Sunday, May 11, 2008

Bearish Signs Are Emerging

Top Line: Friday's market...uh, what happened? Oh yes, even though it seems a long time ago, the AIG news did give the market a little trouble with the Dow dropping just about 150 out of the blocks. From there, the market couldn't get up enough energy to do anything as we went out of the day very close to where we began, at least in the Dow. Some of the other indexes did fare a little better by the end of the day but Friday still ended down. This direction is the one we would continue to think is the right direction.

We only have a few things to share with you this evening starting with an article out of the New York Times which has the potential to hit at the core of the issues we focus on here at the Update. But, of course, it doesn't quite measure up in the end. The discussion includes references to Fleck as well as James Grant, two guys who at least are thinkers. In this article they are somewhat taken out of context but here's what we think.

The article is trying to get at the influence of the Fed and when it should be exerted. The argument taken is that there have been those who say just let the economy go and let the chips fall where they may. Taken at face value these statements seem cruel to someone who is having trouble making ends meet. Here we have someone who thinks the government or the Fed should bail out the people who are in trouble.

Our thought is that nothing is simple but the answer can Not always be to try to increase credit and put many people in debt. In the short run, this has been the answer to put off the day of reckoning until a another time. But, here we are at "another time" and we may not be able to put it off again. We have said the Fed and the government will be powerless to defend against what we are about to experience. They have to try but they will most likely fail. The biggest question is, "what then?"

What this article is trying to say is that we can't let "what then?" happen and the Fed needs to do what it can to "fix" the problem. Well, we think the same answer can not be used again, with good results. It's sort of like using antibiotics a few times and the drug is ineffective at some point. That's where we are now. And, of course, there are no good answers at the moment. The best answers were for the Fed to have let off the gas a little and let a few little recessions happen along the way. We have another analogy, which you are probably getting tired of by now with two now in the same paragraph. That analogy is it's like the economy is trying to take a breath and another breath without exhaling. Finally, it will just have to exhale Big. With little exhales in normaly breathing, things go smoother.

The other items relates to the technical picture for the market. We see that the 13,000 level was exceeded for a few days but has not been able to hold. This is very bearish especially when considered against a couple of other technical factors. We mention one here tonight, that being the volatility indexes, VXO and VIX. These have been mentioned in the Update on occasion in the past as being good contrarian indicators, you might think we actually like that.

If you look at one or both of these, you will see that back in October,near the peak in the market, these indexes were trading at higher prices than at prior times. That was one clue that the October highs would not hold. If you look at the prices of these indexes Now, you will see that they are very near there October lows. We think, and two of our reads this weekend do too, that the complacency indicated by these two indexes when stocks are no where near where they were in October is a confirmation that the market is about to sell off in a big way.

FSI: 93.40 (down in line with the major indexes)

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