Monday, November 17, 2008

The Overlooked Problem: LIBOR

- Massive volatility turns a test of the rally into a rollercoaster.
- The overlooked problem: LIBOR rising following treasury change in game plan.
- No surprise: no rosebuds showing up in the economic data.
- More investors throw up their hands after Friday return of unprecedented volatility.
- Friday frayed many nerves, but market is still set up to move higher this week.

Market doesn't want you to get too comfortable.

Thursday's big reversal and gain had many talking market bottom. After Friday many said it was not. As discussed below, Friday did not undo Thursday's significance, but if the US does not take the right steps, the gains made thus far will backslide as seen at the end of this past week.

You would expect the day after a near 900 point swing on the Dow to start a bit softer. Indeed futures were lower, and they turned progressively lower on bad news in the retail sector, earnings, and the Euro-zone. Retail sales fell 2.8% versus the 1.3% expected, the worst decline since 1992 when the data was first compiled. Almost half the loss, however, was from lower costs associated with gasoline purchases. Thus it was not as bad as the headline suggested. Not good, but not a collapse. Earnings were bad with JCP, ANF, JWN, and KSS, all retailers, lowering their guidance. NOK confirmed its musings last month that 2009 handset sales would fall below 2008. The Euro-zone admitted its nations were in an 'official' recession a day after Germany's own 'official' recession declaration. Here in the US we will have to wait for Q4 GDP in January, but it is pretty clear through unofficial channels that we are in an official recession.

The market started lower and made a good effort in the first half hour at rebounding, but things got out of hand. The modest profit taking was not met with any bids and what was modest selling turned into a 4% decline into lunch. At that point the market bottomed and recovered, rallying to positive into the last hour. That was a relief to many seeing Thursday as a bottom in the market. After three hours of recovering to positive, however, the switch was thrown and once again the selling started. Three hours of gains were tossed in a half hour as NASDAQ sold to a new session low and losses ramped up to 3.8% on the low end to 6.5% on the high end.

As is the history of this market selloff, unprecedented volatility can run the indices up or down in a fraction of the time it would take under what were once considered normal conditions. It is both intraday and inter-day. Thursday that volatility surged the market from new 2008 lows in a massive intraday reversal. Friday it pushed the markets lower overall and twice in the same session after a complete recovery to positive. The buyers and the sellers have obviously not worked out all of their differences.

TECHNICAL. As noted, it was just another day at the office Friday with a lower open turning into a 4+% selloff only to recover to positive by the last hour. Of course you can score to take the lead too early, leaving too much time on the clock for the other side. That is what happened, and within a half hour the indices had hit new session lows. Friday it was back to more of the same with respect to the intraday volatility as the market is still not showing it has adopted a changed character with an upside bias when it is not rallying hard.

INTERNALS. A mixed picture internally. Breadth was stronger on the downside Friday (-4:1 NASDAQ, -3.6:1 NASDAQ) than it was on the Thursday upside. Reversal day on Thursday for sure, but Friday showed a lot of up and down action as well. On the other hand, despite new lows on the indices new lows fell sharply. Volume was mercifully lower as well, falling back below average and matching the Wednesday level on that downside session. A positive on balance.

CHARTS. A lower open on all indices and just a weak tap at the 18 day EMA on DJ30 as the all stalled below near resistance at the 10 and 18 day EMA. Even with the Thursday reversal those are still key levels, the next steps after starting the move with the Thursday reversal. Speaking of Thursday, that action was an outside day where the low and the close were outside of the prior session low and high respectively. Technically that is a positive indication that typically leads to more upside given the direction of the action Thursday. Friday was an inside day, and as you can surmise that is where the high and low are inside of the prior session. Those days basically mean nothing. Thus the Friday action while not instilling a lot of confidence, did not undo Thursday.

LEADERSHIP. It was not a great day for leaders but it was not the end of the move either. While most struggled Friday and gave back some Thursday gain there were no major meltdowns in those attempting to set up to break higher and lead the market. Energy led for awhile, smaller financials hung in for the most part, and health related stocks continue to form up. Large cap tech, after a good recovery Thursday that indicated some life, did not fare well. Leadership is still in need of significant improvement to help any rebound turn into something more than just a short term bounce. There are patterns that are similar to the October bottom in 2002 that carried the load early on, but we need to see them set up more as the move continues.


LIBOR rates quietly rise just as other areas show improvement: Treasury coincidence?

For 23 days LIBOR rates declined, falling at a more rapid pace. There were a few days where rates across the spectrum were mixed, but overall rates fell for over three weeks straight.

In the wake of that decline other markets improved. The October data on the commercial paper market issued Thursday and it showed corporate bond sales jumping. Two-year Treasury spreads are narrowing. There is improvement in the financial market at large.

On Wednesday the Treasury announced it would no longer pursue purchasing distressed assets from financial institutions, the heart of the original TARP program for which it was named (Troubled Asset Repurchase Program). Instead it seemed to prefer the direct cash injection option used with the large banks, the one that gave the banks $250B with no strings attached. We are now seeing that cash used for purposes such as paying out bonuses.

Whether the company had the money to pay the bonuses pre-TARP lending or not, the fact that it took public money and then paid bonuses is unseemly to most taxpayers. It is hard to imagine in times of economic hardship such as these that our money is taken, given to another, and then used to pay a bonus to someone at a company that needed our money supposedly to grease the credit wheels so we all benefit. I missed that day in my U.S. History class as to the constitutionality of this. I also must have missed the day in economics class as well that told us how that was economic stimulus or improved credit markets.

Regardless of whether you agree with Treasury's decision or not, the market is responding. That session the LIBOR rates stopped their 23 day decline. It was not much at first, just the overnight rate ticking up 3BP from 0.35% to 0.38%. The 3-month rate held steady at 2.13%. The next session all key levels rose. Overnight moved to 0.40% from 0.38%; 3-month moved to 2.15% from 2.13%. Friday rates rose again with the 3-month jumping to 2.24% from 2.15%.

After the TARP was announced and the authorization bill passed, within a week LIBOR rates and the TED spread started to fall, i.e. improve. That went on for over three weeks. As soon as Treasury abandoned a course of action that everyone signed off on in favor of direct capital injections in businesses, however, LIBOR rates started to rise.

Whether it is simply some short term uncertainty as to just what Treasury is going to do or some deeper seated misgivings about abandoning the troubled asset purchase plan remains to be seen. We do know that it has injected some uncertainty into the market just as it is trying to put in a bottom at the 2008 lows. Thursday the market managed a big reversal despite the change in Treasury's direction. Friday some of the worries came home to roost as the market gyrated in 4% to 6% swings. What we take from this is that the market as always hates uncertainty and it is in need of Treasury once more laying out a clear plan of action with the remaining hundreds of billions in the TARP.



As discussed Thursday night the bad humor and anticipation of worse times is just about as bad as I have ever seen it. Most people are so beaten down and beaten up they view everything as negative, but as noted the other night, bottoms emerge from the worst of times.

Then along comes Friday and whatever vestige of optimism Thursday brought was spent. We talked with many investors and traders during and after the Friday session and many were throwing up their hands. There are some seasoned ones that viewed Friday as just some lighter volume nervous trade, but many investors are just giving up, throwing up their hands as noted.

This adds to the negative sentiment fires already burning even with the Thursday reversal and the indices still holding over the prior lows. The ongoing nervousness about the market is part of the fuel that ultimately leads to recovery as the sellers finally get done with the selling.

The problem with Friday is the up and down volatility continues even after the Thursday reversal. The buyers and sellers are still fighting. The volume was lower than the Thursday upside reversal volume. With those buyers taking the day off the sellers left could run things up and down. Thus while we don't like the continued and excessive volatility on Friday, we don't think it is going to derail a rally from this point.

Time is an issue here, something I have talked about since this market selling related to the crisis started. As stated months ago, for the magnitude of the problems, this is a pretty short time frame for a selloff, and a pretty modest selloff in percentage terms at that. Financial crises tend to sell quickly and recover quickly. The hope is this one was addressed rapidly enough so the ripples did not spread to the entire economy, causing permanent damage. If the market bottoms here and puts in a good follow through next week starting at the earliest Tuesday, then the meter is still running on the upside.

VIX: 66.31; +6.48
VXN: 66.05; +8.02
VXO: 70.31; +9.71

Put/Call Ratio (CBOE): 1.01; +0.02

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 31.9%. On the rise again, up from 30.2 and the 5 year low of 21.3% hit to start November. Still below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 46.1%. Down from 48.3% last week and well off the 5 year high at 54.4% hit the last week of October. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


Stats: -79.85 points (-5%) to close at 1516.85
Volume: 2.289B (-25.58%). Volume falls significantly below average as NASDAQ sold back. The only above average volume session of the month was Thursday. Looking for more solid volume to come into the index this week as NASDAQ extends its break higher.

Up Volume: 239.577M (-2.451B)
Down Volume: 2.028B (+1.691B)

A/D and Hi/Lo: Decliners led 3.98 to 1. Much higher than the upside Thursday volume.
Previous Session: Advancers led 2.39 to 1

New Highs: 4 (-3)
New Lows: 222 (-498). Nice and low on this test.


Started weak, gapping almost 40 points lower on the open and sold from there. It held above 1500 (1499 is the 2008 closing low) on the early low and on the close. On the high it reached toward the 10 day EMA (1599) and came up short. Still in the pattern, still in the hunt for a move higher after that Thursday high volume reversal.

SOX (-6.40%) fell right back down to the Wednesday close, holding just over that level as the bell rang. SOX and NASDAQ are both trying to hang on and continue the move higher, showing a follow through this coming week after pausing following the initial reversal session.




Stats: -38 points (-4.17%) to close at 873.29
NYSE Volume: 1.449B (-27.21%). Volume dropped off to below average levels, matching the Wednesday selling volume. That leaves the Thursday reversal trade the highest in over a month.

Up Volume: 158.616M (-1.681B)
Down Volume: 1.283B (+1.139B)

A/D and Hi/Lo: Decliners led 3.6 to 1
Previous Session: Advancers led 2.88 to 1

New Highs: 5 (-4)
New Lows: 214 (-471). Well off the prior spike in new lows both Thursday and Friday as those old lows were tested and indeed breached on Thursday. That shows many stocks are acting sold out for now.


Opened lower, sold off, but then came right back to cross the 10 day EMA (908) and move positive. Of course it did not last and SP500 hit the session low on the close. Still well above the prior lows, and despite this setback Friday, in position to make its next upside move. The 10 day EMA and the 18 day (928) are the first levels of resistance to cross this coming week. Looking for a follow through starting Tuesday through Friday

The small cap SP600 (-6.46%) failed at the 10 day EMA as well and turned lower for a market leading loss. The small caps continue to struggle with larger gains and larger losses than the other indices, but they are also well above the lows and are maintaining their double bottom pattern. Of course, a breakout would help.

SP600 Chart:



DJ30 actually made it up to the 18 day EMA (8912) on its high hit at the start of the last hour. Then it made the plunge and closed just off the session lows, right at the interim support range near 8500. Still easily above its prior lows. Positive reversal and as with the other indices needs to show a follow through next week to the Thursday move. In short, the index, all indices for that matter, need to do something with the Thursday move other than fritter it away.

Stats: -337.94 points (-3.82%) to close at 8497.31
VOLUME: 304M shares Friday versus 476M shares Thursday. Nice drop-off in volume to back below average.



Lots of economic data next week for what it is worth. Some regional manufacturing reports, production and capacity stats, housing starts, inflation statistics, FOMC statistics. All they will really do is confirm what the data in October and thus far confirmed: a rapid slowdown in the economy. Right now the data is not going to show the kernels of growth so desperately sought. The slowdown was so rapid and no one has a handle on even that at this point.

That does not mean there is no action. After dumping stocks a year ago followed by a long dry spell, corporate CEO's are starting to buy again. It is reported that C, GE, DOW, GLW CEO's to name a few are buying their stock again. Buying is a better indicator than selling; they can sell for any number of reasons such as taxes, diversification, divorce. They buy for one reason: to make money. The fact that these guys and girls are buying is a kernel of positive news. Further, the redemption period for November is over this week, and the market escaped in relatively decent fashion. Yes all but the Dow hit new lows on the year, but they also reversed to close the week above the prior lows. Without the redemption, some CEO's buying, and that Thursday reversal, the prospects for a further upside move starting this week are good.

As noted above, that leaves us looking for a follow through to the Thursday reversal that is trying to ignite a new rally off a second low and successful, for now, test of the early October selling. A follow through is a strong percentage gain on strong volume with strong breadth occurring a week to 10 days after the initial reversal. The market often stalls some after the initial surge as some profits are taken by those who think the rally is bunk and simply setting up more selling. If the move is for real the market makes a subsequent upside move with those strong indicators as the backbone. The follow through shows the buyers are picking up the baton from the initial short covering surge.

Friday was not a good day. Never like to answer upside with such negative moves. There was no distribution, however, and the lower volume and wild volatility shows relatively few were pushing it around. As noted above, it did not undo the Thursday move, and indeed we are looking for Thursday to carry the market higher. As for how long remains to be seen. The sentiment and internal indicators are strong enough to suggest a sustained move.

In any event we are looking to play the move higher with more upside despite Friday. That means picking up positions as they present themselves after the Friday pullback and riding them for a nice gain. There are more and more patterns that are establishing themselves and thus more potential leaders to take the ball and run on a continued market rally. We will let the market worry about how far it wants to go.

As for the downside, with the indices bouncing up off the lows last week and the big Thursday reversal, we are going to let this bounce play out and see how strong it is. Again, we will let the market tell the story after it delivers this bounce.

Support and Resistance

NASDAQ: Closed at 1516.85
1521 is the late 2002 peak following the bounce off the bear market low
1542 is the early October 2008 low
1565 is the second low in October 2008
The 10 day EMA is 1596
1620 from the early 2001 low
The 18 day EMA at 1641
1644 from August 2003
1752 from 2004
1782 from August 2004
The 50 day EMA at 1827
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low

1499.21 is the 2008 closing low
1493 is the October 2008 low
1428 is the November 2008 low
1387 is the 2001 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low

S&P 500: Closed at 873.29
889 is an interim 2002 peak
899 is the early October closing low
The 10 day EMA at 908
The 18 day EMA at 928
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
The 50 day EMA at 1021
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
1106 is the late September low
1133.50 is the mid-September 2008 low
The 90 day SMA at 1142
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1250 is the 2002/2003 up trendline
1257 is the March low
The 200 day SMA at 1257
1270 is the January low
1285 is the recent July peak

866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low

Dow: Closed at 8,497.31
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
The 10 day EMA at 8772
The 18 day EMA at 8913
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
The 50 day EMA at 9600
9814 from August 2004
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
10,365 is the new 2008 low
10,459 is a September 2008 low
The 90 day SMA at 10,508
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low

8451 is the early October closing low. Key level to watch.
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7282 is the October 2002 low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

November 17 - Monday
November NY Empire State Index (8:30): -26.0 expected, -24.6 prior
Capacity Utilization, October (9:15): 76.6% expected, 76.4 prior
Industrial Production, October (9:15): -0.1% expected, -2.8% prior

November 18 - Tuesday
October Core PPI (8:30): 0.2% expected, 0.4 % prior
PPI, October (8:30): -1.5% expected, -0.4 prior %
Net Foreign Purchases, September (9:00): $14.0B prior

November 19 - Wednesday
October Building Permits (8:30): 770K expected, prior 805K
Core CPI, October (8:30): 0.2% expected, prior 0.1%
Housing Starts, October (8:30): 780K expected, prior 817K
Oil Inventories (10:30): 220K prior
FOMC Minutes, October 29 (2:00)

November 20 - Thursday
11/15 Initial Claims (8:30): 516K prior
Leading Indicators, October (10:00): -0.6% expected, prior 0.3%
Philadelphia Fed, November (10:00): -30.0 expected, prior -37.5

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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