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August 25, 2008

Call Me Skeptical

By most respects the selling endured by equities today was your typical, nasty bear market stuff. Prices slumped out of the gate and never worked their way back to anywhere near short-term overbought. Every little rally was immediately sold giving no recourse to bears who felt they were missing out nor to bulls who were looking for a bounce into which to unload a fretful position. The S&P 500 reversed the consolidation breakout described in the last post, falling away from a perfect back-test of its bear flag, and all the indices closed near their lows.

I don't buy it.

stock chart

A similar picture can be seen on the NDX, and I get the feeling bears are being set up for one last shake out before this puppy heads lower. Therefore, I am not pushing my shorts at this time. If the market closes below last week's low on a convincing uptick in volume, I'll change my mind and get aggressive. I will also be more convinced when the Banking Index takes out support at 60.

stock chart

Ironically, Fannie and Freddie were both up 4% today, though the only reason I can see for these things to trade above zero is hope for a government bailout. I have news for you, folks: these entities will not get bailed out. Not the equity, anyway. The debt will be nationalized. The shareholders will be marginalized. Now, if our government did something as completely obscene as pay a premium for the equity, then I'll be buying as much gold I can get my hands on.

Speaking of gold, the precious metals finished giving back Thursday's big gain. This is what counter-trend rallies do: they chop around a lot trying to shake off both bulls and bears at the wrong time. This behavior is one of the big reasons I dumped half of my long play into Thursday's strength... not to mention it is a counter-trend rally, so it is at risk of big failure at any moment. While I expect this consolidative bounce to take gold up to around $850-860, I'm not going to bet heavily on that outcome.

Have a great evening.


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