The Dangers of Fraudulent Behavior

Throughout most of the Thursday session, markets were substantially lower for no good reason other than that stocks are still overvalued and too risky right now for the majority of investors.

Right at 3:00 pm, however, it was as though Moses had parted the Red Sea and the enslaved people were freed. The Dow had just broken below 7700 for the first time since November 21, but it would not stay down long. (see image at right)

Like Rocky rising from the canvas, the Dow Jones Industrials staged somewhat of a "miracle" recovery, finishing at 7932.76, easily the best level of the day and a solid 240 points higher in just the last hour of trading.

Hallelujah! Reuters is giving credit to the Obama administration for the rally, citing his sketchy plans to help homeowners.

The real headline - instead of Reuters' tag: S&P and NASDAQ rise after mortgage plan news - should have been "stocks higher as day-trading Wall Street wheedlers cover their shorts."

My headline is probably closer to the truth. Hilary Kramer (left), a frequent guest on PBS "Nightly Business Report" said, during her appearance on the February 11 show, that her most profitable trades of late were short term buys, which she would be out of in less than "48 hours." If Wall Street professionals are day-trading (which is trading, not investing) then what does that say of US equity markets?

It says quite a bit, but clearly expresses an understanding that they are no place for actual long-term investments. Today points up what many people suspect. That Wall Street is becoming even more of an inside game than ever before. The bankers who testified to congress yesterday didn't reveal anything about what or how they were doing internally. Traders won't normally tell either, though one must respect Ms. Kramer's candid behavior on a national financial show.

In any case, we should all be used to substantial bear market rallies appearing out of nowhere for no reason. Today was such a case. In days ahead, expect the losses to resume because hitting 7700 and bouncing off it is not a retest of the November 20 lows - not even close.

It may take six months or six days, but those bottoms must be tested, and they will. No significant bottom has occurred in this market and for good reason: we haven't seen the worst of this recession yet.

Dow 7,932.76, -6.77 (0.09%)
NASDAQ 1,541.71, +11.21 (0.73%)
S&P 500 835.19, +1.45 (0.17%)
NYSE Composite 5,256.45, +3.77 (0.07%)

Faced with a market such as this, individual traders must use their own judgment. The smartest among us are out completely, having moved into the safety of money markets and, in my case, heavily into silver (Since silver broke through 13.50 yesterday, I am temporarily out, awaiting the next buying dip.).

If you must be in play, Kramer's advice is a gem of unusual clarity. In and out is the only way to play.

On the day, there were some interesting economic numbers released, including initial estimates of retail sales for January, which tallied a 1% increase over December, which, in itself, is somewhat of a shocker. In other words, people bought more after the holidays (January) than before or during them (December). Of course, the US Census Bureau's numbers are "adjusted for seasonal variation and holiday and trading-day differences, but not for price changes..."

Well, that's a mouthful upon which I won't bite. Never mind that "Total sales for the November 2008 through January 2009 period were down 9.5 percent (±0.5%) from the same period a year ago."

New unemployment claims were significantly higher, at 623,000, which alone could have accounted for the 200+ point drop on the Dow, that is, until manic buying took hold.

Our trusty internal indicators told a vastly different story. There were more declining issues than advancing, 3319-3050. New lows were 321, compared to just 19 new highs. Volume was quite high, especially on the NASDAQ, not unusual considering the overall volatility.

NYSE Volume 1,480,256,000
NASDAQ Volume 2,470,079,000

Commodities, less prone to manipulation and political head fakes acted more rationally. Oil fell $1.96, to $33.98, its lowest level since mid-December.

Gold's rapid rally stalled slightly, gaining $4.70, to $949.20, a gain much smaller than those of the past few days. Silver dipped a penny, to $3.51.

Congress was still diddling around with the banking fix and the stimulus package, though those two major pieces of legislation/regulation are quickly becoming back burner issues. Stocks are supposed to rise and fall on fundamentals, earnings, profit, not politics, though that is what currently seems to be moving markets. It's a condition which cannot last long before becoming a very unhealthy environment.