Stock Market Commentary 9/22/08

From the weekend market outlook:

“It just seems to me to be way too similar to your average hail mary play in football - with their back to the wall the losing team just chucks something up there, as far out as you can get, then looks to the heavens and hopes for a miracle. In some rare cases when the smoke clears the losing team comes up with that miracle, but in most cases they don’t. In any case the fans of the team throwing the hail mary always cheer the loudest right when the ball gets chucked up in the air, and my fear is that the strength we saw from mid-Thursday until Fridays close was nothing more than the cheer for the chuck.

It would stand to reason that this ban on the short sales in the financial sectors is going to make an already volatile and shaky sector even more so. If funds and traders can’t hedge their long positions with shorts they are going to be forced to unload the shares more frequently and quite possibly causing sharp sell offs, and on the other hand you will not see the huge short covering rallies when these battered financial stocks muster up a rally, or announce some news that sends it flying, because there are no longer the ready made buyers that short covering creates. And while this is just my opinion, I think as a result of this we’re going to see a lot less volume in the financial stocks as lots of would be investors will take their money elsewhere, especially funds and big money.”

That scenario seemed to play out about as expected, for the broader market as well as just the financial sector. While it is a bit disheartening and depressing to think about the implications on the economy if this “hail mary” play doesn’t work, it does put a smile on my face getting to say “told ya so” to the idiot policymakers who thought that banning short selling was going to be the answer to the selling in the financial stocks.

Monday also market another very bullish day for commodities, particularly oil, which was at one point up over $25 a barrel. Even with it backing off it’s highs a bit, Monday was the biggest one day gain in crude oil in history. Gold and silver both also posted some nice gains on the day, our weekend long watch lists were loaded with commodity plays, and they are again tonight.

The Dow fell 372.75, or 3.27 percent, to 11,015.69. The end of last week marked the Dow's best two-day point gain since March 2000, so some selling was to be expected, but on this scale it was not a healthy pullback. Although volume was low, this was probably due to a lot of traders just not playing due to these new rules, especially in the financial sector. We did find a little round number support at 11,000, so perhaps that will hold, but that would probably be temporary.

The Standard & Poor's 500 index fell 47.99, or 3.82 percent, to 1,207.09, and the Nasdaq composite index fell 94.92, or 4.17 percent, to 2,178.98.Both erased all of Fridays gains and then some, and look like they want to at least retest last weeks lows.

The Vix also did what we expected, stating that the pullback that ended the week was a potentially bullish setup, and it looks even more bullish now. It feels like we were getting close to the kind of panic selling that would be needed to hammer out a bottom before the rumors started flying last week sending the market flying as well, and we are thinking we will retest last weeks highs on the Vix at some point soon.

Our portfolio stocks once again navigated the market changes very well, closing the last profitable long position and getting into some new short positions this morning. We are still bearish on the overall market after today’s showing, but the volatility of late has to be respected, so we are going to remain somewhat hedged, so are adding a new long to trigger in case we get another reversal. There were a few more shorts in the watch lists above than longs, but oil and precious metals were looking nice and should provide some nice trading opportunities over the next few days. We are truly into “uncharted” territory here, and it should be fun to watch this whole situation play out. Thanks for watching with us, have a great night.


Quote of the Day

"The most beautiful thing we can experience is the mysterious. It is the source of all true art and science."

Albert Einstein (1879 - 1955)