(click on picture to enlarge)
CHART AU COURANT: Here is a daily bar chart of the BKX, the banking index. From its all time high near 120 in early 2007, it has fallen to 46 as of last week, a Fibonacci 62% collapse. Several interesting things happened into that low last week, which is not necessarily THE low for this financial sector index, as my blue lines show at the lower right corner. First, the index touched the 3 standard deviation line (orange), which is statistically impossible to sustain for long. Second, since that touch, the index exploded for the largest percentage advance in four days in history (37%). Third, the weekly stochastics (not shown) have given a buy signal for the next few months, and the monthly stochastics (also not shown) are about to do the same. Finally and most importantly, the government has created a list of companies that are now protected from the hedge fund gambling game. These are key banks and finance companies that have been destroyed in the last year by these games, and are the pillars of our financial system. Since they can no longer be "naked shorted", the continuous selling of their stocks and rumor slinging has abated. This suggests that any decline in the next week or two that remains above the 46 level should be bought. This can be done with the XLF, an exchange traded fund that mirrors this sector, if you are so inclined and can stand the risk of single sector investment. I have also shown the initial and next resistance levels for this coming bounce. Those levels on the XLF are around 24 and 28 respectively. So, one would attempt to buy into any dip toward 18-19.5 from here, using 16.75 as your risk level. The daily stochastics (shown in the bottom window of the chart) have reached an extreme overbought level, and further upward progress should be very limited, until a pullback relieves this overbought condition.
Bottom Line: Basically, this chart tells us that the banks are so beaten down, and have had such historic losses, there is not much more selling to come. Usually, this means the crowd is "out" of bank stocks, but a final price low is yet to come, sometimes several months down the road. I'd now expect a multi month bounce and a final low into late 2008 or by mid 2009. The hard money was made during that 37% move last week. Hard because you would have not only had to have had our decision support model, but had to have made the buy at 17 when the sky appeared to be falling. The much easier money is the trade described above, with clear risk parameters and entry and exit levels known in advance. Taking this trade is less important than understanding that the system used to stalk it is the same one used in every other play we make, including those in our red and green stock lists at the bottom of each post.
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MARKETS: Here's a shocker...if you price the Dow in ounces of gold, the Dow is now below its 1929 peak. About 11 ounces of gold will buy the Dow today vs. 18 ounces of gold back in 1929. Why? Because our government has destroyed the global purchasing power of the American Dollar, cutting it in half vs. the Euro since 2000 alone. So, are we near a market bottom? Probably not a significant one...
Typically, mutual funds raise their cash allocations as a market is falling, not prior to the fall (but wouldn't that be a nice feature for a fund to have?). The greater the market declines, the more cash they hold. Major market bottoms in the last 40 years have ONLY been established once mutual fund cash levels have reached above 10% of the portfolio. This is true of every major low. Currently, mutual fund cash levels are just now touching 5%. So, are we near a market bottom? Probably not a significant one...
What does happen in Bear Markets, and our current one will be one to remember, is the short term cessation of selling. Just the lack of heavy selling is what causes those overly leveraged speculators to cover their bearish bets, and scramble to the sidelines, temporarily. Some of the sharpest rallies in history have been these bear market variety. It appears that this bounce from last week, and likely continuing into August sometime, is another of these types of rallies. Not the kind to jump into, but the kind to sell into.
A similar opportunity availed itself in late 2000, after the markets had their initial declines from the Dot.com highs. That lower high was a gift compared to the carnage that followed for the next 2.5 years. See my post from May 9th, where you can see the Nasdaq from before the Great Peak, and after. Prices fell 40% (2000 points) from the all time Nasdaq highs to the initial low, then rallied 40% (1200 points) to the lower peak in the first eight months of what was a three year decline. From that lower peak, it fell 60% (2500 points) in the next eight months, and not even that was the final low, which took an additional 20 months to get to, finally scalping 82% off the Great Peak prices. Don't we all wish we'd taken the gift of "only down 13%" at that lower peak in mid 2000? Didn't we all tell ourselves that we would absolutely get out at the next early warning opportunity? Of course we did. How many of us took action from the January/March lows and exited into the June highs, while I was pounding the table, showing charts, and giving "line in the sand" numbers that could not be violated? Well, since at least most of us are human, I'll assume very few did. Yes, I know those that did, and you can stop thanking me. The congrats goes to you for taking the hard action to leave the party before it was actually over. Well done. Bravo.
Those who didn't are about to get another chance into this August time frame. Carpe Diem...seize the day!
Popular stocks to lighten up on at current prices or higher are: no point selling here, as a multi-week rally either began last week on July 14th, or will by the end of the week/early next week.
Interesting stocks to add to gently (if you have to): GE from 30 (entered at 27 on July 1) could test 36 and add into 18, SBUX from 13-15 (entered at 15 on July 1) could test 23-25, GRMN from 40-42 (re-entered 43 on July 1) as pointed out for weeks (touched 55 so far and if you didn't take those profits from 42, +30%, hold for the next run above 55) could test 60-75, ABK from 2-3 (entered 1.69 on July 1) could test 20+ if not in bankruptsy a year from now, WM from 5-10 (entered 5.18 on July 1 and 3.18 on July 14) could test 18-23 also if not in bankruptsy, adding into 2.50, BAC from 27-32 (entered 23.70 on July 1 and 18.70 on July 15) could test 42 and add into 16 , C below 18 (entered 17.45 on July 1) and add into 12 which could test 40 in coming 12-24 months, and MSFT from 26.5 (entered 26.5 on July 1) could test 31 by year end, GM under 12 (entered 11 on July 1), adding in the 6-8 range, for at least a test of 30 in coming 2 years, BA under 68 (entered 65 on July 1) for bounce to 77-80, adding in the 45-55 range, EBAY under 28 (entered 24.62 on July 17) for bounce toward 38, adding in the 18-21 range, and SNDK under 18 (entered 17.55 on July 1, added 13.25 on July 22) for bounce toward 35, adding in the 10-12 range, NVDA under 13 (entered 12.78 on July 7) for bounce toward 23-25, adding into the 7-9 range, VMW under 38 (entered 37.95 on July 8) for bounce toward 55, adding into the 18-22 range SBUX under 15 (entered 14.91 on July 8) for bounce into 25, adding into the 8-10 range, MER under 31 (entered 30 on July 9) for bounce toward 50, adding into the 18-20 range, and all home builders for bounce of 30-50% from their lows, but specifically, KBH under 16 (entered 15 on July 11) for bounce toward 30, HOV under 5 (entered 4.97 on July 7) for bounce toward 12 and TOL under 18 (entered 16.80 on July 11) for bounce toward 25, AAPL under 150 (entered 149 after hours July 21) for bounce toward 180, finally GOOG under 480 (entered 473 on July 21), adding at 393 and 283.
For what it's worth,
Ken
