Join The Trading Room

Are You Ready for Papa Bear?

By Rick Ackerman Posted on June 22, 2012, 12:37 am EDT Last Updated June 22, 2012, 12:52 am EDT

The Dow got sacked for 250 points yesterday, but consider the chart below if you think it’s too late to jump on the bearish bandwagon.  Of course it isn’t. On the daily chart, the bar graphically representing Thursday’s selloff barely stands out. It’s not even as bad as the 275-pointer that occurred on June 1. A thousand-point rally followed, turning the downdraft retroactively into a bullish swoon.  So don’t despair about missing a great opportunity. This bear market is just getting rolling, and it is all but certain that there will be plenty of chances to get short down the road with stocks rising. Not that it will be easy, since every Tom, Dick and Harry will be trying desperately to get on the right side of the move. More on that in a moment.  Concerning yesterday’s mini-avalanche, we were a day late ourselves, having challenged subscribers the night before to help us pick the top.  We figured it would be as easy as shooting fish in a barrel, since nearly 800 traders,

many of  them regulars in the Rick’s Picks chart room, have taken the Hidden Pivot Webinar.  (Click here to find out about the next class — and get a $50 discount.)

Keep this well-trained army of chartists in mind as you read the following excerpt from a DJIA trading “tout” that went out to them Wednesday night:

My goal is to short a top that will be distinctively recognizable as such after-the-fact.  The risk, of course, is that I will miss this top while greedily attempting to milk the rally for that last oh-so-satisfying inch. In attempting to [short the top], I’d welcome some help from chat-roomers, since the next thousand-point move in the Dow has home-run potential in comparison to whatever base-hits you may be pondering at the moment. To guide you in this class project, I’ll note that my own forecast calls for a tradable peak at 12931, or perhaps 12973 if any higher.

Diabolically Evasive

Ahh, that last inch!  After the shellacking stocks received yesterday, we should resign ourselves to the possibility that Papa Bear has gotten under way without the expected last-gasp rally to 12931.  The highest the Dow got, three days ago, was 12899. Oh well.  As noted above, however, and as we all know, there will always be another opportunity. Even so, we should be aware that as the bear market develops and more and more traders scramble to get on the right side of it, this feat will become increasingly difficult. It is in Mr. Market’s nature to become increasingly evasive – diabolically so — as it dawns on a growing number of traders (and investors, a handful of whom remain in this world) that stocks are indeed in a major bear market. Assuming this is so, we

are certain to see spectacular rallies in the months and years ahead as the Dow ultimately plummets to depths few might imagine. It is at the Hidden Pivot peaks of bear rallies that we will attempt to get short, since the downdrafts are likely to be too steep and dangerous to catch. The news media will trumpet each and every one of those rallies as evidence that the economy is recovering, just as they did during the 1930s. They will be dead wrong, however, for the economy will be sinking into a morass far worse than the Great Recession that even now is only ambivalently acknowledged.

In the meantime, we invite you to watch the action from the perspective of traders who have seen many bear markets before (even if they have not “seen it all.”)  A free trial subscription, including access to a chat room that never sleeps, is yours merely by clicking here.

***

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • bc June 25, 2012, 1:11 am

    Mario:
    Here you can see it trying to explode during the panic of 2008 until the Fed squashed it like a bug with $trillions of liquidity.
    http://www.wsjprimerate.us/usprimerate-vs-libor-vs-fedfundstargetrate-chart.htm

  • bc June 25, 2012, 12:34 am

    Mario:
    My best guess is the lead in event will be a LIBOR crisis where the interbank lending rate explodes freezing the credit markets.

  • bc June 24, 2012, 10:51 pm

    This begs the question: Are we more like Argentina, or more like Germany? No way will Germany hyperinflate. No way would Argentina not hyperinflate. Populism versus rule of law, that is the question! Are we a baby boomer mob childishly demanding our goodies or are we a republic able to debate and make law we then live with?
    Could go either way IMO. Time will soon tell.

  • greg June 24, 2012, 7:00 pm

    I would like to see some intelligent comments on this thought.
    Fact #1-The stock market has to go up or at least be stable and cannot be allowed to crash for long because of funds needed for retires and pensions. A Japan scenario would be a worst disaster here because of lack of savings and the bulk of retirees(baby boomers) increasing withdrawal of capital from the market would significantly magnify the severity of a crash and would not likely allow for even a stable market.
    IMHO fact#2- the stock market is where its at because the fed can’t directly buy stocks and own companies so they lend out to the big banks at zero with an understanding that there mission is to prop up the stock market with as little volume as possible. Thereby avoiding fact #1. The banks know that they will be forgiven somehow if they take big losses in the market. In other words they get to go to the casino, and if they win they keep the winnings and if they lose , well they can’t lose.
    Fact#3- If money start to return to the market from retail investors then the already propped up market will go up beyond reality and the bank will have no choice but to take there winning rather than break even, or even have losses and wait for the fed to forgive… exacerbating the mother of all crashes.
    The other choice is to continue to print money till people are on the streets. By then it might be to late and could lead to a revolt.
    I see a ungodly amount of pain.

  • bc June 24, 2012, 6:01 am

    Yea. Bernanke goes to the Hill and testifies that he was r…r….rrr…that he was r…r…rrr , in other words, he just wants to say, he was wrong! That shouldn’t be too hard.
    I actually believe this will happen but without the admission. No hyperinflation, just a banking solvency crisis, systemic freeze up from counter-party mistrust, a stock market crash (starting Monday maybe), in sum, a second great depression is coming. Same for Europe.

    • mario cavolo June 24, 2012, 6:42 am

      Hi bc, I’ll have to suggest that a stock market crash isn’t a likely “leading” event. A big ass financial calamity of sorts would be the catalysts, makes more sense, no?

      Cheers, Mario

  • bc June 24, 2012, 2:06 am

    Mark
    I agree. And if treasury needs more money the Fed will be pressured to print. Hence operation twist morphs into QE 3. Thus all roads lead to printing with the Fed buying now 60% then70% and eventually all the new paper treasury issues. Except treasury needs permission from congress to issue debt. What if congress says no?

    • Mark Uzick June 24, 2012, 4:54 am

      bc: What if congress says no?

      Then Obama declares martial law or maybe special war powers after a city or two get nuked by some convenient enemy.[just kidding (I hope)]

      Obviously, the USA then defaults on its obligations, which it will have to do do in any case, whether it defaults by paying a fraction of its debts or it defaults by diluting the purchasing power of its currency; the state shrinks in size; most banks go out of business; bad investments are liquidated and now that the diseased, cancerous and parasitic parts of the economy are cut away from its body it can begin to grow from a solid and healthy base; and, I hope, we’ll have learned from our mistakes.

    • mario cavolo June 24, 2012, 6:40 am

      ….I’ll go with “by diluting the purchasing power of the currency….its the “slowly boiling frog” method that has been going on for decades…plus I can’t really imagine the world’s reserve currency blatantly “defaulting” so to speak…While I understand the reasons, I’m not much of a believer in the global financial armageddon scenario…far too messy…

      Cheers, Mario

    • Mark Uzick June 24, 2012, 10:09 am

      Mario,
      You’ve got it backwards; the USA can either default on its debts or default on its currency; what you’re actually saying is that you prefer that it should default on its world reserve currency.

      You might want to think about the implications of that choice.

    • mario June 25, 2012, 3:30 am

      A little clarity much needed thanks Mark! … Now I need to ponder more 🙂

  • Mark Uzick June 23, 2012, 11:52 pm

    Gary: I refer to the boards general acceptance that Gold will do well no matter what the future brings, be it inflation or deflation.

    If by “do well” you mean that gold will preserve value over time, then isn’t that obvious?

    Along with central bank induced economic cycles gold’s buying power will fluctuate both with the scarcity of capital and with expectations of fiat monetary inflation.

    When a credit bubble deflates, capital becomes scarce as malinvestment in inventories and infrastructure are liquidated. As gold is capital, its buying power increases beyond the norm. Central banks, to protect special interests (Politicians and bankers.), try to postpone the debt collapse through monetary inflation. This causes expectations of price inflation, causing gold to rise against fiat, further increasing its buying power.

    Gold’s price in terms of its buying power is currently very high – it’s nearly three times its normal buying power price, but it’s not without good reason, given the extreme circumstances of corrupt mismanagement and abuse of the financial interventionist state institutions.

    As for the Fed, don’t you think they have tried to inflate their way out of this mess? They have lost that battle up till now. Real inflation is not just printing money, it must get into the economy as growth. Prices, wages, demand usually all go up when inflation hits. What they are actually doing is trying to counter the deflationary forces. Stabilizing banks is a smart choice. The people running these banks aren’t always smart though.

    You cannot force people to borrow money or force illiquid banks to stupidly make more bad loans. The solution to this “problem” is to make bad loans on the behalf of the collective population, without individual consent, expanding the state’s role in the economy, which perversely, is good for the state, as failure is the health of the state.

    I am playing a guessing game for sure. I just think that we have one more economic push before it is all over. I am expecting some surprise (upside) economic numbers to start showing up very soon.

    It may take a little more time than you think (a couple of months or so), but if “Operation Twist” becomes QE to infinity, then there should be a surge in stocks and gold, but probably after a brief bear market panics the fed into action.

  • bc June 23, 2012, 11:33 pm

    Hey Gary. What do you think will happen when the Fed runs out of short duration T-bills to sustain operation twist? This will happen you know. Vlad? Don’t say they’ll buy more. You can’t buy and sell at the same time.

    • Mark Uzick June 24, 2012, 12:06 am

      The Fed buys long term treasuries so that the Treasury can pay off the short term treasuries. When the Treasury needs more money, and if they can’t sell enough treasuries, the Fed will just buy more.

  • Mark Uzick June 23, 2012, 7:15 am

    Gary: Since the metals took an even worse pounding, I wonder why most still expect them to shine even as the equities markets are expected to continue to crash? I believe the dollar is rising. In that scenario both lose.

    Who are these “most” that you’re referring to; are they some straw-men that you’ve dreamed up?

    As far as I can tell, everyone was expecting both stocks and monetary metals to rise upon news of massive further money printing or, otherwise, decline.

    I believe that the market has naively accepted Bernanke’s twisted distortions of his intention, hence “Operation Twist” is the perfect name for this con-game. If they really understood what he intends, then both gold and stocks would have been up as an inflation play.

    If he announced a one trillion QE-3, then that would have been the extent of his money printing intentions for now, but “Operation Twist” is something far more insidious: He’s not limiting the fed to a mere quarter trillion-plus that he prefers us to believe, he’s actually indicating that a quarter trillion-plus is the bare minimum that we can expect. The actual amount is his secret that he won’t divulge, but it’s not limited to one trillion; it could be anything from a quarter trillion-plus to infinity – it’s for him to know and us to find out. In a rational world, the markets would reflect a panicked public bidding up the price of anything likely to retain some value when FRN’s can purchase a whole lot less or maybe become recognized as worthless as they, officially, already are.

    • gary leibowitz June 23, 2012, 7:12 pm

      I refer to the boards general acceptance that Gold will do well no matter what the future brings, be it inflation or deflation.

      As for the Fed, don’t you think they have tried to inflate their way out of this mess? They have lost that battle up till now. Real inflation is not just printing money, it must get into the economy as growth. Prices, wages, demand usually all go up when inflation hits. What they are actually doing is trying to counter the deflationary forces. Stabilizing banks is a smart choice. The people running these banks aren’t always smart though.

      I do believe we might see some signs of growth on the domestic front. If we do the markets will take off.

      I am playing a guessing game for sure. I just think that we have one more economic push before it is all over. I am expecting some surprise (upside) economic numbers to start showing up very soon.

  • ter June 22, 2012, 11:28 pm

    Vlad flawless analysis, concisely stated. Gracias. Candy bars are larger than a stick of gum–more like a pack of Dentyne.

  • bc June 22, 2012, 8:42 pm

    The long (30 year) treasury price is anti-correlated to equities. The anti-correlation is near perfect over short times. But, and this is a big but, over longer time scales this anti-correlation has been absent. So, money flows back and forth between bonds and stocks short term but not long term even with zero GDP growth? I smell a Fed murine. Eventually, the anti (negative) correlation between stocks and long bonds must resume. This is the bear impetus we are talking about, plain and simple.

  • Rich June 22, 2012, 4:58 pm

    Correction:

    Long SPY July 133 calls with Big4 long SPX…

  • Rich June 22, 2012, 4:25 pm

    As this is not strictly HP and slightly OT, will not be surprised if this does not survive the moderator. It does bear on Hidden Pivot, as a discipline for profits.

    The 863 point Dow rally beginning the Monday after the -275 point drop on Friday 1 June 2012 is illustration Mr Market may do whatever it takes to extract the maximum from most traders who trade news or hunches.

    My trading platform is down today, with the home office assuring me that other firms have been down longer, up to two days in the case of one located in Boston.

    Thus, today will likely be a day without adrenaline or high blood pressure, and this is good, as Frankie Joe found out when he traded against the market and blew out his aorta.

    The point is, to survive the madness of the markets, we need a reliable discipline like Big4, HP or TA.

    So still long the SPY June 133 calls like Big4.

    Bona fide Bear Flags can reverse from one to twelve weeks, so I for one am in no frenzied hurry to find this final top before the deluge.

    Let it come to us with Trailing Stops for a semblance of protection…

    • Rich June 24, 2012, 2:53 pm

      Thanks Impaler.
      Noting PMs telegraphed a decline in other assets, took modest profits on SPY Jul 133 calls toward the close and bought some QQQ Jul 64 and SPY 134 puts, having learned from experience and Rick that time is not on option buyers’ side.
      Happily rewarded by a market break selloff just before the close.
      If this keeps up, may accept Rick’s offer to host a trading blog here for profits beside our own…;

  • mario June 22, 2012, 4:13 pm

    I’ll take the middle road and expect drawn out sideways action down to Dow Nov 11300ish , then back up the range, way too much serious expansion and development going on, it ain’t all bad folks…Cheers, Mario

  • gary leibowitz June 22, 2012, 3:16 pm

    Do see some more downside but betting this is “THE” start of a bear run would suggest that the economy has suddenly changed for the worse. If you look at the bank’s downgrade it is way after the fact. Everyone that already invested in this sector knows this. Transparency has never been greater. Surprises are much harder to come by. I suspect a real prolonged drop would have to start from the political arena. Just a hunch.

    I would be very interested to see the July quarterly earnings reports.

    • gary leibowitz June 22, 2012, 3:28 pm

      One other important point. Since the metals took an even worse pounding, I wonder why most still expect thm to shine even as the equities markets are expected to continue to crash? I believe the dollar is rising. In that scenario both lose.

    • redwilldanaher June 22, 2012, 6:31 pm

      Go Vlad!

    • gary leibowitz June 22, 2012, 6:32 pm

      VLAD,
      Transparency in the fact that banks took on the mortgage derivitive play, the known amount of exposure. We also know that mark to market was taken away. No surprises. Investors in these banks know everything you do. When I talk about transparency I am talking about policy change and company exposure to risk. As for the amount of true debt banks have that is also know. The remarks and newsletter from Middleton testifies to that fact. He was an accountant that dissected exactly the debt exposure these banks had years before the debacle.

      Even the 2008 debacle took time for the market to digest the news and finally crash. It did not happen as a surprise. In fact all the bullish advisors on the news media was proclaiming the situation was under control specifically becuase the market did not fall hard after the news broke.

      With everyone dissecting every aspect of the economy and news it is hard to be surprised and caught holding onto stocks. The real problem is to put aside emotional attachments and trigger buys and sells on strict rules. My persdonal rules got me out a while ago. Waiting to get back in IF my targets hold.

      As for the 3 year reprieve I must remind you that the earnings, yes real earnings, are doing fine. The Fed did not put money into GE, AAPL, MMM. Certainly didn’t put money into individual accounts. In fact as most state here the real inflation rate was much higher than the offical report. Earnings don’t happen out of thin air. If you invest in a specific company you can be sure you would know where their money is comming from and when to be worried.

    • fallingman June 22, 2012, 8:06 pm

      Yeah, go Vlad. You saved me some time. As if the banks are transparent. Ha. What a crock. Might wanna consult Chris Whalen on that one Gary.

      I’m feeling friendly today, GL, so I’ll ask very gently … So, the government didn’t put money into GE? Really?

      I suppose we could parse words, Clinton-style, but I’d suggest that guaranteeing GE Capital’s debt amounts to the same thing…a distinction without a difference.

      It’s all laid out in the Washington Post and Seeking Aplha below in case you missed it.

      But maybe I misinterpreted what you’re saying. Could very well be the case, because much of the time I have no clue what you’re saying. Are you asserting that GE got no government support of the sort that would boost their earnings artificially?

      You can ramble on all you want with your opinions, but that’s simply not true.

      http://www.washingtonpost.com/wp-dyn/content/article/2009/06/28/AR2009062802955.html

      http://seekingalpha.com/article/105984-general-electric-gets-a-140b-bailout-what-s-the-point-of-aaa

      GE is so in bed with the feds it’s nauseating. Used to be a great company. Now, they just a ho.

    • gary leibowitz June 22, 2012, 8:56 pm

      Vlad,

      Bank’s does show all liability. They were allowed to “hid” it from the quarterly earnings report, BUT not from the report itself. It ws there. I am not an accountant but if they were able to see it so can anyone else.

      The crash did not happen unexpected. I am not saying the actual news wasn’t a shock. The BIG news came out and markets initially reacted in a mild manner. Look at the time line. There was ample time for an individual to exit. There was a rally off the initial drop.

      I do not discuss personal economic hardship. That is not material to the discussion of stock market reactions and crashs. I know the hardships that have been going on world wide for 4 years now.

      Just becuase you don’t think the market “gets it” doesn’t mean you are correct. The market got it right for 3 years now. The market did not get the build up of the housing debacle and they were slow to react. Once they did react it was a crash. There will always be shocks to the system. I am just stating that individuals have a great advantage over fund managers in that instance. We are allowed to react faster than the general markets. We can pull the trigger and get out on a dime. They can’t.

      You have to seperate corporate profit potential from persoanal economic health. They are very different.

    • mario cavolo June 23, 2012, 5:25 am

      Hi Gary,

      With regard to “gary,
      “deteriorating overall economic personal financial health of 300 u.s.a. million people, you say, does matter to u.s.a. corporate profits, so separate them?
      …. it must really be those 1,500 million nouveau-rich chinamen, that are really buying all those u.s.a. corporate products, so skrew all the u.s.a. broke bums.

      I’ll continue agreeing with sticking to your points that economic health is not such a disaster and make the further distinction. We are seeing massive economic “shifts” across the global economies. And as such I also don’t suggest that such a “shift” equals economic disaster. In the case of the 300 million americans you refer to, I have oft stated that it is accurate to look at the societal “schism” in the U.S.: that 100 or so million Americans really, truly are in trouble, the foundation of their life growing economically weaker for a variety of reasons, while the top 150 million Americans lives are in fact doing quite well and relatively stable. Hence, as you suggest, corporate earnings are coming from spending that is happening somewhere out there. When I look at the global growth happening on the Asia Pacific side and other regions, such growth is real and, not to mention, thank heavens it is there. Yet, while Starbucks (and dozens of other companies expanding globally) is planning to quadruple its outlets in China from 500 to 2000 by 2015, that keeps the company healthy, the stock healthy, profits rolling in, Starbuck’s employees in the U.S. secure. But its not all roses as they are not adding employees to the payroll on U.S. soil, leading us right back to my point, that the lower/middle class Americans are the ones seriously suffering from a case a bad timing and bad location on planet earth.

      Cheers, Mario

  • John Jay June 22, 2012, 3:27 am

    On a long term basis I see the boomers and pension funds having to cash in their chips more and more. The boomers need money to live on thanks to ZIRP.
    The pension funds, especially the public ones, need to meet the ever increasing nut as government employees retire with bloated pensions and it is discovered that the 8% ROR is a fantasy. And, for myself, the price of a candy bar is stuck north of $1, and the size of it is slowly approaching stick of gum size.
    Things are indeed bad all over!

    • Seawolf June 22, 2012, 4:00 am

      ZIRP = ZROI (zero return on investment)

    • SD1 June 22, 2012, 6:48 am

      The companies do this in such a sneaky manner. The box (wrapper) is the same size but the contents within shrink. This should be against the law.

    • fallingman June 22, 2012, 7:44 pm

      And that would describe the pension plans too, SD1.

      8%…yeah, right.

    • mario cavolo June 24, 2012, 6:37 am

      Hi JJ! Have read of such definitely being the case as one of the trends that is going to continue and accelerate…So then, in comparison to total holdings, we should wonder how big a chunk we’re talking about here which they are going to need to be steadily liquidating to live on over the next 20 years…

      Cheers, Mario

  • Seawolf June 22, 2012, 1:41 am

    This market reminds me of a poker table in a casino late at night. There is one empty chair at the table which is not being filled. The remaining players keep playing even though the rake and tips to the dealer diminish the cash on the table. They just keep playing, hoping some new money will come in and fill that empty chair. If they stick to the end all the chips will disappear down the rake slot and they will all go home losers. Only the house will win.
    Keep hoping for QE to infinity — without it the HF day traders, hedge fund algos, and ETFs are eventually going to flatline the whole market.


Exit From This Page Back to Trades