by Sam Collins 10/06/08
"Buy on rumor, sell on news." We've all heard it before, but on Friday the slogan had a louder ring to it when the House of Representatives passed the financial markets rescue plan.
After a negative vote earlier in the week that drove not only the U.S. markets lower but world markets, as well, investors may have expected that the passing of the bill by the Senate and then the House would have rallied the market. Not so.
Bad economic news, the negative impact of the rescue, and a big bank deal thrown into chaos drove stocks lower. Questions about the impact of the bill on taxes, the economy, the timing of its introduction, etc., all seemed to create even more uncertainty than before its passage.
However, even prior to the market's opening, a weak September employment number had investors uneasy. The Department of Labor reported the economy lost 159,000 jobs in September for the worst decline in five years. This brings the total jobs lost this year to 760,000 but the unemployment rate remains at a steady at 6.1%.
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Wells Fargo's (WFC) offer to acquire Wachovia (WB) -- which received fanfare on Thursday -- ran into a snag on Friday when Citigroup (C) objected to the $15-billion stock swap, saying that Citi's prior offer had precedence over all others and was exclusive of further offers.
If the WFC deal proceeds, it would not involve government assistance from the FDIC and was evidence that the system need not depend upon government in every case. The news resulted in renewed selling of financial stocks with Citigroup off 18.4% and Wells Fargo down 1.7%. But Wachovia rose 88.5%.
So, with uncertainty creating fear traders rushed for the exits -- not willing to hold positions over the weekend in such volatile conditions. At the close, the Dow Jones Industrial Average (DJI) was down 157 points to 10,325, the S&P 500 (SPX) fell 15 points to 1,099 and the Nasdaq (NASD) was hit with a 29-point loss and closed at 1,947.
The New York Stock Exchange traded 1.4 million shares, with decliners ahead by 2-to-1, while on the Nasdaq more than 1 billion shares crossed with decliners there ahead by 5-to-2.
For the week, the Dow was off 7.3%, the S&P 500 fell 9.4% and the Nasdaq was down 10.8%. For the year, the Dow is down 22.2%, the S&P 500 off 25.1% and the Nasdaq has lost 26.6%.
On Friday, crude oil for November delivery was down 9 cents to $93.88 a barrel, and the Amex Energy SPDR (XLE) fell 70 cents to $58.01. Crude has been in a downtrend since the beginning of July when it topped at just under $150 a barrel. Friday's close takes it near to the low of early September at $90.42 and a break of that could send it quickly to the mid-$80s.
The December gold contract closed down $11.10 at $833.20, and the PHLX Gold/Silver Index (XAU) rose $1.05 to $112.09.
What the Markets Are Saying
One week ago today, the stock market made another new low that some are calling "Black Monday 2008," but the 8.8% hit wasn't even close to the Oct. 19, 1987, low at a 20.5% drop or the infamous Black Monday of Oct. 28, 1929, which brought the market down 12.8%. In fact, the following Black Tuesday took the market down another 11.7% -- nearly three points harsher than what we saw last week.
But last Monday did rattle investors, and rightly so, since it confirmed the breakdown of the markets and their move to the most damaging phase of the bear market -- the one which causes investors to capitulate and sell at any price.
Thanks to Mark Arbeter of Standard & Poor's for the following data which Mark said indicates that a capitulation has occurred and a market bottom is at hand: On Monday, the Nasdaq (NASD) fell 9.1%, the third-largest decline in the history of the index.
In addition, the New York Stock Exchange decliners/advancers breadth ratio surged 19.5:1 (highest since 1987 at 28.1:1), and its down volume/up volume rocketed to 39.8:1, the third-highest reading since 1990.
Finally, the CBOE Volatility Index (VIX) soared to 48.4% on Monday, the highest reading since July 24, 2002, at 48.5%. There are several other indices that are close to records, as well.
Perhaps a market bottom is at hand but a new low on Friday with relatively light volume doesn't indicate that a final "selling climax" occurred on Monday, despite volume then of more than two billion shares. In fact it only serves to reinforce my view that -- when the Dow, S&P 500 and Nasdaq all closed at their daily lows on Monday, and each penetrated its prior reversal low made on Sept. 18 -- it was confirmation that we have entered the final phase of the bear market with the ultimate low at least as far down as the bottom of the next support zone at 1,060 and perhaps even as low at 1,000.
This should be the final gasp of the bear, but it is also the most destructive as investors will finally give up on positions held, sometimes, for years. It is too early to buy and probably even too late to sell. But dressing up portfolios with contra Exchange-Traded Funds (ETFs) could ease the pain of the decline.
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Earnings to be reported include: IDT Corp (IDT), Leading Brands (LBIX) and Zila (ZILAD).
No major economic reports are due today.
Global markets are sharply lower this morning as Europe moves to shore up its banking system. The Fed is pushing Wells Fargo (WFC) and Citigroup (C) to settle their claims for Wachovia (WB). Eli Lilly (LLY) will acquire Imclone (IMCL) for $5.6 billion, which works out to $70 a share.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
