DJIM #10 2008

We are 10 trading weeks into 2008 and major indices closed at a new low for the year on Friday.  By now, we think most if not all the market participants have either willingly or unwillingly admited that we are in a bear market.    If this was just a correction, the market would've turned already.   Instead, for the better part of the last 8 weeks of trading, and on more than a few occasions, this market tried to defy logic and rally on hopes that all of the bad news was already "cooked" into the security prices.    

Until last week, the proven trading strategy was to fade the strong selloff and buy on the weakness on the notion that we won't break 12000 on Dow and 1320 on SPX.        Based on the volume the past few days, we believe the latest breakdown of major support is pointing to more downside ahead of us.   A fresh phase.  Why?  The selling volume of the past few days that broke the major support does not seem climatic and the pace of selling seems too orderly.    Of course, just by having a technical picture in front of us does not give us any real edge to interpret what may actually happen the next few weeks.

Without looking at any charts of any kind, but by simply reading through some of the major headlines the past week, you'd wonder why we even bother checking the charts for confirmation.     Lets just recap some of the news headlines here.    

• 1. The much anticipated bank bailout of ABK finally came to conclusion with ABK ending up doing an equity offering.     This news shouldn't come as a surprise because most of the banks desperately needed to boost up capital on their own balance sheet and why would they offer free credit to a very troubled bond insurer?    You can see the reaction of most financial institutions as most of them closed at multi year low.   Things will get even more interesting as GS and LEH are set to report their Q EPS a week and half from now.    2. Both Crude and Gold hit new highs during the week and they show no sign of pulling back.    This of course coincides with the new low hit by U.S. dollar on anticipation of another major fed rate cut.    For those who don't quite grasp the connection of these things, you only have to understand that more and more money is fleeing U.S. dollar denominated assets and into anti-inflation assets such as gold and oil.   If you have been playing any stocks that are into digging stuff out of the ground, then you'd know which sectors people are favouring right now.   3. The latest job report indicated a loss of 63000 jobs.    This further indicates that we are heading deeper into the recession and it doesn't take a genius to construct a line chart from last three job reports to see where this trend is going.

So what now, you ask?    Has this market become an all out short fest?    Historically, March to September is never the strong period for the equity markets and it's more importantly so this year to consider.     Basically, we have an economy pointing to deeper recession, a credit market that is in disarray, and potentially a stagflation environment, we just don't have a lot of positive things to look forward to.    Fortunately, we think what has worked for us the last few weeks still apply to periods going forward.    That is, we'd try to play on the long side of resource based sectors on dips while short others on strength.

We have a Fed meeting a week and half away and if there's a rally anticipating a rate cut, we'll be there.   To us, things will go from bad to worse in the coming months and we'll keep this mentality in our trading strategy.    In the meantime, it's a good idea to define your watchlist into a long play and short play list so you'd know what to do when when a triple digit move happens from this market.

A few things from Friday needing some explaining was the lack of correlation in the indice tallies.  We don't have it.   The indices not blowing past the breaking points on horrible news maybe offering up a chance to move up early in the week.    Was this what the NDX stuff was thinking ?   Something is amiss here and we're not sure what to make of it.    We'll just eye it closely starting from what may be a very telling premarket futures.