Click chart to enlargeThere are several legitimate reasons to call a market bottom here. Let's review the many very significant milestones of last week.
1.) OIL spiked (it could still go further, to 90. see chart above)
2.) FRE and FNM failed. (Though saved by government intervention, still MAJOR failures)
3.) The Dow broke 11,000 intraday
4.) The Nasdaq and the S&P corrected 20%
5.) VIX (the fear index) nears 30
By all means, one could not be laughed at for calling a bottom right here. All the stars are aligned, and we even have the element of fear. We could easily see a bottom forming here, and a formidable rally to the Dow's 200dma (currently at 12765) already underway.
First, let us preface our next comment by saying that we do not attempt to outright "time" the market, and only guess at its next move for fun. We are long fertilizer and that will not change regardless of the broader market's action. This is the first time since the start of this recent downturn which began in mid May that we feel a bottom could be in place. We would not feel shortchanged if the market rallied from here. While we feel the market is only days from a bottom, we still feel it may be several hundred points away. So, on to our fun prediction, for what it's worth...
Despite all of the signs that a bottom is in place, including the technical fact that the Dow is as far below its 200dma as it was at January's bottom, we predict a retest of Friday's low at a minimum, and more downside as a likelyhood.
Here's why... while the government provided a safety net for FRE and FNM, they explicitly said that they would not provide a safety net for any other financial institutions. (Unless they're lying again). It is not far fetched to predict the collapse of one or more substantial financial institutions in the days ahead. With earnings season starting in force this week, all it would take is for one bank to report lower than expected earnings, sparking rumors of failure which would lead to a run on the institution. A run on a bank is simply a mass rush by its customers to withdraw funds fearing the worst. The rumored failure quickly becomes self-fulfilling. This happened to IndyMac Bank on Friday. The government shut it down in order to stop the panic and allow people to regain their confidence in the company over the weekend.
When we predicted a bankruptcy, we were thinking along the lines of an airline, not Fannie and Freddie. The speed and depth of our economy's deterioration is shocking. In light of Friday's events, it would come as no suprise if LEH collapses this week. C, MER and JPM report this week.
11 comments:
Always appreciate your views Snot and a very nice recap post, as always. I somehow don't agree with the earnings though. I would guess, the earnings miss is already accounted for in the steep decline. I would assume the forward guidance is not. But again, as you have rightly noted, all the bank CEO's have lied outright - I see no reason why they would not lie about the guidance.
You're right that a lot has been factored in, with some of these stocks down over 50% this past quarter. But of course earnings season is not limited to the financials. Stocks in other sectors that have not fallen 50% this quarter may just do so in the weeks ahead as they report. There are landmines everywhere in this market. We are going to decide how much fertilizer to hold in the days ahead of CF, MOS and POT's reports on the 24th and the 28th.
ooh yes, totally skipped my mind that POT/MOS reports next week. I may need to cut my AGU as well. Thanks for the reminder.
Yeah, if they get anywhere near the 3/4 marks of their channels, lightening up ahead of earnings is a must.
I thought Lehman reported last week on the 9th?
You're right that LEH reported, but it looks like it was 3 weeks ago on the 16th. We saw that C, MER and JPM all report this week and misread LEH's 16th as being this week also.
Wonder if that makes them safe for now, or if pin action from the others is enough to bring them lower. LEH dropped from 22 to 14 over the past 3 days. It looks like nothing on the chart considering it traded at 65 just 6 months ago, but these percentages are incredible. You didn't have to hold LEH for the past 6 months to lose money. Just buying it Wednesday would already have lost you 33%... amazing, huh?
Apparently in a tough economy, people drink more. CEDC (vodka) and BUD (anheuser busch) are leading this "new" economy, lol!
Someone asked about MON on the previous post's thread, wondering if weakness in MON forecasts weakness in the sector as a whole. MON is more diversified than the other fertilizer plays, so it is not a direct correlation to them. It is less of a pureplay in the space, and may be weighed down by those aspects of its business that are more closely tied to the broader economy than the price of fertilizer itself is.
If you want to invest in lightbulbs, you buy CREE rather than GE. Same idea with CF vs MON.
Looks like people are going to wait for the earnings reports before deciding whether or not the market should put in a bottom here. It's no suprise that people are not happy with the Fed's decision to further devalue the dollar of conservative, budget-minded people in order to bail out those that lived beyond their means... again. This system of dependancy is outrageous!
Snot, whatever happened to your FXP positions? You were underwater for a while and now it came back. Are you still in?
FXP became one of those break of channel 'damage control' scenarios. After aggressively trading it, we got out with a relatively small loss. We then moved into Ag long near the bottom of its channel, sold that a while ago, and are now back in Ag long again. We're also starting a small position in DDM (Ultralong Dow) because we cannot buy any more Ag this far off the bottom of the channel. If the financials crash (C to 11, MER to 22), we're going to make our DDM position substantial.
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