Stock indexes moved higher today, mainly on the euphoria over the bailout of the sup-prime mess. Why doesn’t the government bail out commodity traders when they have a bad day? I’m not sure I understand why irresponsible behavior gets bailed out. I know many people got talked into loans that they didn’t understand and they didn’t take the time to read the fine print. If a car company makes crappy cars nobody wants, they get bailed out (remember Chrysler). If people don’t want to spend the money for earthquake insurance and an earthquake happens, the government bails them out. So why buy insurance? Did anyone catch the Maria Bartiromo interview with Hillary Clinton? She of course said the Bush bailout didn’t go far enough and wanted five billion more. When Maria asked where that money would come from, Hillary answered “it comes from where it comes from.” Is that kind of like saying “it depends on what the meaning of is is.” Do we need a dictionary of Clintonspeak like we needed for Greenspanspeak? At least we won’t have sex scandals. That’s an image too unpleasant to imagine. And then she went on to bash the republican congress for not wanting to understand the warning signs of the impending subprime mess, and apparently not caring. I don’t recall democrats stepping forward with warnings, and I do think there were also democrats in congress that could have said something. In fact I think Hillary was in the senate during all the subprime loans. Did she say anything or give any warnings? A CNBC news analyst came on after the interview and praised her for not bashing Bush and the republicans. Didn’t he hear the whole interview? Was his cable broadcast interrupted with an emergency broadcasting test during that bit? The transcript is available if you google for it. But I don’t want to get into politics here. The market doesn’t seem to care about any of this. It is happy people will be bailed out so they can keep their homes and maybe buy more stuff after the dust settles. The real estate bubble was never supposed to end. Who will bail out the Chinese when their bubble bursts? Oh, that’s right – they have all the money and are bailing us out by buying our debt.
On the S&P/SPY chart above you can see the breakout of the big fat red line I drew. Today it overcame two points of resistance. The trend indicator is just now touching and ready to cross back up. The standard error bands are still flat to slightly down. But market structure, by taking out those pivots, is now positive, and waiting for the technical trend indicators to catch up. Pullbacks should be good long entry points as long as the low points hold. I replaced the bear in the upper left corner with a bull. I couldn’t quite manage a full bull, so instead chose a mechanical version, more of an eight second ride. This market has been displaying a habit of making quick turn-arounds with triple digit moves. It wouldn’t be surprising to see this breakout fail and prices come back out through the bottom. So I have the bear ready and waiting to put right back in its place. There tends to be a seasonal upward bias about now, and with technicals improving, I don’t want to stand in the way of it, even though I’m still not convinced this rally is for real yet.
The chart to the right is the same S&P, but with the bars squeezed a bit tighter and with two sets of Fibonacci retracement tools drawn. The thicker lines are the retracements from the top of the move on 10/11 to the bottom on 11/27. You can see the thick darkred line is nearly the same as the line I drew in the previous chart at those two pivot peaks. We are currently sitting right at the 61.8% retracement level, and you can see the 50% level did turn the market back for a few days. The second tools was drawn at that second peak on 10/31 to the same low point on 11/27, and is marked with the yellow dashed lines. It is interesting that prices stalled out the first time the 61.8% line was approached and then went down to test, almost to the tick, the 38.2% level. Today prices blasted through all the resistance on that second retracement tool. The S&P is also sitting right on a downtrend line drawn from those two previous peaks.
Sometimes it feels like flipping a coin is better than all the analysis that can be done. The market will set up for a move in one direction, and sentiment can change overnight and completely reverse that analysis. One can only take in all the information and make the best judgement with what is available. Nobody knows if the market will be higher or lower two or three days from now, despite what many will tell you after the fact. Us technicans can just do the best we can with what is available. Sometimes it works and many times it doesn’t. Always use good money management in both instances.