weekend update

REVIEW

The week started off with the market trying to add to last week’s gains. But on monday and tuesday the SPX again had trouble breaking through the 990 pivot and the rally fizzled. For the week the SPX/DOW was down 6.1%, and the NDX/NAZ dropped 8.8%. In the foreign markets: Brazil, Germany, Hong Kong, India and Japan dropped over 10%; while Australia, Canada, China, and the UK dropped less than 5%. Commodities continued their selloff with the CRB -9.3%, Crude -11.1% and Gold -7.3%. Only the USD +4.9%, the Yen +7.6% and Bonds +2.9% advanced. The wealth destruction phase of this bear market continues.

LONG TERM: bear market

At the beginning of the October 2007 bear market from SPX 1576 the downtrends were contained by FED interventions. Surprise rate cuts and new alphabet lending programs were introduced around SPX 1370, and twice around SPX 1270. The market completed three waves down into January (1276), or five waves into March (1257), completing a wave A. Then rallied for two months into May (1440) after BSC was sold for $10/share to JPM over a weekend to complete a wave B. When wave C began the first downtrend was steep (1440-1200). But it was in line with what we had observed thus far in this bear market. When the downtrend bottomed in July a transition took place. Crude, the commodity leader peaked, several currencies peaked or ended uptrends, and the USD started to rally. When the stock market uptrended into August (1313) in a typical bear market rally, the commodity and currency downtrends accelerated. Entering September the new downtrend continued to move along in a organized fashion, commodities and currencies steadied, but Libor started to rise as banks tightened their lending. In mid-September when the Paulson bailout plan was introduced the market surged 130 points to 1265, pulled back to 1179, held for a few days, and then most assets classes started selling off as Libor continued to soar. The financial system had frozen worldwide. Over the next few weeks the market went into panic mode, and has remained there ever since. As a result the market put in a multi-week crash as the SPX dropped from 1265 (the Paulson bailout plan high) to 840, a 34% decline. Over the past two weeks the SPX rallied to 1044 and is now now again close to the lows, as volatility has been intense. Commodities continue to tumble, currencies continue to selloff, and the USD has rallied strongly. After governments worldwide infused funds directly into the capital of troubled banks Libor started to ease. This series of events certainly caught me off guard. What’s next will depend on the interactions between the various asset classes, the activity in the credit default swap market, and the fallout from the credit freeze. The August downtrend is still ongoing, and the support pivots at 848 and then 789 are the important levels to watch.

MEDIUM TERM: downtrend low holding SPX 840

In assessing what has transpired thus far there are two views. The first is three waves down into the January low, then three waves up into the May high, and we are now in the third wave down from the May high. This suggests when this downtrend ends Major waves ABC will end as well, and a sharp counter trend rally should follow. The second is five waves down into the March low, then a simple rally in May, and we are now in the third wave down from the May high. This suggests that when this downtrend ends, the next uptrend will be a weak 4th wave, and then another downtrend will follow to finish a 5th wave and Major waves ABC. This should also lead to a very sharp uptrend rally. The determinig factor as to which scenario unfolds will be the interaction between the various asset classes. The objective now is to determine where we are in this downtrend, and then, attempt to determine the potential levels where it might end. The strength of the next uptrend will define which scenario is the right one.

The downtrend from the August SPX 1313 looks to be in wave 5: 1134 wave 1, 1265 wave 2, 840 wave 3 and 1044 wave 4. In addition it appears to be in wave 3 of the fifth wave. Applying fibonacci relationships to our second scenario 5-3-5. The first support is SPX 833 where wave 3 = 2 x wave 1. The next support is close to the 789 pivot. At SPX 796 waves 3-5 = 2.618 x wave 1, and then at SPX 781 wave 5 = 0.618 x wave 3. Also applying our first scenario ABC, at SPX 802 wave C = 2 x wave A. Therefore we have a cluster of fibonacci relationships around the long term 789 pivot: 781, 796 and 802. Should the SPX 848 pivot fail to hold, let’s look for support at the SPX 789 pivot possibily as early as this up coming week.

SHORT TERM

Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum ended around neutral. Should the market start making new lows positive divergences are likely to appear on most timeframes. The market is very volatile intraday and this will probably to continue as the VIX made a new high on friday. Also, market breadth made a new low. So the selling pressure continues. Be careful.

FOREIGN MARKETS

The Asian markets continue their downtrends, with Australia and China displaying some relative strength.

The European markets are following the US, and the FTSE is displaying some relative strength with a 7.5 PE.

The Commodity markets continue their extended downtrends, with Canada displaying some relative strength.

COMMODITIES

Bonds rallied this week after making a new low for the year at 111.44 last week.

Crude continues to selloff in one nasty downtrend. After hitting $148 in July it gone straight down to $63 on friday, a 57% decline.

Gold remains in a downtrend from July as well despite the enormous buying in the cash market.

The USD rally has been incredible as the Euro has lost 21% from its July high at 160.

NEXT WEEK

New home sales will be reported on monday and Consumer confidence on tuesday. Then Durable goods on wednesday, and Q3 GDP on thursday with the weekly Unemployment report. On friday, Non-farm payrolls, the CPI, Chicago PMI and another Consumer reading. If that wasn’t enough, the FED FOMC is on tuesday/wednesday, Governor Kroszner gives a speech in NY on thursday, and FED chair Bernanke gives a speech on friday Halloween. Wonder if he will be wearing his bear costume, with Paulson and Bush as they go ‘trick or treat’ in Congress. Speaking of Bush. In February we posted an analysis of the DOW performance for every president since Hoover. Our illustrious leader was doing okay at the time, he was +17.5% over his two terms, and +2.5% annualized. As of friday’s close GW’s "trickle down", "spend till you drop" policies have placed him in a special position on the all time list. He is now "down" 20.9% over his two terms, with an annualized rate of -2.7%. Historically only one president has ever done worse, Herbert Hoover. And on a per year basis only Richard Nixon and Hoover have done worse. But G W still has a chance to move into sole possession of second place by time his term ends in January. Certainly he will be remembered as he makes his mark in American history. Best to your week!

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