The S&P 500 Is About To Collapse, Day 1, Vol 1
As much as many of you around here don't care for GMX, I'm going to pay tribute to him here by whole-heartedly agreeing that the market is in for a major correction to the downside. I had been waiting for confirmation of a change in attitude and figured late last week that we were within days of finally seeing the fruits of patient waiting. Alas, a plethora of ghost-bullishness has us rallying like we've dropped 40% over the past two months. We are in for a very hard, very fast move to the downside that will come as a surprise to many. Really, I swear I'm not a perma-bear, though it may seem like it the past seven weeks, but there are just too many negatives here to continue standing behind this rally, especially the one over the past 4 days that has us up 8.3% off of the lows. What negatives you say, glad you asked..... *breathes deeply*
• CIT Group is going bankrupt and the government is going to do a darn thing to stop it. CIT is a financing middle man for something on the order of 300,000 small to medium sized business and its very likely that some of these businesses will have their money frozen during the bankruptcy process. The simple fact that the market is ignoring the impact that the fourth largest bankruptcy in history would have on the market is arrogance at its finest. CIT is going to have a wide ranging impact on the retail sector specifically.
• I don't care how many times I have to say it, a gap on the S&P 500 chart will not stand! The S&P 500 has not been able to sustain a gap in its chart for longer than a few weeks in nearly two decades. The setup here is also undeniable as the gap coincides perfectly with that little indicator that I despise so much, the 50 day moving average. Although we've broken the downward channel to the upside, we've done it on non-convincing volume and with a gap. I'd be in the bull camp technically, if we managed to break through the upper channel without the gap, but leaving it there and even filling it will not be enough.
• The put to call ratio has been exacerbatingly skewed toward the bears. I mentioned in my last blog that I should have looked very carefully at the amount of open calls for the July 93 contracts on the SPY. Traders did everything and anything in their power to move the S&P 500 up to a point where their contracts were no longer worthless. Still, the amount of Aug 80 and 85 puts are going through the roof by the day. Options sort of act like a road map to tell you where traders are placing the majority of their short-term bets, and right now, beyond tomorrow, the traders are telling you to sell your stock and bet short.
• Despite the Obama administration's best efforts, the foreclosure rate rose another, incredible, 15% last month. We're talking now that 1 in 380 homes in America received a letter of foreclosure in the mail last month. Inventories are rising like mad given this rising rate of foreclosures and as silly as the idea Warren Buffett proposed might seem, it may be time to axe the production of all new homes in order to get rid of the glut of inventory.
• Unemployment rose to 9.5% in June and continues to look like its on a torrent path to 12%. This wouldn't be such a completely insurmountable situation if hourly earnings weren't stagnant as well and now inflation (as of those June numbers) is starting to kick into high gear. We have people who want to work, working less hours, making the same amount of money, and having to deal with rising prices yet again because the Obama Administration can't, nay, won't stop printing money!
• Earnings have not been that spectacular, definitely not enough to warrant an over 8% move to the upside. Intel reported its first quarterly loss in nearly two decades, JP Morgan warned that the credit side of their business is still very poor and would amount to more losses in 2009 and 2010, and Google reported tonight that ad revenues in Q2 were weaker than expected. Particularly of interest in Intel's report and a few other smaller reports thus far is that the growth has been from foreign countries, not the United States! We are still very much in a recession here and a few people are blowing up the balloons for a party still six months away.
• Stocks can't rally without energy! There, I said it! Energy is just as important to a market rally as the underlying financial and tech sectors which have been the main proponent of this four day shenanigans period. Oil has moved approximately 20% below its earlier high and commodity prices have been relatively stagnant, if not moving steadily lower. Once again, we're ignoring the bad as if it doesn't exist and praising the little good we receive.
I don't want to write a book so I'll stop there...