STOCK MARKET CRASH

Today is going to be one hell of a day in the equity markets. Dow futures are showing an open of down 500 points. The way things are shaping up I expect the circuit breakers to be deployed especially as the Dow flirts with minus 1000. This will be the biggest market crash since 1987.
The Fed has stepped in and cut rates by 75 basis points . A Fed cut at this stage is like treating cancer with Aspirin. It will have no effect.

The play for todays market is probably to cut back on long positions by atleast 50%. I am sitting on almost 30% cash with another 20% in inverse long ETFs such as SKF and SRS. I do have one silly play having gone long QLD though the losses here will be more than cancelled out by my inverse ETFs. It was fear of a bounce that held me out from being atleast 50% invested in inverse ETFs. I should have been more afraid of a day like this in retrospect. Oh well I have plenty of cash and can deploy it as I see fit. I could go long and buy quality names at a huge markdown or I could play the bull ETFs if I see capitulation. On the other hand I could throw it all into QID DDM SDS MZZ FXP or other inverse ETFs if I see things headed lower.

HOW TO PREDICT THE MARKET

The Dow Jones Industrial Average is an index composed of 30 stocks. IBM XOM BA MO MMM UTX PG JNJ CAT KO make up just under 50% of the index. These 10 stocks lead the Dow up or down. If these stocks start gaining strength, it is almost a certainty that the Dow will too and vice versa. Keep an eye on the movement of these stocks and you can time the Dow intraday. Today for instance, IBM is up nearly 6% in premarket. IBM is 6.76% of the Dow. XOM is up over 1%. XOM is 5.61% of the Dow. MO (5.1% of the Dow) is up 1.5%. PG (4.55%) is up 1%. Just by keeping an eye on these major components one can see that the Dow will be very strong to start the day. If strength holds among these top 10 names, its likely the Dow will have a strong day.

The same study can be done with the S&P 500 by breaking down its components. Some of the S&Ps biggest names are also part of the Dow - XOM GE MSFT T PG JNJ . Throw in CVX BAC MO PFE CSCO AAPL IBM GOOG AIG JPM C KO MRK VZ and you have the top 31% of the S&P 500. 20 stocks in total. Many of these names are also up strongly in premarket - GOOG AAPL CSCO BAC JPM apart from the Dow names we mentioned before. So again I expect the S&P 500 to start the day of very strongly and as long as these big 20 stocks stay strong, its likely the S&P will have a strong day.

A POSSIBLE MARKET BOTTOM ?

The futures are starting to climb here this morning. The Asian market were killed though Europe is recovering and it appears many indices will finish in the green. After being murdered in after hour trading, it appears INTC is recovering here after a Morgan Stanley upgrade this AM. Would not surprise me if we rally all day after a lower open. Also keep an eye on the Yen which needs to weaken in order for a sustainable equity rally.

THERE WILL BE BLOOD ( IN THE MARKET)

This aptly titled movie could be referring to the stock market itself. There will be Blood. How true.

In after hours Intel INTC is being disembowled after reporting soft earnings and weak guidance. Futures are down by alot and tomorrow is likely to see an open a few hundred Dow points down.

Option expiration is on Friday and I do suspect we could get some upside after some panic selling to start tomorrow though I wouldn't bet on it. For all I know the wheels could really come off and we may close down 5% across the board. I really want to see panic selling amongst retail investor before I step in on the longside. Until than I continue to play the shortside via SKF and SRS.

A WELCOME RALLY

A welcome rally for bulls and in some cases bears as it allows them to reload short positions. In any case I feel this rally may be very short lived considering the economic data releases on the horizon . Producer Price Index and retail sales tomorrow along with the New York manufacturing report. Consumer Price Index and and Industrial Production reports on Wednesday with Housing Starts and the Philly Fed survey on Thursday followed by Option Expiration on Friday. This will be one busy week and probably highly volatile. I am already excited !



Currently I am long QLD while betting against financials via SKF and housing via SRS though I lightened up on both these positions last week.I will look to add more SKF and SRS if we rally hard this week. Took some of the table on GLD today. I am looking for a pullback in Gold leading up to the Fed meeting. I have been long GLD from $58 with an average cost of under $65. Selling above $89 is prudent . Agriculture is having a phenomenal run as of late with my position in the agriculture ETF DBA soaring. I believe DBA will be one of the best plays for 2008.



Here is an interesting chart courtesy of Headline Charts showing a market sell signal via and S&P 10 week and 40 week moving average cross over. This signal appears to have accurately predicted the Bear market of 2001-02 and the bull market starting in 2003.



If one wants a accurate predictor of where the markets are headed, keeping an eye on what the institutions are doing is key. This chart via Stocktiming.com shows the Institutions are reducing expsoure to equities.



There are 71 technology stocks in the S&P 500. Not a single one is above its 50 day moving average. This chart below from Bespoke Investment is incredible to look at.







Yahoo is the only S&P tech stock up this year ( as of this morning). Amazing. This can be looked in 1 of 2 ways. Either tech is oversold and a great buy here or tech is weak and will continue to get weaker. I personally believe tech will continue its downtrend though the above tech names could all rally in the next week or 2 towards their 50 day MA. Hence I am long QLD which is a bull ETF modelled on the QQQ x 2 . Since the Qs are mainly tech stocks, I believe a tech rally can be played best by utilizing QLD though some would argue ROM is better since its a bull tech sector ETF. ROM however does not have enough volume for my liking. Too illiquid for me.

WHAT DOES KUDLOW SMOKE ?

Watching Kudlow and Company here. You really have to wonder what Larry Kudlow and some of his guests are smoking. I thought I heard someone say how great they thought financials would do the rest of the year. This Don Luskin fellow thinks the stock market does well during recessions. Wow ! He's obviously on Ecstacy - the club drug. Larry Kudlow is dressed like a clown and everytime his mouth moves, a steaming pile of horse turd is released. This Doug Kass person is the only one who makes remote sense. Luskin, Kudlow and this other older guy are either drunk or very high. The other day Kudlow had Ben Stein as a guest. Ah the same old Ben Stein who reminds me of a crew member aboard the Titanic telling people to go back to bed and not worry while the ship sinks. These fools continue believing everything is fine. The problem with these idiots is they are so out of touch with the reality that millions of Americans face on a daily basis. I mean how much can Ben Stein know about the average American when he lives there in his $20 million Malibu mansion ?

DON'T BET AGAINST ANGELO

Or any other tanned Italian men in general. Looks like Countrwide may be saved via rumors of a takeover by Bank of America. If this is the case, than look for a strong market rally especially in the financials. A short term bottom appears to be in place. BAC injected $2 billion in Countrywide back in mid August which also market a market bottom. I expect the markets to continue their downtrend in the intermediate term. But a strong rally could develop here and continue till the Fed meeting in late January.

BEN FAILS TO IMPRESS

Judging by the market reaction following the Bernanke speech this afternoon, he didn't bring hope to the bulls. The indices jumped in anticipation with the Dow in triple digits. Those gains evaporated soon after. What is Ben supposed to say or do ? Staving of a recession at this point is a highly unlikely scenario. Cutting rates further will only be inflationary. It won't save the markets or the consumers. The Fed should just stay put and not cut rates any further. It will only lead to stagflation - slowing growth with rising inflation.

The plus side is the spikes in gold and silver. GLD and SLV are looking pretty today. I can't help but feel commodities will be the way to go in 2008 as every rate cut only leads to further spikes in commodity prices. Gold and Silver along with agriculture could easily rise 30% or more in 2008.

EMERGENCY RATE CUT COMING

I'm expecting news of an emergency rate cut sometime soon maybe even today. If the market continues this downslide there will be some sort of intervention. We had a rally going this morning but things started falling apart. We are up barely.

WE ARE IN A BEAR MARKET

After having officially broken all types of support - The Dow at around 12700, the S&P at 1400 and the Nasdaq at around 2540 it looks like we are officially in a bear market. Can't argue the facts. Slower growth ahead and a recession on the horizon though by my count we are already in one.

Despite the bearish picture on the horizon I am looking for some type of bounce and even a sustainable rally on the near horizon. I can't help but feel with all the doom and gloom that there will be a strong rally that could life the major indices 3-4% at a minimum. At the moment I am short financials and real estate while having taken a long position in the QLD in anticpation of a bounce in the Nasdaq and the Qs in particular which are down over 12% in the last 10 trading sessions.

NASDAQ 7 DAY LOSING STREAK

After a 7 day losing streak in the Nasdaq in which we've lost over 200 points I expect a sharp bounce either today or tomorrow. There is a gap that needs to be filled at the 2600 level which is a 100 points higher and we may just get there. Its times like this when people are about ready to throw in the towel that sharp rallied occur. And we are extremely oversold on an intermediate term basis. Add that to CES in Vegas which tends to have a positive effect on tech and I would say a bounce in the Nasdaq is forthcoming.

I don't think Howard Schultz returning to the helm of Starbucks is going to help the company anytime soon. Higher commodity costs and increased competition from Dunkin Donuts and especially McDonalds, is killing this coffee shop chain. People have come to their senses and decided paying $4 for a cup coffee is absurd. Disclosure: I don't drink coffee. Hate the stuff.

Jimmy Cayne has come to his senses and decided to step down as CEO of Bear Stearns. Or rather he was 'politely' asked to vacate the chair. Now he can go focus on golf and bridge which he is more suited for rather than making foolish bets with 'real' money.

I sold off my QID position yesterday and went long QLD . Still have SRS SKF. I'm betting on a bounce here before more bloodshed. The Dow could be putting in a double bottom though having tested Novembers lows. Markets don't go down in a straight line though its feels like it sometimes. I love the volatility nonetheless.

BE VERY BEARISH WHEN UNEMPLOYMENT IS AT ITS LOWEST

Many financial commentators over the last few months have pointed out low unemployment/full employment as a sign that the economy is strong . Nonsense ! When unemployment is at its lowest, it only has one way to go and thats up. Today was evidence of this via date showing the highest unemployment/ jobless rate in 2 years. Be bearish when unemployment is at its lowest and bullish when its at its highest. Thats how real money is made in the market. Full employment means things can only get worse. Record unemployment means things can only get better. Thats how you interpret employment data unlike those clowns in the financial media.

On another note, I cannot help but feel we are going to get a bounce in the markets possibly via some rumors of an emergency rate cut or something along those lines. I am looking for a Dow bounce to 13200 in a week or so and the Nasdaq to close its gap at 2600 while the S&P should get up to 1445 or so. I have thus reduced short exposure such as QID SKF SRS and I may buy DDM SSO QLD in anticipation of a bounce.

NOTHING WRONG WITH A RECESSION

I am selling a little of my ultra short positions here. Taking a little profit on QID SRS FXP SKF.

The Chief Marketing Officer at NTRI recently spent $2 million of his own money to buy stock. That says a lot. NTRI is a strong buy under $30.

Now that we've hit $100 oil I think we turn back. I think oil will trade as low as $70 this year especially on the back of a slowing global economy.

The drop in the manufacturing index is essentially telling us we are in a recession. How many more signs do we need before we accept reality. There is nothing wrong with a recession. It's part of the business cycle. Accept it and move on. Stocks will eventualy become super cheap. There will be lots of opportunities to make money on the long side. Financials will eventually bounce back. So will real estate.

TRADING FOR 2008

HAPPY NEW YEAR ! Prosit Neujahr ! Bonne Annee ! Kenourios Chronos ! Feliz Ano ~Nuevo ! S Novim Godom ! Antum salimoun ! Xin Nian Kuai Le ! Naye Varsha Ki Shubhkamanyen !

After an extended break I am ready for 2008 . Looking ahead some of the key themes that I
see are as follows

• Strengthening of the Yen and hence a weakening of the global stock market via unwinding of the Carry Trade ( borrowing Japanese Yen at low rates to speculate in high yielding assets ). The Yen has been making lower highs and lower lows since July.
• Continuation of the banking and mortgage crisis. Subprime is so 2007. 2008 will introduce as to HELOCs ( Home Equity Lines of Credit) , Pay Option ARMs and other fancy mortgage products that are going to be defaulted upon. Watch for an increasing amount of defaults in jumbo loans ( $417,000 +) .
• Credit card and Auto Loan defaults will go through the roof. People making $60,000/yr cannot afford $100,000 cars.
• The bottomless real estate market. Things will not get better in 2008. Infact they will get worse. A large rise in foreclosures in the million dollar plus range. Commercial real estate will suffer too. Watch the Los Angeles and Manhattan real estate markets take big hits.
• Recession. First there was absolute denial , then there was acceptance of perhaps slower growth , than they agreed upon a mild mainly housing based recession and soon they will accept the truth and that is an all out recession. Things will get bad. Very bad.

I may add more to the above list as the day progresses. From the list it may appear that I am overly pessimistic. Truth be told I would love to sound optimistic and act like everything is great like this cheerleader Ben Stein . Unlike Ben however, I live in the real world and see things on a daily basis. I go to regular malls, eat at regular restaurants, talk to regular people and get a sense in general that things are not looking good. Its not too difficult to do the math. The 2003-2007 economic boom was built on cheap easy credit. While credit is not too expensive, it is alot harder to come by.

Less credit = lower spending = economic slowdown/recession.

One does not need to be Einstein to figure this out. People tapped equity from their rising home values to spend. Home prices are heading south. People can't use their homes as a bank any more. Spending is going to have to be done the old fashion way - credit cards or perhaps the old old fashion way - through saving. Americans are maxing out their credit cards at an alarming rate and they dont' have Home Equity Lines to bail them out like they did a few years back. This is cause for concern.

So how do we trade all this ? For now I feel the best way to trade this market is to stay on the short side. There will be sharp rallies as always but as we have been seeing since September onwards, the market has been making lower highs and eventually things will break down to the point where those August 2007 lows will be taken out. I believe the Dow will eventually trade as low as the February 2007 lows and perhaps even lower if things get really bad.

IMPORTANT LEVELS ON INDICES

The 13200 number appears to be an important level for the Dow. Its around the early December lows. A close below 13200 could see a pullback to test the November lows.

The S&P 500 is currently below is support level of 1460 and is signalling a retest of 1400 is in order.

The Nasdaq appears to be ready to fill its gap around 2580 or so.

The markets are weak this morning despite the Fed credit auction that will occur later today and word of more liquidity injections. Despite current weakness I would not rule out a rally in the closing hours.

MARKET UPDATE

Will we get a strong close like yesterday or will we sell off ? The market opened weak and attempted a rally and currently it is retesting the lows. A successful test may mean a rally into the close. From a bullish perspective a strong close is good. But I am currently leaning more towards the bearish side and I wonder what happends if we don't get a strong close. The wheels could fall of the market fast.

I added more QID SRS SKF FXP a little earlier though I may sell them if I see strength going forward.

DON'T BET AGAINST THE BULL

Or perhaps don't bet on the bear. Either the bulls have remarkable resilience or the bears lack the ability to take control of the market. To be fair, the bulls have Bernanke on their side in the form of liquidity injections - don't think I didn't see that liquidity injection today Ben !

As I mentioned in my earlier post, I expected a late day rally if the bears were unable to force the issue. We got one as expected though how much of it can be attributed to Bernanke liquidity injections one cannot tell. Their appears to be a lot of indecision in the market though th efact we held above yesterdays lows is a positive for the bulls.

I added a little FXP SRS and SKF towards the end of the trading session. Sold some QID midday. SRS and SKF appear to be a better hedge than QID.

While the Dow and S&P both finished in the green, most of my major positions were in the red save HANS and NYX. 18 of 30 Dow components finished higher led by HON MSFT BA HPQ UTX . Its pretty easy to get the Dow green when you pump up some of the bigger components.

LOOKING AT NUMBERS

The market has opened weak today though the bears have not really taken full control with the bulls still hanging around. If this continues, I think the bulls could come back strong in the final two hours of trading.

A few numbers to look at. 14198 13962 13780 . These are three intermediate tops set on the Dow between early October and now with the latest figure occuring on Tuesday. The lows have been 13407 and 12724 . So we are in fact making lower highs and lower lows over the last 2 months. If 13780 does indeed stay as a high number in the short term, we are likely to see a lower low than 12724 in the coming weeks. I reckon from judging the point difference between the two lows 13407 and 12724, the next low could very well be around 12000. Perhaps even test the February/March lows of 11939.

The S&P 500 tells a similar story with highs being 1576 1552 and 1523 with the corresponding lows being 1489 and 1406.

The Nasdaq has been a different story with its late October high of 2861 breaking its earlier high of 2834. The recent high is 2734 with the low being 2539. The Nasdaq while being the strongest of the indices is also more volatile and could thus see more downside in a downturn.

FADE THE RALLY

The rally today has been extremely fadeable. I stared in shock as I witnessed the Dow up over 200 with the Nasdaq and S&P up over 50 and 30 respectively. All this because of the news that the The Federal Reserve, European Central Bank and three other central banks are moving in concert to alleviate a credit squeeze by pumping liquidity into the credit markets via auctions. This move is just another way of the Fed signalling that the credit markets are in deep shit. I think the crisis is still in the early stages and will get worse over time. The Fed is better of staying clear of the mess and allowing the market to settle things on their own way. Sure a few big banks may collapse in the process but this is the only way to prevent future such occurences. A bailout will only make things worse in the future as financial institutions fail to learn a lesson.

Today I added more QID SRS and took a position in the double inverse financial ETF SKF. Short financials and real estate will be the play for 2008. This is a trend that will continue for a while.

I sold out of my C position last week. The new CEO does not seem to be the right man for the job. More of a follower than a leader. I think C will see more downside perhaps even into the teens.

FED GIVES BULLS THE MIDDLE FINGER

Not quite the middle finger - an unchanged rate would have been the equivalent but close enough. A half point interest rate cut expectation by Wall Street was not on the cards as the Fed choose to cut rates by a quarter sending the stock market substantially lower though based on the volatility over the last few months , a 295 point drop in the Dow with 66 points on the Nasdaq and 38 on the S&P 500 is not such a big deal. The averages are still above strong levels of support and after such a strong rally the past few weeks a pullback is probably a decent buying opportunity.

Positions I had on today included QID FXP and SRS which all did well though my longs were pretty much beaten up across the board. I will continue to keep QID FXP SRS as hedges in these times of uncertainty .

The question on my mind right now is whether this pullback is a buying opportunity or the start of another leg down. If the preceeding rally was a result of hopefully investors expecting a half point interest rate cut, then is this a sell the news event considering we didn't even get the half point cut ? Are big funds going to play it safe here and close shop for the year ? - Play it safe due to uncertainty, keep their yearly gains and prepare for next year.