WEEKEND OBSERVATIONS

First, I am 25% short (QID, TZA, FAZ, SRS) and 8% long (MRGE). I am net short with a neutral-bearish bias. Once/If I get to the 50% short level, then I am "committed" to the dark short side.


I would like to note the New Highs-New Lows Index and the VIX. The ones below are for the NYSE and the NASDAQ. Do you see a problem on the chart? I do. We had the biggest rally (+30.5% so far) since the bear market started yet we can't get a noticeable uptick in new highs. This, among other things, tells me that the bear market is not over yet. There is no improvement here if we look at the 2-year picture.



The VIX is forming a bullish wedge and I am expecting a breakout to the upside or at least to the top of the wedge's channel. Obviously, this correlates with my bearish stance. The VIX also found support at the July 2008 high yesterday (Friday).


Now, the COMP, RUT, and SPX. All three have broken their uptrends. As the COMP was the first one to reach the 200-day, so shall it be the first to lead the decline, and it has. Some people say that the lack of volume has been an issue. If you noticed, we didn't get high bursts of volume in the beginning of any of the previous declines. We did get larger volume towards the end of the capitulation/exhaustion stages.

The most important market volume indicator is the COMP. Take a look at May 7th (red highlighted volume bar). This is the day that the COMP failed the 200-day MA, and it is also the biggest volume for the COMP in all of 2009. You may also notice that volume remained weak during previous declines. Price action should be your most important criteria when determining direction.


The RUT also has a pronounced breakdown, and it is very obvious. Currently flagging between 470-485, the RUT has the potential to reach the 50-day MA which should be above 450 in the coming days. There is major support at 470, so I do expect a lot of whipsaw on the daily.


Both indices are below both the 15- and 20-day SMA's, which is short-term bearish and serve as trend break confirmation.

Did you notice the "stick sandwich" 3-candle formations on the COMP and RUT? The textbook will tell you that it is a bullish pattern, but it is wrong. It's all about the location of it. The R-W-R (Red-White-Red) stick sandwich in my book is a continuation pattern to the downside (or if the candles were W-R-W, then bullish). If you need more examples of a stick sandwich, then let me know.

Finally, we come to the SPX, which is testing the 20-day. Of course, there is strong support at 875, a level which has acted as a barrier for months. So far, it is holding extremely well. The SPX's strength is the reason why I am not committed short. If we close below 875, then we could see a move to 840. We'll know if/when we get there.


As always, don't forget to exercise caution when shorting stocks.

MARKET BREADTH - BREATHING SLOWLY

AMAZING! Finally, we break the habit of hitting several thousand new lows each day. Although combined, we hit 7 new highs, we did hit 339 new lows. We made 483 gap ups. It looks like the NH-NL indices below will take a rest from the free fall (for now).

Don't forget to try out the Free Trend Analysis. It's FREE, so give it a shot!

WEEKLY TECHNICAL COMMENTARY (Oct 6 - 10)

THIS WEEK’S ISSUE:

• In-Play: The Battle for Wachovia (WB)
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• Update: Russell 2000 Small-cap Index ($RUT)
• Update: NYSE/NASDAQ/AMEX New-Highs/New-Lows Index, CBOE Volatility Index (VIX)
• Currencies: U.S. Dollar Index ($USD), Euro Index ($XEU)
• Commodities: Crude Oil ($WTIC), Gold ($GOLD)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:00AM EST): DJIA (-2.59), SPX (-2.95%), COMP (-2.94%)

IN-PLAY: THE BATTLE FOR WACHOVIA

Haha…I posted Part 1 of the battle on a previous post on my blog (http://www.weeklyta.blogspot.com) so I’ll get on with the developments, which is part 2 of the comic. If this goes on for a while, I will create an entire comic strip to chronicle the event. It’s an exciting and educational way of breakdown something that’s extremely complicated.

What’s happening now is that on Saturday night, Citigroup (C) asked NY Supreme Court Justice Charles Ramos to issue a order blocking the sale between Wachovia (WB) and Wells Fargo & Co. (WFC). Citigroup’s claim is that WB breached the exclusive agreement (entire agreement found on my blog) between WB and C. C is seeking $60 billion in punitive and compensatory damages against WFC for interfering with the deal.

In response, WB asked U.S. District Judge John Koeltl to declare that the agreement between WB and WFC “is valid, proper, and not prohibited by a letter agreement between WB and C. Koeltl vacated Ramos’ order, however scheduled a hearing tomorrow (Tuesday) for all parties to present their case. This is a complicated matter that can last for a very long time since both WFC and C are large institutions with a lot of money, backing, and attorneys and neither party will back down without putting up a fight. What’s for certain is that both WFC and C has devoted considerable resources in terms of time and money to engage WB, therefore, both institutions have personal interest to get this deal done. The question is: Who will win?

When WB signed the agreement with C to sell their banking operations, it was noted that if WB did not sell part or all of their operations, they risked seizure by the FDIC the very same day. Therefore, the ultimate loser in this battle is WB with possibly only days to survive. In any case of failure, the FDIC would step in as it has done many, many times this year.

The most important section of the letter agreement between WB and C is the following paragraph:

"In consideration of the foregoing and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged. Wachovia hereby agrees that, during the period commencing on the date hereof and ending on Exclusivity Termination Date (Oct 6,2008), Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors ("representatives") to, directly or indirectly. (i) solicit, initiate or take any action to facilitate or encourage the submission of any Acquisition Proposal, (ii) enter into or participate in any discussions or negotiations with, furnish any information relating to Wachovia or any of its subsidiaries, assets, or businesses or afford access to the business, properties, assets, books or records of Wachovia or any of its subsidiaries to, otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage may effort by, any third party that is seeking to make, or has made, an Acquisition Proposal....."

However, many people argue that the letter agreement is non-binding. I am neither an attorney nor do I have inside information on the matter but it appears that this case is not clear cut. I do agree with the fact that the deal between WFC and WB may be the best for shareholders given that the deal goes not require government assistance, keeps WB intact, and benefits taxpayers. Ultimately, shareholders and regulators will have to approve of any deal and that cannot take place during litigation. What everyone can agree on is that a deal must be consummated quickly. This has once again placed uncertainty in the markets in a time where we don’t need any more uncertainty.

According to the Wall Street Journal, C and WFC may “carve out” WB with C taking WB’s northeast and mid-Atlantic branches and WFC taking southeast and California branches to reach a compromise. No deal has yet been consummated at the time of this writing.

MARKET COMMENTARY – SPX 1,099.23, COMP 1,947.39

The market continues to decline, hitting new lows 2-3 days out of the week. As I mentioned before volume must confirm price action. Once the short ban on financial stocks began, volume on all exchange got cut in half. This past week we are again seeing volume increase on the down days and volume decrease on the up days, which is bearish. This has occurred many times and I have stated this many times in previous commentary. The start of a major rally and the subsequent confirmation days must be confirmed with volume. With the short ban in place, that is extremely difficult to do.

I would like to point out that we may see a short-term low, marked by a capitulation day sometime this week. I am looking for a major gap down at the open today possibly followed by a sharp decline. If a sudden and sustained rally does occur and closes near its highs, then it is time to go long. I am advising all short positions to be covered during the weakest first hour of today’s trading. This is in support of the major oversold levels in several technical indicators, mainly the slow stochastics. This will be corrected soon.

The SEC stated that the short ban will be removed 3 business days after the bailout plan is signed into law. This could be Wednesday or Thursday, depending on the time in which the SEC decides to remove the ban. We should see a marked increase in volume on Thursday and Friday as a result, giving the market the opportunity to act in an undisrupted manner.

As for support levels, the 10,000 level in the DJIA is key support in 2005, the S&P 500 must hold the 1,000 level which is a key level in 2004 and the NASDAQ must hold the 1,900 level which is a key level in 2005.

UPDATE: RUSSELL 2000 SMALL-CAP INDEX ($RUT)

I’m adding the Russell 200 ($RUT) in a separate section to highlight the importance of the index this past week. Below, the chart on the left is a 5-year chart and the one to the right is a 10-year chart:

The significance is that the RUT broke out of its consolidated reactionary rally on Friday and hit a new low. The RUT is the last remaining index to decline to the levels of the DJIA, SPX, and the COMP. Looking at a 10-year chart (to the right), we have a long ways to go for the small caps. The larger capitalized stocks took the first hit in 2008 and it only makes sense for the small-caps to follow suit. Due to their smaller size, small-caps face a greater risk of a sharper decline in the next few months. Also note that the other 3 indices started their 3^rd primary leg down and the RUT only started it’s 2^nd primary leg. This divergence will soon be corrected and I expect the RUT to take the largest hit in the next few months of all indices.

Critical support is at 600 in 2005, which I expect it to break. Afterwards, the 500 level in 2004 is the next target area. At this point, given the sharp decline in the past two days, I expect the RUT to decline in a sudden, volatile and erratic move. Expect considerable selling in the small-caps in the coming weeks.

On the head-and-shoulders pattern, every technician views a pattern slightly different from other technicians. In the 5-year chart (to the left), I view the pattern drawn by the blue lines. Others may consider the purple lines. In either case, there is no disagreement that the pattern has now been reached due to break in the necklines.

UPDATE: NYSE/NASDAQ/AMEX NEW-HIGHS/NEW LOWS INDEX, CBOE VOLATILITY INDEX (VIX)

Below are the New-Highs/New-Lows Indices for the NYSE, NASDAQ, and AMEX. Notice that we are still hitting a lot more new lows than new highs. On Thursday, we hit 5 new highs and 778 new lows and on Friday, we hit 4 new highs and 1076 new lows. This gap is getting wider and wider, killing the chance for a major recover that certain people are still preaching about. Charts do not lie and they paint a very clear picture of what is going on in the markets. This is an undeniable truth in technical analysis. Notice how the AMEX fell the sharpest – most companies on the AMEX are small-to-micro caps. These indices must improve for any confirmation of any type of rally.

I stated in the previous commentary that the VIX will breakout and stay elevated in the 40’s level. This has held true. This is a high-and-tight flag that formed, and these patterns have extremely high reliability and a low-failure rate. These patterns are one of my most favorite patterns to look out for. The VIX is currently consolidating between 40 and 47, however, there is concern as the pattern is overextended. I do expect a bounce in the markets this week and also a slight pullback for the VIX. The fear level remains elevated now that Europe and Asia are the next regions to fall amid the credit crisis.

CURRENCIES: U.S. DOLLAR INDEX ($USD), EURO INDEX ($XEU)

Focus is placed on the U.S. Dollar and the Euro because of the significance of the levels they are at. The USD made a new high and I do expect consolidation, if not a breakout higher. The XEU is testing support. On long-term charts, it appears that the USD will be heading higher after forming a higher low and the XEU will be heading lower. These trends can remain in place for many months unless there is a great and sudden shift in global macro factors affecting both currencies. Both currency indices use the 50-day as support (USD) or resistance (EUR) and make note of their guiding pattern.

COMMODITIES: CRUDE OIL ($WTIC), GOLD ($GOLD)

Just like the XEU (Euro Index), commodities such as oil and gold are testing support levels. Oil follows the 40-day MA and gold follows the 20-day MA as of now. Make note of their respective support levels and react to any clean and full breakdowns. A low-risk trade would involve waiting for a confirmation day of any bounce or a continuation of the decline.

THIS WEEK’S WATCH

• Make note of any intraday reversal and rally into the close on either Monday or Tuesday to make capitulation day. Expect the market to gap down considerably in the morning.
• Pay attention to the VIX
• Note successful or failed tests in support/resistance for the USD, XEU, Oil, and Gold
• Be aware of the notable economic and earnings reports below

Noteworthy Economic Reports: Mon. (ICSC-Goldman Store Sales – 7:45AM, Consumer Credit – 3:00PM), Tues. (MBA Purchase Applications – 7:00AM, Pending Home Sales – 10:00AM, EIA Energy Status – 10:35AM), Wed. (Chain Store Sales, Jobless Claims – 8:30AM, Wholesale Trade – 10:00AM, EIA Gas – 10:35AM), Fri. (Import/Export Prices – 8:30AM, Int’l Trade – 8:30AM, Treasury Budget – 2:00PM)

Noteworthy Earnings Reports (planned): Mon. (AEP, IDT, VOXX), Tues. (PAR, AYI, AA, ZZ, YUM), Wed. (COST, LNN, MON, RT), Thurs. (RBN, SABA), Fri. (GE, HST, SLAB)

BLOG OF THE WEEK: HEADLINECHARTS BLOG! (http://www.headlinecharts.blog.com)

TODAY'S BREAKOUTS & BREAKDOWNS

You know what pisses me off the most? People who do the exact opposite of my time-consuming analysis. For example, someone who called me had the nerve to go long the material stocks today. What an idiot, and I’m not afraid to say it either. That was stupid beyond belief. He is now a “long-term” holder. I should have just hung up the phone.

When I highly not recommend something, it’s for a very good reason. Today is one of those days that make that reason reality. Who else gets on my nerves? People still hoping for that huge explosive rally. I guess they can blame it on human nature, but still, people get to a point where they have to see the reality of what’s going on right now and what the market is telling them…right now. We might get a major rally if (when) the House clears the vote, but the market just sold off after the Senate vote. It’s good to stay in all cash once things clear up. If I don’t have prior experience with an experience, then I’m not trading it. It’s like an IPO…I’ll never trade it when it first comes out.

We hit 4 new highs today and 778 new lows. The imbalance between the new highs and new lows is getting larger and larger. To confirm any type of rally, I have to see some type of improvement in the new highs-new lows indices for the NYSE and the NASDAQ. When I say there is an imbalance, this is what I mean:

So my question to the people who are hoping for that major rally is, “How on Earth are we going to rally if the NH-NL lines look like this? The Advance-Decline charts look just as bad. No trend lines needed; these chats remind me of my ski trip at Park City, Utah, more specifically, riding down the double black diamonds with some messed up looking moguls.

We had 3 breakouts today: Atmel (ATML), TreeHouse Foods (THS), and Diamond Foods (DMND). Interestingly, 2 out of three are food stocks, just like my favorite – CPB. I have no clue why they’re doing well, and I don’t care. All I need to know is if they’re the best performing stocks in the entire market. So if you want to go long, don’t do what my friend did, but rather, go for these very, very few stocks that make new 52-week highs. Stocks that are up on days like today exhibit unusual and maybe even supernatural strength. Kidding, but consider these stocks for possible long positions if you need defensive positions.

ATML is a type of swing trade; notice the wide ups and downs. ATML formed a breakaway gap to the upside today and finally has a chance of not hitting $3.20 again in the short-term.

THS formed an ascending triangle and broke out today. These are the types of stocks I would put my money in. I don’t care what the media says what some “guru” is recommending on TV or anything else. There’s only one criterion – the chart must support my decision to go long, and they do.

A similar pattern as THS above, DMND breakout to the upside while almost everything else liquefied into a huge mess. Don’t forget about CPB!

We had many, many breakdowns today. Most of these stocks lost 20% or more of its value. Even with a nice sized rally, some of these stocks are so deep in the hole, they don’t have a chance. It’ll take these stocks below a very long time to stabilize. In the meantime, feel free to short the ones that pullback to resistance, but don’t even think about going long. Here are today’s biggest losers:

WEEKLY COMMENTARY - Sept 29 - Oct 3

THIS WEEK’S ISSUE:

• In-Play: $700 Billion Bailout – Deal Reached!
• In-Play: Short-Sellers Report Holdings
• In-Play: Citigroup (C) & Wells Fargo (WFC) Bid for Wachovia (WB)
• Market Commentary: DJIA, S&P 500
• Update: CBOE Volatility Index (VIX)
• Update: NYSE & NASDAQ Hew Highs-New Lows Index (NYHL, NAHL)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:15AM EST): DJIA (-1.61%), SPX (-1.80%), COMP (-1.99%)

IN-PLAY: $700 BILLION BAILOUT – DEAL REACHED!

It’s about time! On Sunday, Congress and the White House reached a tentative deal (still needing to be voted on) on the $700 billion bailout. To remind you of the times that we are living in, this bailout is the largest financial bailout in U.S. history. You will never forget this time in our financial history. The plan could provide $250 billion immediately, $100 billion if the president saw it necessary, and the last $350 billion subject to Congressional approval. This means that the full $700 billion may not come for a very long time and both the President and Congress may disapprove of the additional funding. In my opinion, Congress fully understands the implications of putting $700 billion in taxpayer’s funds at risk; therefore, the full amount will not be risked.

Still, $700 billion will not stall the inevitable recession we are about to face. Unemployment is projected to hit 7.5% by the end of 2009, housing prices have yet to stop declining (the root of the MBS/CDO problem), and consumer spending is further restricting. I view this as a compromise between furious taxpayers on Main Street who do not wish for a Wall Street bailout and the Federal Reserve and Treasury’s repeated warnings of “total failure” if action did not occur. A recession, or if you don’t believe we are in a recession – the stock market, cannot be “forced” to improve. This is a natural part of the business (market) cycle. The excesses of our incompetence and the last traces of hubris must be eliminated prior to making a full recovery. That is the nature of any market cycle.

Here are the key provisions of the bill:

• The bill would be disbursed in stages. The authority to use the money will expire on December 31, 2009.
• The assets would be bought at “market value”. I have a hard time believing this as market value for the most toxic real estate assets still cannot be determined. Taxpayers may breakeven or make a profit if the assets appreciate (housing prices must improve for that to happen). If the government overpays for the assets, resulting in a net loss, they may be able to recover the majority of the principal on the open market once they sell the securities.
• If a net loss is evident, the bill requires that the financial industry make up the difference. This will be determined in 5-years, after the bill is enacted.
• The Treasury will have the right to take ownership stakes in participating companies. The firms willing to participate are still to be determined. I and a friend on Wall Street (SB) believe that many of the financial firms will not need to want to participate in this program. Well-capitalized firms have little inceptive to participate.
• The government may purchase non-performing assets directly from banks, giving the government more flexibility in modifying the terms of the loans.
• The Financial Stability Oversight Board (FSOB)and a congressional oversight panel will be established to oversee the program. The FSOB will include the Federal Reserve Chairman, SEC Chairman, FHA Agency Director, HUD Secretary, and the Treasury Secretary. The congressional oversight panel will consist of 5 outside experts appointed by the House and Senate.
• The treasury will establish an insurance program to insure against losses. The risk-based premiums will be paid by the financial industry. This includes MBS’s purchased before March 14, 2008.

The House is expected to vote today and the Senate is expected to vote later this week, or as early as Tuesday.

You and I will patiently wait. If you don’t watch CNBC, this week will be a good time to turn on the tube.

IN-PLAY: SHORT-SELLERS REPORT HOLDINGS

Short-sellers, mainly hedge funds, will have to disclose their short positions to the SEC today. The holdings will reveal the number and value of securities sold short for each day of last week. Although the SEC has good intentions to fight naked short-selling, this presents several problems:

• Other short-sellers may follow and add positions that the funds already have in place. Although this does not apply to financial stocks, this will put pressure on stocks in other industry and sector groups. This could result in an artificial short squeeze for buyers who wish to bet against the funds.
• Hedge funds are most likely to shift their strategies. This presents a special problem for short-biased or short-only funds which have to disclose their entire strategy. With hedge funds providing 25% of the markets liquidity, this will cause a major disruption.
• This puts additional pressure on managers and their staff who must fill out a form that includes short positions placed in the beginning of the day, intraday short positions, and the number and value of the shorted securities at the end of the day.

This information will remain private for two weeks, after which it will be revealed to the public.

IN-PLAY: CITIGROUP (C) & WELLS FARGO (WFC) BID FOR WACHOVIA (WB)

Wachovia, the 6^th largest U.S. bank with $40 billion in deposits, is currently locked in a bidding war between Citigroup (C) and Wells Fargo (WF). If WB fails, this would be the 2^nd largest bank failure in U.S history, tied with Continental Illinois National Bank in 1984. This would mean that the top 3 largest bank failures in the U.S. would all have taken place in 2008. But, let’s not speculate.

The Federal Reserve and the Treasury are involved in facilitating the deal and both remain adamant about not providing public capital in guaranteeing WB’s assets or taking over WB, unless the company deteriorates more rapidly.

Shares were down 15% on Friday, after-hours. I don’t expect both Citigroup and Wells Fargo to pay close to WB’s closing price of $10 on Friday.

MARKET COMMENTARY -- INDU 11,143.13, SPX 1,213.01

There are two things that are important for this week: 1) the direction of the triangles that are forming in the market and 2) volume. Notice the symmetrical triangle in the DJIA and the ascending triangle in the S&P 500. Just because we made a higher short-term low does not mean we are out of the woods yet. Any breaks above of below the triangle’s boundaries should be considered.

Observe the volume since the short-selling ban occurred. This is amazing. Hedge funds make up over 25% of the trading volume in the markets and if you get rid of a primary aspect of their trading (in financials), then it is no surprise that the volume has completely dried up. A well-functioning and liquid market should see increasing volume, not volume that is cut more than half! Volume has increased on Thursday and Friday, however, they still remain at ‘average’ levels. This is very discouraging because trading activity has dried up to point where it has discouraged many participants in the market. If there is a rally, it cannot and will not be sustained with volume at these levels. Volume confirms price action – that’s a fact!

UPDATE: VOLATILITY INDEX (VIX)

I want to point out the significance of the VIX at the stage it's in. The VIX is actually consolidating in a high-and-tight flag pattern. If you check the past 3-years, you'll see that the VIX has never done this. This means that the fear is still at elevated levels and probably won't be coming back down anytime soon. This pattern indicates that a breakout higher should occur imminently. But, the bailout could change all of this and the flag pattern could breakdown, sending the VIX into the 20s, but I doubt it. Note any bounce off the 15-day MA.

The VIX is likely to hit the 40s again and stay there.

UPDATE: NYSE & NASDAQ NEW HIGHS-NEW LOWS INDEX (NYHL, NAHL)

What’s important here is that the NYSE and NASDAQ issues are still making new lows! In fact, we’ve continued to make new lows all last week while the short-ban was in effect. We did get a slight rebound as I mentioned in last week’s commentary, but it was only temporary. As the market consolidates in their respective triangle formations, we should see both NH-NL indices remain steady at this level; however, I do not expect many new highs to be hit. On Friday, only 9 new highs were made on the NYSE and NASDDAQ (total) and 263 new lows have been hit. This is a clear indication that the market will most likely make a new low.

Remain vigilant and be aware of any sudden changes in these two indices. The market cannot rally if the ratio between new highs and new lows is only 3%! Be a realist, not an optimist or pessimist, and make note of any increases or decreases in the number of issues making new highs or new lows this week.

THIS WEEK’S WATCH

• House and Senate vote results on the bailout package
• NYHL & NAHL indices
• VIX – possible breakout to the upside
• This week’s economic & earnings reports

Noteworthy Economic Reports: Mon. (Personal Income, Personal Spending, PCE Core – 8:30AM), Tues. (S&P/Case Schiller HPI, Consumer Confidence – 10:00AM, NAPM – 9:45AM, Weekly Retail Sales – 7:45AM), Wed. (Total Vehicle Sales, Weekly EIA Energy Inventory – 10:35AM, Weekly MBA Mortgage Applications – 7:00AM, Challenger Job Cuts – 7:30AM, ADP Employment Change – 8:15AM, ISM Manufacturing – 10:00AM, Construction Spending – 10:00AM), Thurs. (Initial Jobless Claims – 8:30AM, Factory Orders – 10:00AM, Monster Employment Index – 6:00AM), Fri. (Unemployment Rate - 8:30AM, ISM Non-Manufacturing Composite – 10:00AM).

Noteworthy Earnings Reports: Mon. (CC, SCS, WAG), Tues. (PBG), Wed. (BLUD, ATU, MU, ZZ, WWW), Thurs. (STZ, MAR), Fri. (FDO).

BLOG OF THE WEEK: GROOVINATOR STOCK BLOG! (http://www.groovinator.blogspot.com)

Would you like your blog featured here? E-mail me: JCLee84@hotmail.com

WEEKLY TECHNICAL COMMENTARY - Sept 22-26

THIS WEEK’S ISSUE:

• In Play: The $700 Billion Bailout? No! It’s the $1.8 Trillion Bailout!
• In Play: The Global War Against Short Sellers
• In Play: Goldman Sachs (GS) & Morgan Stanley (MS)
• Market Commentary: S&P 500, NASDAQ
• Sentiment Indicators: HYAD, HYHL, NAAD, NAHL, AMAD, AMHL, CBOE VIX
• This Week’s Watch: Economic Reports & Notable Earnings Releases

U.S. FUTURES (as of 5:30AM EST): DJIA -26 (-0.23%), NASDAQ -3.30 (-0.26), S&P 500 -1.50 (-0.09%)

IN PLAY: THE $700 BILLION BAILOUT? NO! IT’S THE $1.8 TRILLION BAILOUT!

In a historic and unprecedented move, the Treasury is trying to push a $700 billion plan to absorb toxic mortgages and other assets (or liabilities if you want to call them) from financial institutions to save the U.S. financial system. This is considered by many to be the “Mother of All Bailouts”. This may help the banks, but the billions in bad mortgage debt simply do not disappear, it is merely transferred from “them” to the taxpayers (you”). It seems unfair, but the alternative in allowing the non-performing assets sit on these banks’ balance sheets seems far worse. Already, we have seen the largest financial institutions fail or get bailed or bought out including Bear Sterns, Lehman Brothers, Fannie Mae (FNM), Freddie Mac (FRE), American International Group (AIG) and Merrill Lynch (MER).

However, if you look at the total amount of taxpayers dollars going into stabilizing the financial crisis this year, we’re talking nearly $2 trillion! Here’s the breakdown:

• $700 Billion – Treasury to purchase toxic mortgages and other non-performing assets from financial institutions.
• $50 Billion – To guarantee principal in money market mutual funds.
• $10 Billion+ – Treasury purchases of mortgage-backed securities (MBS) in September. More to come.
• $144 Billion – In additional MBS purchases by FNM and FRE. Limit $850 billion. FNM’s portfolio currently holds $758.1 billion and FRE holds $798.2 billion.
• $85 Billion – AIG bridge loan giving the Fed a 79.9% controlling stake in the firm.
• $87 Billion – Repayments to JP Morgan (JPM) for providing financing to underpin trades with the now bankrupt Lehman Brothers. In response to the Fed & Treasury’s stand against providing public funds to consummate a deal.
• $200 Billion – $100 billion capital infusion for FNM and FRE by the Treasury.
• $300 Billion – Provided to the FHA to refinance failing mortgages into new, reduced principal loans with a federal guarantee as part of the housing bill.
• $4 Billion – Provided to local communities to purchase and repair abandoned homes due to foreclosure.
• $29 Billion – Financing for JPM’s takeover of Bear Sterns. The Fed takes $30 billion in non-performing assets as collateral.
• $200 Billion – Currently outstanding loans to banks through the Fed’s Term Auction Facility. Recently updated to allow loans of 84 days in addition to the original 28-days.

Total: At least $1.8 trillion!

From Interfuidity:

The Fed's "balance sheet constraint" is not a hard limit. The Fed can circumvent it. But that doesn't mean that the size of the Fed's balance sheet is not important. Consider this:

“The easiest would be to ask Treasury to issue more debt than it needs to fund government operations. As investors pay for the bonds, their cash moves from bank reserve accounts at the Fed to Treasury accounts at the Fed. The Treasury would allow the money to remain there, rather than disbursing it or shifting it to commercial banks who, unlike the Fed, pay interest. Because the shift of cash out of reserve accounts leads to a shortage of reserves, it puts upward pressure on the federal funds rate. To offset that, the Fed would enter the open market and purchase Treasuries (or some other asset), replenishing banks’ reserve accounts. The net result is that the Fed’s assets and liabilities have both grown but reserves and the federal funds rate are unaffected. This wouldn’t cost Treasury anything so long as it doesn’t bump up against the statutory debt limit. The loss of interest on its cash deposits at the Fed would be roughly offset by the additional income the Fed pays Treasury each year from the interest on its bond holdings.”

It's only true that this operation doesn't cost the Treasury anything if what the Fed buys with the excess cash pays as much as the Treasury's cost of borrowing, and there is no loss of principal. But if the Fed uses the cash (directly or indirectly) to buy or lend against market-shunned securities, then the Treasury is only made whole if those securities perform, or the loans against them are repaid. If the market is irrationally shunning these securities, then the Treasury will eventually break even. But if the securities turn out to be worth less than what the Fed lends or pays, taxpayers might be forced to eat the loss.

For the most recent update on the Fed’s Consolidated Statement of Condition of All Federal Reserve Banks, visit: http://tinyurl.com/fohhe.

IN-PLAY: THE GLOBAL WAR AGAINST SHORT SELLERS

At the time of this writing, there are 10 countries that have either issued additional warnings, restricted short-selling of certain securities, or banned short-selling outright for vary durations.

Most of you already know that the United Kingdom banned short-selling in financial issues. This remains in effect until January 19, 2009. The measure may be extended to ban short-selling in other sectors. You also know that the U.S. banned the shorting of 799 financial stocks, which ends on October 2 unless the ban is extended.

Did you know that some financials were excluded?

• For example: CIT and AXP
• Conglomerates with large financial divisions were excluded, such as GE.

Did you also know that the list included some “typos”?

• Included in the list: 4 delisted stocks, a biotech, and a Nigerian aviation company.

After the U.S. markets closed on September 19, the Ontario Securities Commission (OSC), supported by the Canadian Securities Administrators (CSA), issued a temporary order to ban short-selling effective until October 3. The following financial securities are affected:

• Aberdeen Asia-Pacific Income Investment Company Ltd. (FAP)
• Bank of Montreal (BMO)
• Bank of Nova Scotia (BNS)
• Canadian Imperial Bank of Commerce (CM)
• Fairfax Financial Holdings Ltd. (FFH)
• Kingsway Financial Services Inc. (KFS)
• Manulife Financial Corp. (MFC)
• Quest Capital Corp. (QC)
• Royal Bank of Canada (RY)
• Sun Life Financial Inc. (SLF)
• Thomas Weisel Partners Group Inc. (TWP)
• Toronto-Dominion Bank (TD)
• Merrill Lynch & Co, Canada Ltd. (MLC)

Jean St-Gelais, Chair of the CSA and President & Chief Executive Officer of the Autorité des marchés financiers (Québec) stated:

“The CSA is supportive of the action taken by the OSC today, other jurisdictions in the CSA will be taking similar action today, or in the coming days.”

If that’s the case, we’re talking about a possible 12 agencies to follow the OSC (Ontario):

• Alberta Securities Commission
• British Columbia Securities Commission
• Manitoba Securities Commission
• New Brunswick Securities Commission
• Newfoundland & Labrador Dept. of Gov’t Services – Consumer & Commercial Affairs
• Northwest Territories Registrar of Securities – Legal Registries Division
• Nova Scotia Securities Commission
• Nunavut Registrar of Securities – Legal Registries Division
• Prince Edward Islands Securities Office – Consumer, Corporate & Insurance Division
• Quebec Autorité des marchés financiers
• Saskatchewan Financial Services Commission
• Yukon Territory Superintendent of Securities – Community Services

In addition, 5 European countries, Australia and Taiwan also joined in on the fight.

Germany announced that they have halted short-selling in the following financials:

• AAreal Bank
• Allianz
• AMB Generali
• Commerzbank
• Deutsche Bank
• Deutsche Boerse
• Deutsche Postbank
• Hannover Re
• Hypo Real Estate
• Munich Re

This ban by the German Federal Financial Supervisory Authority is in effect until the end of the year.

The ban for the US is in effect until October 2, October 3 for Canada, and January 16 for the UK.

Ireland banned the shorting of four of its financials:

• Bank of Ireland
• Allied Irish Banks
• Irish Life and Permanent
• Anglo Irish Bank Corp.

The Irish Financial Regulator also requires positions of more than 0.25% of the issued share capital be disclosed every day starting on September 23 at 3:30PM.

In the most dramatic move against short-sellers yet, the Australian Securities and Investments Commission (ASIC) banned short-selling of all listed shares. The ASIC noted: there was a risk that if Australia didn’t follow with its own ban that there would be a risk of “unwarranted activity” in the Australian market.

France’s AMF stated that they will take similar actions as they increase monitoring of short-selling as well as deliver a warning against naked short-selling. Switzerland also issued a warning against naked short-selling on its SWX exchange in Zurich. Portugal’s CMVM announced that they will incorporate similar “extraordinary measures” against short-selling. It is possible that most or all European regulators will follow the Committee of European Securities Regulators’ (CESR) extensive efforts to limit or ban short-selling.

Taiwan banned short-selling of 150 stocks for two weeks, effective until October 3. The securities are listed on the Taiwan 50, Taiwan Mid-Cap 100, and Taiwan Technology indices. Short-selling is banned when they trade below the previous session’s close!

If you want my opinions on why this ban is stupid and ridiculous, you can read the previous posts on my blog at: http://www.weeklyta.blogspot.com.

IN-PLAY: GOLDMAN SACHS (GS) & MORGAN STANLEY (MS)

I was getting skeptical this weekend because we haven’t heard any “dramatic” financial news yet. But I spoke too soon when I realized that nearly the entire world has taken steps against short-sellers. But on Sunday, Goldman Sachs (GS) and Morgan Stanley (MS), the two largest (and last) independent investment banks (I-banks) changed their status to becoming a Bank Holding Company.

I did mention in my previous newsletter that without consumer deposits, investment banks face considerable pressure in the condition that they are in. This is the reason why Bank of America (BAC), JP Morgan (JPM), Citigroup (C), Wachovia (WB), and Taunus Corp., collectively the top 5 largest BHC's, have all been able to survive. Now the last members of the I-banking elite have joined their ranks.

A BHC must directly or indirectly own or control 25% or more of a U.S. bank. Under Regulation Y, GS and MS are now under the Federal Reserve's supervision, increasing regulatory oversight as well as reducing the amount of debt these two firms can take on in the future.

From the NYTimes: In its statement, Goldman said that it would become the nation’s fourth-largest bank holding company, with its small existing deposit-taking units to be rolled into GS Bank USA. Morgan Stanley will convert its Utah industrial bank into a deposit-taking national bank, to be called Morgan Stanley Bank.

Typically, new or smaller banks adopt BHC status due to its flexibility, allowing the BHC's to easily raise capital, issue stock, and acquire banks and other entities more so than I-banks. The chance of failure for GS and MS are very slim given the additional backing from the Federal Reserve. Therefore, the WB-MS deal may not even be considered.

Here's the best article (NYTimes) on the details following the announcement so far: http://tinyurl.com/3w55hj.

For more updates regarding Bank Holding Companies, visit: http://www.weeklyta.blogspot.com.

MARKET COMMENTARY -- SPX 1,255.08, COMP 2,273.90

Following the news regarding the ban on short-selling, the S&P 500 rallied almost 100 points to close at 1,255.08. If you look at the charts below, you can see the power spike that occurred on record-level volume. The index is still in a primary downtrend and has met resistance at the 50-day MA and was unable to penetrate above it. Today’s trading action and more importantly, the close, will determine the most likely direction for the market this week, provided that the Fed/Treasury does not disrupt the markets.

The gap up may be characterized as a breakaway gap, but in this case, it looks more like an area gap. Breakaway gaps start new trends in the direction of the gap and area gaps have a greater than 90% chance of filling within one week. Therefore, today’s trading will determine the type of gap.

Notice the divergence between the S&P 500 and the RSI and MACD. This divergence leads me to believe that the market will continue higher for the short-term. There is a high likelihood that the market will act in the direction of the divergence, whether positive or negative. In addition to the 50-day MA acting as present resistance the primary trend and the August short-term highs act as upcoming resistance areas. Thereafter, a failure at the 200-day MA is higher likely.

The NASDAQ has bee doing quite well compared with the other indices as it has attempted to hold its March and July lows. On Friday, the NASDAQ formed a bearish gap up which can be characterized as a breakaway gap on record volume of nearly 4 billion shares traded. A breakaway gap signifies that the index (or security) opened at a certain point but sold off throughout the day to close well below its open. This typically signifies that the selling may continue into the next day. Like the S&P 500, today’s action will determine the market’s likely outcome for this week. The only difference is that the NASDAQ may fill its gap and move higher.

Note that the RSI remains level but a positive divergence exists on the MACD. The NASDAQ could not hold at the 50-day MA and faces additional resistance at around 2350, 2400, and 2460 as well as the 200-day MA, which I expect it to fail.

The market’s previous response to an announcement by the SEC regarding short-selling fueled a short-term rally beginning on July 18. This rally lasted for about 1.5 months. Visit: http://www.weeklyta.blogspot.com for more technical-related analysis.

Sentiment is more important now that ever for the short-term. Some are used to confirm price-volume action, and others are noted for any divergences. Below are the NYSE, NASDAQ, and AMEX Issues New Highs-New Lows (NH-NL) and Advance-Decline (A-D) lines. Typically, the A-D lines follow the market. However, the NH-NL lines (in the right column) are the most important. Notice that after the 700 point Dow and 100 point S&P 500 rally more and more stocks are still hitting new lows! In fact, new-lows on the NYSE and the AMEX have hit parabolic vertical status, comparable to falling off a cliff. I expect this line to rebound gradually. Keep a watch on how these indicators change throughout the week.

How do you use the indicators? HeadlineCharts (http://www.headlinecharts.blog.com), one of my most favorite blogs for sentiment, provides an example for the NYSE/NYHL. Notice how there is always a spike before a short-term bottom is reached?


The VIX indicator is my personal favorite. We recently hit the 40+ level, not seen since mid-2002. Notice the spikes in the VIX:

We recently hit the 40+ level not seen since mid-2002. By this time, the previous bear market was already about 3/4^th’s finished. This is NOT to say that this bear market is over. All bear markets are different and previous readings for the VIX should not be used as a crystal ball but as a measure of how we stand now compared to the past. The VIX is making long-term higher-lows signaling that the VIX is indeed likely to hit at least the 50 level. In my opinion, there is still a bullish group of folks, albeit small, that believe we have finished this bear market. Let me remind you that a bear market cannot end unless there is overwhelming and undeniable widespread pessimism. We have not reached that level yet.

THIS WEEK’S WATCH:

• $700 Billion bailout plan approval
• Market response to the global short-selling ban
• Goldman Sachs (GS) & Morgan Stanley (MS)
• Currencies, Treasuries
• Economic Reports and Earnings Reports listed below

Economic Reports: Mon. (None), Tues. (Richmond Fed Manufacturing Index, House Price Index, Weekly Retail Sales – 7:45AM), Wed. (Existing Home Sales – 10:00AM, Weekly EIA Energy Inventory – 10:35AM, Weekly MBA Mortgage Applications – 7:00AM), Thurs. (Durable Goods Orders – 8:30AM, Initial Jobless Claims – 8:30AM, New Home Sales – 10:00AM), Fri. (Q2 GDP Final – Personal Consumption, Price Index, Final Core PCE – 8:30AM, Consumer Sentiment – 10:00AM)

Noteworthy Expected Earnings: Mon. (AZO, KMX, COMS), Tues. (LEN, FUL, FDS, CPRT, WOR), Wed. (NKE, PAYX, BBBY, RHT), Thurs. (RAD, CHTT, SCHL, TIBX, ALOG, MKC, TXI, RIMM), Fri. (JBL, AM, KBH)

Contact: John C. Lee // E-mail: JCLee84@hotmail.com // Website: http://www.weeklyta.blogspot.com

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