Thursday, August 12, 2010

No Cat, No Bounce In Dead Trade

Normally, following a massive decline like the one Wednesday, traders will be looking to see if the market shows any signs of strength with a bounce the following session. In bull markets, there's almost always some buoyancy with buyers stepping in to scoop up what they deem bargains. Even during bear markets there is usually enough optimism to promote some short-term relief, but there was none to be found on Thursday, as the major exchanges wrote down their third straight session on the red side of the ledger.

Although the markets opened down heavily and within minutes were trading at what would eventually be the lows of the day, stocks spent the entire session below the unchanged line, without even a hint of buying. This is a very bad sign for anybody holding stocks right now. An acute lack of buyers in the public marketplace presages not only a severe downturn in the values of stocks, but potentially a liquidity crisis in which stocks cannot even trade efficiently.

If there's going to be another shock to the financial system, it's likely to be in the form of liquidity since we've already entered into a deflationary environment. The one asset hailed as supreme during deflationary periods is CASH, simply because that's what everyone covets. Stocks will be shunned, and eventually bonds too, as the wisest choice will be seen as fast-appreciating cash, because it will buy more tomorrow than today as asset values are pounded down into the earth.

Since sellers are normally looking to "cash out" of positions, what happens when they don't recirculate their cash back into the equity markets is a lack of liquidity. This soon turns into a vortex, as buyers cannot be found except at deeply-discounted prices, sucking down the value of stocks with every trade. The abnormally low volume witnessed over the past week demonstrates, quite clearly, that buying interest has all but dried up. It's only a matter of time before stock holders cash in their chips and leave the markets for a long, long time.

Dow 10,319.95, -58.88 (0.57%)
NASDAQ 2,190.27, -18.36 (0.83%)
S&P 500 1,083.61, -5.86 (0.54%)
NYSE Composite 6,881.94, -20.77 (0.30%)

Declining issues ramped past advancers on the day, 3788-2646. Even more telling was the now-complete about-face in the daily new highs and lows. New lows took the upper hand for the second straight session, by a widening margin of 264-209. While volume has been decried as out of order, it is worth noting that the only positive daily finish of the week (Monday) was accompanied by the lowest volume, by a long shot. Overall, trading volume has improved each successive day since, though every day was a losing one. That's about all one needs to know about whether or not this downturn will continue. Volume continues to gain strength as more and more traders hit the panic button and sell. Since Tuesday was only the beginning of this current round of equity liquidation, expect further declines and the same or higher trading volumes in days and weeks ahead. There seems to be no stopping the markets from engaging in a race to the price discovery bottom.

NASDAQ Volume 2,211,456,250
NYSE Volume 4,563,876,000

As the dollar gained strength again, oil prices careened downward, losing $2.28, to $75.74, a quick reversal from the trades last week above the $80 mark. Gold got a sizable lift, up $17.30, to $1,214.80, now that speculators can read the Fed's hand without even having to peek. The Fed is out to eventually rip up the currency, making gold more valuable, and trader's aren't particularly concerned with short-term dollar strength, like today. They're ready to dive into gold and drive it to new highs, something that should surprise nobody, as gold has outperformed every other asset on nearly every level over the past ten years.

Silver gained slightly, adding 16 cents, to $18.05.

The markets were blind-sided once again prior to the open by another depressing report on initial unemployment claims, up to 484,000, following last week's stunning 479,000, which was revised higher, to 482,000. Not only are jobs not being created in the United States, more companies are beginning to lay workers off as the economy has stalled. If unemployment continues to rise, there is no hope for a recovery, which seems obvious. The double-dip recession which so many have discounted as unlikely, now seems a certainty, though one wonders why it took so many people so long to admit it.

For what it's worth, Bank of America (BAC) closed at another 52-week low today, down 13 cents, at 13.06.

Tomorrow's CPI report for July should show the effects of a moribund economy. Unless I've been completely wrong the past three years, the number should be lower, signifying further deflation.

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