Market Diary 1-15-08
We had a strong down day, but not a full-fledged panic.
China turned down Citigroup’s plea for funds, though maybe China already sank all their available cash into other troubled financial companies. Other governments in the Middle East and Southeast Asia grabbed some bargains on Citigroup stock, but its earnings report this morning was still far worse than analyst expectations. Its stock dropped about 4.5%, which was good news in itself for those of us with a bearish mindset. But even better was the fact that it hovered around the high for the day for about 20 minutes after the opening bell, which gave the bears plenty of time to buy puts or sell short.
The broader markets were down overall, though not as much as I had hoped. I’ve been tracking four indexes: 1) the Russell 2000 (RUT), which consists of lots of small-cap companies, 2) the Standard and Poors 500 (SPX), a blunderbuss index that is said to include 80% of the entire market’s capitalization, 3) the Dow Jones Industrial Average (INDU), in which you can find an industry-balanced group of the thirty biggest companies, and 4) the Nasdaq 100 (NDX), containing the 100 biggest NASDAQ companies, which are heavily skewed toward technology.
I think of the RUT, the SPX, and the INDU as three points along the same axis. The RUT has the smallest companies, the SPX captures the middle, and the INDU shows only the behemoths. Each has some degree of independent motion, but they also generally move together as the total market.
Right now the INDU is the most bullish of the three. It ended the day by stopping right at 12,500, which was also the low five days ago. If you were only watching the INDU, then you would conclude that there is no market rout yet, because the INDU hasn’t formed a new low. The past six trading sessions have all bounced around wildly, but within a fairly constant range of 12,500 to 12,750. From just the INDU chart, we would have no idea where the market is going next.
The SPX tells a slightly more bearish story, though still far from a panic. This middle-of-the-market index bounced around 1375, which was the low in the big crash of August 16, and also where the market bottomed out after the Shanghai surprise in late February of last year. It’s a great big long-term support. And we didn’t break it today—although we did close right at it.
Maybe I’m straining to see what I want to see, but the last few days of the SPX look more bearish than the INDU. While the INDU has been pretty flat since January 7, the SPX looks like it tried hard to bounce, and failed. It found the big support on the 9th, and then jumped up sharply on the 10th, just as you would expect at the bottom of a sideways trend. But the 11th was a warning shot, with a lower high and even a slightly lower low. Monday the 14th was also noncommittal with an inside day or harami (lower high and higher low). Up through yesterday, you could have argued that the SPX chart could be showing a nice bounce. But today broke that decisively. The rally attempt over the last few days failed, and we slammed right back down into that support level.
So we have a flat INDU (big cap) and a possibly bearish SPX (big and middle cap). But the warning sirens go off when we look at the RUT (small cap). The chart there is in freefall. The only support you’ll find is back in the summer of 2006, down at 670. And while today’s bearish action didn’t go below the low of Jan 9, it’s still well outside the range of all the other previous days.
My interpretation is that the market expects some kind of credit crunch, and it will hit the small caps the hardest. The lenders simply won’t have enough money to go around to keep the wheels turning. And I don’t see how the Fed can really prevent that, as the problem is with loan-to-asset ratios rather than interest rates. (I’m not sure about that, though. The Fed still holds many mysteries for me.) When these companies go back to their lenders to renew their operating loans, some will be turned away. And if you’re the lender with a limited supply of dollars to go around, you’re naturally going to want to lend to the big companies first.
Finally, consider the intraday charts. They say that the big money only trades right at the end of the day, so there’s some significance to the price momentum in the last half hour. All three charts (INDU, SPX, and RUT) show a decisive downward plunge right at the end, with the INDU and SPX charts showing a sharp selloff five minutes before the closing bell. This supports the theory that the big money is steadily pulling out of the market.
This is why I’m bearish on the RUT, and pessimistic on the rest. The only area with any bullish promise is technology, where the index charts (QQQQ and NDX) look much healthier. But with the overall market going down right now, I wouldn’t be buying any calls on Apple or Google.