Click chart to enlargeThe chart of the Dow above shows today's 800 point selloff and recovery, much of it taking place below the bottom of the channel. When looking at the channels we draw, it's important to realize that they are computer-generated linear regression channels. The computer figures out the slope of the channel based on the average price of the stock or index each day. This average is represented by the yellow line in the center. The other lines are offsets (meaning they are parallel) to the yellow line. They define the upper and lower limits of the channel, and make it possible to draw conclusions about the stock or indexes current price relative to its recent history.
We bought DDM on Thursday and Friday because it was trading at the bottom of its channel. While we were calling for the Dow to drop another 700-800 points to 9600 in a capitulative move, it remained wishful thinking. We got the opportunity to add to DDM today, which we did at 42.50. We also added another layer of GE at 20.5. Throughout the day, we thought the bottom would be tomorrow at around 10am. Now, after seeing the close, it is very hard to imagine the market taking out today's lows during this iteration. Maybe a few months from now, but not this time.
Today was perhaps the most healthy day the market has had since the start of this downfall. A completely uninterrupted, government-intervention-free, broad market capitulation is exactly what we needed. We would have liked to have seen follow-through tomorrow, with a bottom at 9200 or so, followed by a coordinated worldwide rate cut, cementing in a tradable bottom that would hold for at least the next two months or so. But this will have to do for now.
We're focused on selling portions of our DDM into the rallies, and adding on the dips in order to get to a point where we own our current shares at a break even price. We still believe that the broader market is oversold short term, and due for a significant bounce back to the moving average at around 11,000 - 11,200 (by the time it gets there). It is a scary market, though, in that much of what's happening now is unprecedented. It isn't every bear market that the top 100-year-old financial firms collapse.
We're holding our GE shares (6% dividend at today's lows) for the longer term. We would sell them if the Dow approaches an overbought condition near its 200dma, but otherwise, they are going to be used as a partial hedge against inflation, currently at 13.2% a year.
38 comments:
Hi Snot,
I followed your move and added more DDM today at 45. I guess it depends on the market condition, at what level will you consider unloading some of your DDM if there is a short term rebound? I am thinking in the low 50s.
Thanks,
Edward
You bought a little late (or early) today, but still probably have a lower break even than us overall. Our break even is 50, but we have a lot of dry powder.
As for a selling price, the market "should" take DDM to the mid 50's, maybe a little higher. But that would be a full move to above the center of the channel, requiring a catalyst. If there is follow-through tomorrow, 47 to 47.5 is a likely high. We'll sell what we bought today at that level if we reach it, just to lock in some profits. We'll have to deal with the rest of the shares seperately. A safe (conservative) bet on the top of the next rally is 50 or so. We're just looking to break even, but with a series of small trades, maybe we can turn our questionable timing into a profit somehow. We have absolutely no qualms about adding more DDM at 42 if the market should retest today's low.
42 is so far below the channel that you should be able to profit from buying it at that price sometime within the next two months, even if the market continues trending lower. There will be a spike to at least 42 or better if the market continues to plunge from here. We feel that there is limited risk buying at today's lows if you're looking to sell within a month or two.
The only scary thing to us is Cramer's remark today. Not because it came from him, but because it's true. He said that we're back to 2003 levels, but the ecomony was in much better shape back then. This suggests that we do not even deserve to be as high as today's lows. Despite the logic behind this being correct, in our opinion, it will still take time for the selloff to unfold.
Hi Snot,
Any comments on the BAC early earnings release?
Thanks
hk22, it's scary stuff. We can't even pretend like we've seen anything like this before. Nobody has. Of course we've been steering clear of all financial names for a very long time, but we do check their charts from time to time to get a feel for who's on top and who's going under. There are only a handful of "pillars" in the sea of financial names, GS, JPM, BAC... these are the ones left standing, the ones expected to buy out the others. We wondered how any bank could afford to buy another company in times like this, and maybe our suspicions had more merit than we thought. It truly is scary to see such a chinck in BAC's armor, considering so few pillars are left standing.
If GS ever admitted to having any difficulty, it would be 1987 all over again. Geez, it's even October... this is truly scary stuff! Please tell us the 19th is a Sunday this year, lol!
There is some more ways to go. I would be surprised if a bottom is put in before options expiration.
Sure we can get a bounce in the next few days. But until more follow-through, lets not get bullish
What do you think about MON? They are coming up with results on Oct 8.
The stock was down by 7 today. what do you think...how the earnings will be?
Any Suggestion?...
All day all i hear from the talking heads is capitulation and has the market put in a bottom?
Gimme a break. Capitulation aint gonna solve the problem of
house prices worldwide tanking in value and personal wealth getting
wiped out in the process. This isnt a technical drop as traders buy
and sell the channel. The US has already played its trump card by
buying all the bad debts and yet everything still falls.
The problem now is that the banks have stopped lending and while
everybody knows that this is bad for other banks the real problem is
that it is also bad for millions of other business's who depend on
cash flow and revolving credit. Cut off that cash flow and the
business's fail and as enough business's fail the world slides into
recession. Its a viscous circle and until the root cause is addressed
(collapsing house prices) then the circle does not end. The only way
the cause can be addressed is for house prices to hit a bottom, start
rising and create wealth again and that is not going to happen next
week. Or next year for that matter. Until then every business that
hasnt got massive amounts of cash is in trouble and danger
of collapse and while business's are n danger of collapse theier
shares will continue to fall. Sure you can trade the swings, but anyone waiting for the market to recover is just dreaming...
Sniper.
To anon, MON is going to 14 cents. Earnings can't help, they can only hurt.
I sure wish IBCNU and his "ilk" would keep their meth induced rants to Yahoo.
Sniper, we wholeheartedly agree with you. This economic downturn is far from over. It cannot turn around until real estate, oil, credit, taxes, federal deficit, innovation, etc etc etc. A recovery is far from imminent. However, the market is irrational. It would not suprise us in the least if the Dow gained 1,000 points on the week, for almost no reason whatsoever.
Admittedly, playing the channels at a time like this is a dangerous game. This is why we're keeping our trading to the indexes themselves, as many individual stocks will never recover from this bear.
We're going to sell some DDM today, psychologically the ones we bought yesterday, to lock in that profit. We're in damage control mode (once again) but considering we're invested in the index itself, we are ok with averaging down on major dips (700-800 points). Little by little, these small profits work to bring our break even price down such that we've effectively bought near the bottom even though we have no idea where that will ultimately be.
Hope your trading is working out for you. There is a lot of money to be made in this market if you're in the right place (SMN,FXP,DXD) We just aren't that brave at this point!
snot,
love your analysis and commentary, keep up the good work!
Just wondering what do you think about MCD, not perfect, but one of the only stocks still in an uptrending channel this year..
MCD is quite an anomole. We thought the reason for MCD's recent bull was expansion into China (1 billion more burgers to sell), but it doesn't add up seeing as how China's market has been tanking. One would think that if China was the reason for MCD's new bull, it's recent massive selloff would affect the chart of MCD. The chart looks a little toppy, but considering the environment, it has a lot of relative strength. Its uptrend is intact. And a 3.3% div, not a bad choice. Just don't put too many eggs in one basket, and watch closely for it to weaken versus the broader market. Once it breaks its channel and moving average decisively, you absolutely must sell before the next earnings report at least, because a technical breakdown is like having inside information on what the report will contain.
Sold the DDM we bought yesterday at 42.5 for 45.3
Still holding more bought at 52
Hi Snot,
I brought some DDM late yesterday with the overall average around 47.3, looking to sell some today if the market turns higher.
Given the Australian central bank has lower their short term rate, what is your take on the odd that our Fed will follow with a rate cut?
Thanks,
Edward
Just a guess, but we don't think we'll get a rate cut today.
They already threw us a bone today by buying commercial paper. Perhaps if we were down 700 we would, but they'll likely wait until their scheduled meeting at the end of Oct.
Hopefully they really are working on a coordinated cut so it won't devalue the dollar against other world currencies again.
The Fed will likely go down in history as having handled this crisis incredibly well. For all the frustration they are causing traders, they have gone a long way towards bringing us down softly. It may not feel like a soft landing, but considering how many major financial institutions have collapsed, the market's crash could be a whole lot worse. The Fed has been doing everything in its power to help avoid total panic, and truth be told, they're doing a good job.
They better be doing a good job, for the "fee" they are charging.
Just bought some DDM at 43.3.
Its due for a rebound. Selling at 50-60 range.
We'll be paying the "fee" for a decade or more, but at least they're doing something. Just for kicks, check out IFN (it's India's stock market index... ouch!)
And they are free -- Freefalling :-)
not Funny tho
They are freefalling for sure.
Want to see a scary chart? Check out Ford (F). We've been saying for a while that we think GM is headed for bankruptcy (based solely on its chart), but Ford is even closer!
The American car manufacturers, as much as we hate to say it, deserve bankruptcy. Americans have been DEMANDING electric cars for years now, and Detroit has done NOTHING to that end. They're only just starting to work on them now that Tesla, a small startup company from California, has beaten them to it. We cannot feel bad for the big U.S. automakers. They did not listen to the consumers despite their demands being made loud and clear.
They are freefalling for sure.
Want to see a scary chart? Check out Ford (F). We've been saying for a while that we think GM is headed for bankruptcy (based solely on its chart), but Ford is even closer!
The American car manufacturers, as much as we hate to say it, deserve bankruptcy. Americans have been DEMANDING electric cars for years now, and Detroit has done NOTHING to that end. They're only just starting to work on them now that Tesla, a small startup company from California, has beaten them to it. We cannot feel bad for the big U.S. automakers. They did not listen to the consumers despite their demands being made loud and clear.
The folks at CNBC must read our blog. They're doing a bit on F and GM after the commercial.
Hopefully they mention how the downfall of the American automakers was their own fault. If they made an electric car for under 20k, how long would that waiting list be? We'd be on the list, that's for sure.
Snot, your concrete may start to get poured today- especially if the S&P manages to close below 1,000. That would make for quite a ride tomorrow. Let's just get it over with already!!
Hey Snot..
Are you going to buy some more DDM at this prices or too risky?
GM is currently working on an electric vehicle.
More info on media.gm.com.volt or www.gm-volt.com. if you are interested. The price after the $ 7500 tax credit would be around $30.000 whih isnt that bad.
Well, it looks like you might get your close below 9600.
Got DDM at 41.09 a minute before close.
haha, that is funny you mention the indian market. They are at a bottom and we are still forming it.
Also, your logic of continuing to buy ddm stumps me. Sure, I enjoy your witty comments of and on, but the rationale of going long is lost on me. When you have a downtrend why not buy DXD on a positive open like today and just enjoy the returns until the end of the day and sell it.
Hi Snot: is this the bottom now? Thanks!
I don't we are there yet! next support 8500 then we going down 500 points every day until we get to ZERO. It matter of time, DOW is down every day for the last 7 days so I think it will take another 20 days 'till we get ZERO on DOW and we all BROKE. Let VOTE for another 4 years... I am sick...
-We know about Volt, not too little, but many years too late.
-No one knows where the bottom is.
-Our logic going long stumps us, too. Our general approach is to trade the channels, but usually in the direction in which the stocks are going. This "reverse" trade in which we find ourselves swimming upstream is not typical for us. Guess we just figured that at some point, the market would have to bounce. Wishful thinking. We feel a little bad about going against the trend, but it's hard to feel like we've made a major lapse in judgement considering the market is down 20% since the start of September. That's an entire bear market in basically one month! We come from a time when bear markets took many months, or even years, to play out. If we lose 5% while the market is down 20%, we cannot complain. Sure, we could have done better in hindsight, but we did manage to avoid the major pitfalls, like owning an individual stock like MOS during this time. Our thinking was that if we were going to swim upstream, we'd rather be in something that will be around 20 years from now, so at least we'd have the psychological wherewithall to be able to hold through a 1987 type crash if need be. Maybe tomorrow will be that day. Another 20% bear market by noon... everyone ready?
It is brutal market and I think we will go ZERO from here...
Hi Snot,
enjoy your blog very much. Do you have any opinion as to what bearing the Alcoa earnings will have on the market tommorow.
Given the no short selling/naked short selling rules are still valid, where did the panic selling pressure come from? Funds redemption?... Any ideas?
Thanks,
Edward
Alcoa has historically been the unofficial start of earnings season, so they do set the tone psychologically. They were worse than expected, but wasn't that expected?
Our wild guess (which are usually wrong) is that the market will gap down in the morning, continue to drop until 10:00/11:00 or so, then stage a massive rebound from the 9,000 level, closing at 9600.
Ed, if you're talking about the selloff that happened after the helicopter spoke, it was because traders started pricing in a coordinated rate cut, which of course did not materialize. Other than that, we don't know of any other major catalyst.
When Ben spoke, he alluded to a change in policy, which suggests that we will likely get a rate cut when the FOMC meets on Oct 29.
Depending on who you ask, it's already priced in:)
Last week MOS brought down all the Agriculture stocks big time.....AGU, MON, POT...all suffered big losses.
Tomorrow before market opens...MON will announce their earnings. How are you predicting the market after MON resulats?....Another big sell off for agriculture or there will be a gain?
Another sell-off as usual, I think! This market is bas as it can go. It can go down another 1000 point easy from here. Look at the dow. It is broken! There is no buying interest at any sectors period...
I think this market had fell over 15% since the SEC ban short so there is no short cover of any stock and there is no buyers so the market will have more to fall. S&P 500 broke support today and close under 1000. My predict DOW will get to 8500 before any meaningful recovery and any recovery will be short live. Future earning will bring the entire market down again.
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