Weekend Analysis for Fri July 11th 2008

Fri July 11th 2008
Fed Try's To defend...Or Did He?
by Jack Steiman

But the market fails when you look at the internals. Once again the advance decline line on the intra day rally was terrible. The numbers speak for themselves. Two to one negative on the Nyse and a few hundred more decliners on the Nas. It's not the way a market bottoms. It just isn't. It doesn't mean we can't rally from oversold as that's possible at any moment or that we can't rally from news that hits such as what happened today to cause the massive intra day rally when the fed supposedly said he'd leave the discount window permanently open to Fre and Fnm. After hours he denied that report to be true. That's more than interesting. It shows how the market can be manipulated when the wrong people say something. it doesn't take much and isn't appropriate but that's for another time. So it's quite possible the fed didn't try to help and the market rallied up for no reason. Bottom line is this. The market rallied only to see that rally fail late. The advance decline line was terrible and thus there's absolutely nothing in this moment to get excited about. The market remains terribly weak despite the length of time it has been extremely oversold. A strong rally is out there. We are compressed but we still don't have the necessary catalyst.

So you wonder how its possible for the market to close the Sp at 1239, basically right on the edge of disaster. We were well below it when the "false" rumor about the fed came out and shot it well above, back to 1251. It then once again fell back and closed at 1239 and leaves everyone wondering what's next. It is virtually impossible to be either long or short this market. Trust me when I tell you that any drop of good news out of the blue will send this market sky rocketing near term as we are deeply compressed and we also have a record number of shorts historically. It will happen but who knows when thus the risk is high shorting from these levels. Going long, however, is also very dangerous as we're near that breakdown level and the fundamental news is nothing short of horrific. If we fail to get any good news in the days ahead it is realistic to think we will break down hard. When markets are this tough you take the third position, cash!!!

Earnings begin in earnest next week and whenever this happens in a bad market, invariably you get two distinct reactions. If you miss and warn on the future you get annihilated. If you're a closely watched stock the market will be affected as well. To the contrary, if you are one of those closely watched stocks and you report better than expected earnings you will be heavily rewarded and so will the market the next day as again, we're very compressed and the shorts are at record levels. This makes playing even more complicated as you have to try and guess what stocks will report well and which stocks won't. Russian roulette. Good luck!! So we basically go from very difficult to near impossible until we get the right signal contrary to what exists now. The daily Macd's simply must improve and put in a divergence and there's almost no chance of the type of one we need to see until we can first establish a decent rally that's sustained for a few weeks.

The thin zone is still out there and that means 10,700 is still a distinct possibility on the Dow as is 1170 on the Sp. You must respect these thin zones as they are watched carefully by the big money. They know there's no support and thus they become far braver in shorting. They know others won't try to get in the way until support is reached and so far it has worked out beautifully. Always rallies but they know new shorts and sellers will step in. When you are dealing with multiple support zones close together it is far harder to gather up the momentum necessary to take the markets down harder. This has not been the case and thus why you're seeing the markets fall so rapidly. There just simply isn't much support until 10,700 and 1170.

It was interesting and troubling today to watch some key stocks break. Rimm continues its nose dive. This loved stock is completely out of favor since they warned and it just can't hold a bid more than a single day. Aapl had good news today yet was down 4. Bidu, a major leader, got crushed by 23 today and Goog is on the precipice of losing massive 525 gap support. Add the lone financial savior in Gs as it lost massive support today at 167/165. Down 9. Good volume to confirm the move. Not what you want to see if you are trying to find something bullish to hold on to. That's an important group that got crushed today. Leaders selling hard is not good. On top of that the Vix broke out and is seemingly on its way to 32/33 over time which would suggest lower stock market prices. There just isn't anything positive to take from today's session even though we had that amazing intra day rally on a false rumor. The key stocks still ultimately performed in a bearish fashion. They need to lead and they're not any more.

I am a very deep believer in being cash when markets tell me to. There's nothing wrong with that. There's a lot to be said for being slightly positive since last October while the major indexes are down over 20%. We are very proud of that. We did great shorting in January and February but took the foot off the gas once things got more risky. So yes I wish we had shorted more but the bottom line is no one is getting hurt throughout this entire bear market and we are very proud of that. What is that worth? We're far from perfect but we'll take it and I'm sure most of you will as well. The market is still in deep trouble. the risk of shorting is increasing but the market may go much lower still. We probably won't chase it lower unless we get a good rally to short in to. We will not do much if any buying until we get the right signal. It is what it is folks. Being appropriate in this environment will leave you tons of capital for when the time is right and help you sleep at night.

Have a great weekend and play with a child if you get the chance. It'll make you smile.

peace

Jack

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