the market's view on this one.

LEH is also being taken to the woodshed now trading at $14.00 regardless of who is pouring money into that seemingly bottomless pit. I might add that a New Jersey State pension fund poured a few hundred million in last week. Probably got suckered in by the promise of bringing some jobs to the Garden State. The whores in Trenton will do anything that smells of expanding the tax base. That includes encouraging the municipalities to raise property taxes at every twist and turn on the sun dial, refusing to lay off useless bureaucrats, providing building permits for construction of just about anything on all open spaces. We even charge the public to access our beaches (sickening). Now they've been suckered in by the lame duck Lehman Bros., which in all likelihood, will soon be joining the likes of Bear Stearns, Kidder Peabody, EF Hutton, and DLJ in that big subprime market in the sky without producing one promised job to the State. How about that.

When a NJ pension fund manager was asked about the LEH investment and rapid slide of the stock, his response was old school, saying "We are in for the long term". The stalwarts of value, Bill Miller, William Nygren, Richard Pzena, Chris Davis, ad nausium, when asked about their large holdings in FNM, FRE, C, WM, AIG, and the housing sector, responded verbatim even though they were thousands of miles apart from each other that, their cash flow models showed that these securities were vastly mispriced by the market and that they were in for the long term. Uncanny!!

sentiment

A couple of different looks at the current
over sold conditions. I prefer the extreme pessimism in the sentiment indicators the best indication. I'm looking forward to seeing the investor's intelligence #s later today which I'm sure will be quite gloomy.

A very good book on using market sentiment is Gary Smith's, How I trade for a Living. I recommend it. If you get nothing else out of it, Smith at least shows why using multiple technical indicators to trade is like searching for fool's gold.

I'd like to see a nice rally off this bottom to around 9000 on the NYA (see weekly chart)

Why there are no rich technicians

Ever wonder why there are no super wealthy technical analysts among the Forbes 400? You know those purists who rely on trend lines, rectangles, head and shoulder formations, oversold oscillators, double tops, etc... Because on its own technical analysis is useless. TA has some merit but in reality it is very over rated. The market is a huge barometer of public opinion and human psychology. The bottom line about the stock market is that the only thing it cares about is future earnings, or in the very least, the prospect of future earnings. It was that way 100 years ago, that's how it is today, and that's how it'll be in 100 years (mercifully I won't be around to find out).

That said the market is very over sold and looked like it was going to hold its early gains until that wack job Janet Yellen opened her hole. Where do these people come from? What world do they live in? I guess I'll never know.

More important than these indicators are the sentiment readings. The AAII readings were Bulls 24% and bears 52%, which suggest a short term turning point is really close. Tomorrow investors intelligence's numbers come out.