Friday, April 18, 2008

Today's Markets

One of the annoying things about traveling is not being in front of a computer for most of the day watching the market and the news develop on a constant basis. Instead, I get to the hotel and have to figure it out by looking backwards at events. It's all just a bit weird.

Anyway, I'm going to do things a bit backwards this morning. Let's see if we are in the middle of a bear market bottom or rally. The reason why I am assuming it would be a bear market rally is the economic backdrop is not solid. We are just starting a slowdown. There has been a fair amount of debate over what the slowdown will look like. I think the best analysis (so far) comes from Mish who is arguing for an "L" shaped recession - a recession where the economy slows down and does not pick-up any growth momentum for some time. Considering housing won't even think about bottoming until the end of this year (at least) and we'll be dealing with the fallout from the credit crisis for some time as well this analysis makes the most sense. While Fed has provided a floor for both the market and the economy as a whole, so far they have demonstrated how powerless they really are -- they can't force people to lend money to one another. And so long as firms are writing down mortgage paper lowering their own asset base loan growth will be constrained.

Let's look at the charts:

This is the chart that got me thinking a bear market rally might be in the works. Notice the following:

-- The 10 and the 20 day SMA are both increasing

-- The 10 and the 20 day SMA have crossed over the 50 day SMA

-- Prices are over the 10 and the 20 day SMA

-- The shorter SMAs are above the longer SMAs

-- The one drawback to this theory is the low volume of this rally. While it's possible for a market to advance on low volume, it's a whole lot harder (thanks to an astute reader who pointed that out).

The analysis for the SPYs is the same as for the QQQQs -- down to the volume comments.

Let's look at the 6 month charts to put this action in perspective.

On the SPYs notice we may be forming a double bottom, with the first bottom occurring in mid-January and the second occurring in early March. Also note the lack of volume on this rally when compared to the previous months. 138 is a key level of the SPYs -- to be in a near market rally they index has to move convincingly through this level. But also note the strong support for the index in the 126 - 127 area. Every time the market has approached this area it has rallied indicating strong buy interest at these levels.

On the QQQQs, notice the market "bottomed" hard in late January and gently descended to a second low in early March. The market has been rallying since. But notice (again) the lack of volume. This is not an excited market.

Notice the possible double bottom figure along with the (surprise) lack of volume on the rally. The IWMS would have to move convincingly above 72 on solid volume for this to be a bear market rally.

The biggest problem going forward is the last of convincing volume for any of these indexes on their recent upswing. That tells me these are rallies that come from lack of meaningful selling rather than strong buying interest. As such, I don't see the markets moving meaningfully higher. However, with the Fed backstopping the markets I don't see a major sell-off either. Given the fact we have, I think a trading range is what's in out future for the next few months as traders try and get a sense for what's happing in the economy.