Fracked Friday

First, on the "Presidents Meeting" this morning....

What are these guys smoking? Crack is against the law guys. Their focus is basically on "global will save us."

In a word, bullshit.

The facts are the facts. GDP came in this morning inline roughly with expectations but the devil is in the details. And here, the devil is saying this to the US Economy:



In what way? The consumer. Spending growth up less than 1%. Wake up folks, this is a recession call!

How come? Simple - ICSC and Redbook didn't go off the cliff until the first week of June. They've deteriorated since and now are at a net negative run-rate. But we only had one month worth of that contribution to the 2Q GDP number, and remember, 70% of the US economy is consumer spending.

What held it up? Non-residential construction. Anyone remember this chart?


What is that? Allegedly AAA-quality non-residential construction bonds.

Gee, what 'ya think about those donuts? I think they're laced with cyanide and the patient just ate a shitload of them, which started in early July, thus, not reflected in the 2Q GDP number.

So what happens when you take out that nice "non-residential construction" number and the consumer has a negative spending growth rate?

Can you think of a word that starts with "R" and describes a negative GDP growth rate?

Paulson had a hell of a nervous tick on the air today, and was being hammered about exactly what he saw that justified his "no contagion" call. Notice how he didn't answer that question?

I wonder why not?

Heh Paulson - your nose is growing!

The real news today in the credit markets was.... no news. Not "all things are normal" - a real, honest-to-God, "no news." As in no deals getting done, packages coming back "no bid", etc. Gee, you think? That's what I was talking about last night in the ticker - people are simply shellshocked with the deterioration in the ABX and CMBX paper, and wondering - is this a general corporate paper problem too? Might be! So they're choosing to sit on their hands until they can get their arms around it. That seems like a totally reasonable position to me, but its one that won't have good effects on the "LBO mania" premium.

Reality: Margin calls are going out through Hedgistan and people are getting fuched literally by the hour, roaching the ABX and CMBX further. You're not hearing about it yet in the media, but I will predict this - you will, and soon.

Now add to this huge margin debt in the equity markets and you have a potential nuclear blast. If someone doesn't find a pair of wire cutters to kill those timers..... all of them..... "betcha gonna miss at least one!"

Oil. Oil. Oil. $77 a barrel! WOW.

Countrywide gets some rumors, but then S&P craps all over them with something you never hear analysts say - STRONG SELL. Their new price target 12 months out? $25, well below the CURRENT trading price. Oops. Buy into that rumor game this morning, did you? Well guess what - you got roached. That'll teach 'ya to "buy the dips".

Be warned - the dips are, just once in a while, headed for a waterfall! By the time you hear the roar its too late; you're going over!

Let's talk ABX, CMBX and LCDX for a minute. While the 07-AAA paper actually turned up a tiny amount, the BBB paper is now trading at 40!


As for the CMBX, that's beyond stupid. Commercial is contained eh? I don't think so! The AAA chart is above; the horror show of the BB chart is beyond words:



And finally, in LBO land, this is the very definition of "my world sucks."



Ok, now for some charts. For those who argue "PPT", where the hell were they today?

Goldilocks' limp body was seen swinging from a tree - upside down. I think the bears are bleeding her out before she goes on the barbie. They have a giant-size "Green Egg" and it's smokin' hot. I think she might go on Monday morning......

Ok, charts charts and more charts! Today was, to put a word on it, interesting. And Cramer - what an asshole. Complaining about the futures being spiked (down) at the close. Heh dillweed, you used to work in this business! Mutual funds that get a redemption are required to meet it at 4:00! So guess what happens when people see the market go to shit and call their broker telling them to, as you put it, "SELL SELL SELL" and they hold mutual funds?

Well yeah, they SELL SELL SELL. Right into the close.

Oops.

Ok, here's some charts:



Now notice this chart. The market was sold right at the open coming off yesterday, bounced, traded down mostly through the day, and then was pretty much floating around right up until the last 30 minutes, when it went off the cliff.

The Nasdaq and Dow look similar.

PPT? Oh hell no. Mutual fund redemptions. Bet on it.

Now let's look at a few more things:



This is the NDX, or the Nasdaq 100. This is, basically, the same thing as the "Qs". Note that it is sitting right on the 50 but that it cracked the (weak) first-level support just above that today. In addition volume today was lighter than yesterday, but heavier than the most recent runup. Yesterday, of course, was a blind panic - this wasn't, but it sure would have been if had fallen apart earlier in the day!

Here's the Dow:


The Dow is sitting right on second-level support, the strong support from early June and then right around the turn of the month (when it was successfully retested.)

Now you might say "whew!" We didn't go over the edge yet!

NOT SO FAST! Here's the SPX!



There's just no way to spin this one or find anything to like in here. The S&P got ROACHED today going into the close and this, along with the Russell which had an even worse horror picture, tells the story.

We are now clear of both first and second-level support, threatening the 200, with the next clear support around the 1425 level and below that, the March lows.

Now I want to show you a few more charts, these with technical indicators. These are weekly charts; click them to load a new window with an expanded image you can see easily:



This shows the SPX on a WEEKLY basis. While its tough to see here we violated the uptrend from last July today, closing below it. We also have a MACD SELL (decisively red histograms) and a DMI sell signal.

This chart bears paying attention to because if you look at the MACD it has a good record of showing actual pain ahead! In addition the DMI has been very reliable and not prone to whipsaws.

And both are saying - right now - SELL LIKE HELL - THE GATES JUST YAWNED WIDE AND THE DEVIL IS GRINNING AT ME!

Now next up is the DOW, same deal - weekly.



It too is posting a MACD sell. This is new today - up until then, it had not done so. Note that the DOW has not yet violated the uptrend from last July. However, the MACD just posted a SELL and the DMI is dangerously close to doing so. Interestingly enough these very same indicators, on the DOW, have a habit of being a bit late! So if you wait for the MACD to be CONCLUSIVELY under or the DMI to CONCLUSIVELY cross you're late to the party. The SPX doesn't have this problem. Why "whys" and "wherefores" are an interesting academic exercise and have a lot to do with the representation depth in both indices (the Dow is only 30 stocks)

If we look at the Nasdaq Composite and NDX in turn we find something even more interesting - the composite is holding up better than the NDX, even though it sure as hell doesn't look that way from the last couple of days! Again, this is a breadth issue.

The real horror show however is the Russell 2000. It is sitting on the February lows; this week was an absolute disaster, now having erased basically all of 2007's gains!



So here's the deal guys. We've violated key support levels in the SPX, the Russell is sitting on the February lows , and it is basically a given that the SPX and Russell are going to drag the other indices with us.

We are now talking about the timing, or when, not what, and how long this goes on.

Remember that a few weeks ago I said that I saw two scenarios setting up - either a break right there, or that we would push to new nominal highs, either right at or just beyond the former all-time trading highs intraday, then fail.

We did the latter.

Next week we have the same scenario setting up. I suspect that we've got margin calls going out right now in the equity markets, and that the Hedgistan guys have similar - or maybe far worse - problems. In addition the downstrokes continued in the Futures beyond the close indicating that people knew they had trouble and were trying to front-run it in the 15 minutes they had before they got locked out for the weekend.

So what happens Monday?

IF one of the nuclear weapons go off over the weekend before we open, then "what's going to happen" will be obvious. We are going to crash. Period. If you wanted to get positioned, your chance was today. Monday you won't get the chance. What will kick it off? Any of the following:

• A serious unwind of the carry. Yen somewhere under 118 will set that off, but there's no way to know exactly where it happens. In short, watch the Yen Sunday evening when the FX markets open and especially when we get into the wee hours of the morning when Europe starts trading. If it roaches hard, WATCH OUT.
• If the Asian markets go completely to crap, we will likely follow them. Note that "complete to crap" is not down 1 or 2% - its a crash over there. Remember that China cannot drop more than 10% (they actually close the markets!); perspective is important. If they open severely down and followthrough occurs in Europe, look out!
• If any of the ticking nuclear weapons go off in the debt markets. This is a very serious risk - perhaps the most serious, because it is nearly impossible to quantify and could show up suddenly during the day as well. There is simply no way to put a handle on this but if it happens - you'll know it.

Note that only the second - the Asian markets going to hell, with none of the others getting in the way leaves any chance for intervention by anyone. There is no government in the world that can stop the FX markets from unwinding if they want to; they will simply piss money into a singularity. Ditto if the implosion occurs in the credit markets. The problem with the other scenario is that it is almost certain to touch off one of the other two! So forget about the "PPT" or any other such nonsense - if we get triggered there will be no rescue.

The other alternative is that none of these things happen going into Monday. In that case we will likely open down but at some point next week - perhaps Monday - the selling will abate. It could happen at the open but I'd bet against that; in all probability we will open down and either it'll wait a day or two and slowly abate or we'll reverse hard midday one of the days next week, perhaps even Monday.

At that point we will start to rally again. This rally should stall somewhere before we get to the 50DMA, likely before 1500, but we may cross it. When that rally stalls, and it should either next week or the first week in August, The Abyss will yawn wide.

Beware for there will be many Bears - and Bulls - caught in this trap on both ends. Trying to trade this in either direction carries extreme risk. If you can't be watching the market literally tick-by-tick don't even think about trying it!

If you try to front-run either of these moves play limited risk strategies that cannot be caught offsides and inflict unlimited - or nearly so - damage upon you.

Many people will see the selling exhaust and think its over, buying "the bottom". It is very likely that this will prove to be an excruciatingly bad bet; the odds of this being a "one trick pony", with the technical damage done here, are extremely small.

I rate the odds of this being over when the selling exhausts initially at less than ten percent.

To give you an idea of where we might end up if the February lows do not hold (and remember, they have effectively already cracked in the Russell; this means that odds are they will not hold in the other indices either!) I will leave you with one final chart.

The targets, assuming we break trend at roughly 1375 - coincidentally right at the February lows (the trendline from 2003) are 1250 (there is a strong bottom there), 1160 and 1070. Below that we go after the 2003 lows as there is no meaningful support below 1070 until we get there!

Put those numbers in your pipe and smoke 'em, because if the February levels crack in the S&P the minimum downside target is 1250 - a full 20% loss - and it only gets worse from there.

Come over to the forum and let's chat!