Thursday, May 13, 2010

All About Today's Reversal, And Why It Matters

The downturn in equity markets today should not have come as a surprise to anybody who understands charts and amrket dynamics.

A nice chart of the Dow covering the past six months reveals the condition. The market is sitting right on its 50-day moving average with no clear direction, though lower seems to be the most likely move as days progress.

Recall the events of the past 5 trading days: After the "flash crash" (thanks to the geniuses at CNBC for giving it a nickname) of last Thursday, the Dow sank on Friday, had a sharp opening gap up and maintained that stature on Monday, dipped a bit on Tuesday, rallied above the 50-day moving average on Wednesday, and today closed below that important measuring stick.

Now, there's an easier way to look at these events, especially if you're a cynical observer such as I. After scooping up shares at the bottom on Thursday and Friday, the power players behind the scenes made fast cash on Monday, sold a little more on Tuesday, sucked in more late-comers on Wednesday and now are selling in earnest. The moves are being made in conjunction with various and many stock option plays, the May variety which expire on Friday, the 21st, being the most active.

Depending on how badly these power players - the same group likely behind the flash crash and other recent organized selling - want to hit the little guys on the other end of trades - and how soon - this little episode could take on some very interesting dimensions. They might be over-weighted on the long end, or they could be itching for another downdraft. The latter would make more sense from a chartist's perspective. Once a market breaks through a key level - like the 50-day MA - the corresponding next moves are usually more of the same, and this move was one of significantly violent quality, so the downside appears to be the more obvious choice.

Of course, these insiders are a savvy bunch and they've likely already discounted the idea that the market should behave in patterned ways, so they just might keep stocks chugging along, mirroring the 50-day until options expire. The cynical view is that they bought close to the bottom and are slowly selling at fat profits presently, though, and that patten should continue.

At the end of today's trading, there was a rush for the exits. Stocks closed at their lows of the session, which is one of the more profound daily indicators one can find. It indicates a real reluctance to maintain positions and even less commitment to any new purchases.

Dow 10,782.95, -113.96 (1.05%)
NASDAQ 2,394.36, -30.66 (1.26%)
S&P 500 1,157.43, -14.24 (1.22%)
NYSE Composite 7,234.37, -81.99 (1.12%)

On the day, decliners took the advantage over advancing issues, 4193-2349. There were 192 new highs to a paltry 53 new lows. This is an interesting development. The market is holding judgement in abeyance, perhaps awaiting some catalyst, or just marking time until the next move lower. Volume was down for the third consecutive day, another indication that the markets are poised to head even lower, likely back to test the Friday intra-day low of 10,221.50.

NYSE Volume 5,477,719,500.00
NASDAQ Volume 2,321,865,500.00

Commodity prices continued to cool. Crude oil maintained its relentless slide, losing another $1.25 per barrel, to $74.40. Even gold bugs were either spooked or taking profits, sending the price down by $13.90 per ounce, to $1,228.80. Silver also ran down 16 cents, to $19.48.

Much of today's selling was blamed on some interesting and disturbing comments from mainstream retailer Kohl's, which issued 2nd quarter fiscal 2010 guidance that fell short of expectations and noted that the average amount per transaction was down in the most recent quarter. Macy's also cited the same metric, days ago. With retailers cautious about consumer spending, they are acting as the canaries in the coal mine, warning that the current recovery - if one exists at all - may not be sustained. If they're right, stocks will find no bottom in the near term and the remainder of the year may be a wipeout for many corporations.

It's interesting to note that the January indicator predicted that 2010 would be a down year for stocks and maintains a solid record of correctly predicting the future economy, somewhere in the range of 85% accurate. Since the major indices are right about where they began the year, that long-ago (4 months) indicator overhangs the market like the sword of Damocles.

While Wall Street pondered its own fate, oil continues to surge from beneath the ocean into the Gulf of Mexico. With the disaster now entering its 4th week without resolution, the slick continues to grow and the oil continues to flow. That oil will go somewhere, eventually, but the drama is playing out in what appears to be a slow-motion nightmare on Bourbon Street.

At the end of it all, expect to see the end of the rig company, Transocean, drowned in a sea of lawsuits. The CEO of BP, Tony Hayward, almost certainly will be sacked, if the company even survives. As for Halliburton, the love-child of former US VP, that company seems to be born under a lucky star. The damage to the Gulf waters, the shorelands and the wetlands may be unbearable and unresolved for years to come.

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