The market fools the average investor/trader at every turn, and last week we were witness. Unless some fundamental change occurs, the recent stock market fall may be more than just a temporary 'correction', caution. Yet Jim Cramer, on his Friday's "Mad Money" CNBC show attempted to pull the wool over viewer’s eyes by calling the sell off a 'correction'; the
Psychology of the Call team (POTC) vehemently disagrees.
Technical 'corrections' occur at market peaks/tops; this is not the case today. The S&P 500 Index (
S&P) is attempting a recovery from a 1,257 low just two months ago, and that print signaled something much different. The 1,257 level translated to a 20% drop from its October top, and in theory, drops of that magnitude are classified as bear markets, not mere 'corrections' Cramer would lead us to believe. Does Cramer have a history of misleading statements, you decide, our team already has:
http://www.youtube.com/watch?v=SGkrNJ19DSU&feature=related
Perhaps Cramer should address the market mechanics of bear market rallies on his next show, as the S&P is 13% below its October high and only 9% above its very recent March low.
POTC is in business to educate our readers in a dynamic process called Psychological Financial Fusion (
PFF), and even make some friends along the way...
The
PFF equation involves technical analysis, financial/quantitative analysis, and psychology.
POTC has been right and wrong on individual stock and economic data analysis, granted, but we pledge to never mislead you with inaccurate financial terminology, which would lead to bad behavior/trading/psychology. Talking heads on major cable networks must be held accountable and even be more responsible than the average blog or internet portal, as many more people are affected and in Cramer's case, infected. Now that we've cleared up the technical difference between a 'correction' and a 'bear market rally', we ask you to allow us to sprinkle you with some psychology of why the market is currently in a bearish cycle.
Consumer sentiment/psychology has been decimated with rising food and energy prices. The last Michigan Consumer Sentiment reading was at a 25 year low, and in the end, IF the consumer stops spending, it'll bleed through to lower revenues and profits for most of the universe of stocks you hold and trade. Anyone feel we have broken out of an acceptable comfort zone in food and energy costs? Have you ever considered if it weren't for the real estate and Investment Banking credit crisis the Fed would have never lowered rates so aggressively and the 'bear market rally' would have never occurred?
So
POTC prefers our readers do not refer to last week's fall as mere 'correction', but a bear market rally running its course from March lows.
POTC will never be monolithically bullish like Cramer, therefore we feel we must call out anyone who misinforms the investing masses, and we are proud to have you aboard our no spin ship.
Consider this; even hedging strategies and mathematical modeling software were worthless at Bear Stearns, which was noted as the fifth largest U.S. Investment Bank.
With all the knowledge and experience and connections Cramer has, even he was caught off guard by their Roman-candle like collapse:
http://www.youtube.com/watch?v=gUkbdjetlY8
Oh well, hopefully that caller practices the 11 Commandments.
Now for the three positive/optimistic arguments why the S&P could recover and close and stabilize above that elusive 1,420 level, a level that would be above the one year mid point, and cause us to turn bullish:
1) If government officials in D.C. would vote to open up drilling in Alaska's Arctic Nation Wildlife Refuge (ANWR). This has been a hot issue since President Carter in the late 1970's, what is your psychology on this touchy topic:
http://en.wikipedia.org/wiki/Arctic_Refuge_drilling_controversy
With crude above $130/barrel, a level many economists believe will have a devastating domino effect on the U.S. consumer, and eventually cripple the global economy, as the U.S. Gross Domestic Product still accounts for nearly one third of the entire world's out put.
POTC feels that even if it were to take five years to begin pumping Texas Tea from under Alaska, market mechanics would discount crude oil under $100/barrel immediately.
On Saturday morning, Presidential candidate Barack Obama stated Americans should "eat and drive" less; do you feel that is the answer to the oil problem?
Word to D.C. government officials: Stop focusing on the 2008 election and pass legislation ASAP that would bring about true fundamental change, agree? Whether you agree or not, please read on, as we have more positive psychology that would wake up the bulls.
2) If Bernanke and Paulson made a concerted effort to strengthen the greenback. Since oil is priced in U.S. dollars, we feel the collapse of the currency has reached a point of diminishing returns to S&P profits, and blackened the eye of the average U.S. consumer, caution.
POTC believes the Fed must raise interest rates by 50 basis points before their June 25th policy statement release. Raising rates would prop up the greenback and lower prices of food and energy. A stronger greenback would lead to the unwinding/selling of crude oil positions, and have a fire starter effect on a more diverse set of asset classes and sectors; perhaps even real estate psychology would improve. The new asset allocation/balance would allow the pendulum and market forces to swing more freely to retail, airline, automotive, restaurant, and many other depressed sectors. If it weren't for specific sector rallies caused by high energy prices, like coal, rails, financials, and alternative energy, where would we stand in terms of the S&P, lower, higher? Will the bursting of the oil bubble finally come due to shift on a strong dollar policy from Bernanke and Paulson? Word to Bernanke and Paulson, a strong greenback plan must be initiated sooner than later. In
POTC's opinion, the real estate and credit markets are impacted more by the negative psychology that surround the consumer than aided by the diminishing and disastrous return of lower short term rates.
3) If other strong world currencies, especially the Euro-dollar began buying U.S. assets. POTC has stated before the Euro-dollar may act as a fire starter for the S&P by the time the leaves turn color and 'Fall.' The Euro has appreciated a staggering 40% vs. the U.S. dollar in the past five years.
Perhaps it's only a matter of time until prime urban U.S. real estate and high end coastal locations and blue chop stocks like Genentech (
DNA) and Joy Global (
JOYG) begin to get bids from the Europeans. The European Central Banks (ECB) decision not to lower rates just days ago is a tell. Is Trichet waiting for Bernake to raise rates before he shows his hand, we think so.
POTC sees the bulls running wild after a couple U.S. blue chips begin to be "
Euro-ized." We believe such a scenario will unfold, you? We believe the ECB and Trichet bluffed, and since the Euro-dollar remains strong, we feel the
Euro-ization fire starter theory grows stronger, but again, it may not occur until Autumn:
http://money.cnn.com/2008/05/08/news/international/bank_england.ap/index.htm?section=money_news_international
So, until any of these three scenarios are made public, or even better, a combination,
POTC disagrees with Cramer's analysis of a mere 'correction' last week. The S&P has experienced a bear market rally from its March lows, nothing less and nothing more.
Lastly, the Dow Jones Transportation Index has in fact double topped at 5514, so will the Airlines run down the Rails soon too =================, try and ingest that nugget. You decide the
Psychology of this Call; a bear market rally running a muck in a rising sea of adulterated crude oil and rising tsunami of food prices wedged between a sick credit market all happening during an
election run, something has got to give.
Now for the Psychology in the Upcoming Week's Data:
Tuesday, May 27th is a somewhat difficult call to make, although ironically, we favor the bulls from Monday through Thursday. Usually, trading days after three day breaks are lackadaisical in terms of volume (low), but very bullish, as no major geo-political event transpired, billions of dollars that left the exchanges now return as event risk has dissipated. Will the bulls run come Tuesday; we think so, so set up trades accordingly. For all our investors/traders/readers out there, always keep the 20% cash liquid, as
POTC feels there will be better buying opportunities after the 4th of July fire works, but some may be skilled in market mechanics enough to put some of that 20% to work until Thursday, especially in stocks we will mention soon.
Consumer Confidence is released for the month of May at 10:00 ET.
http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/conf.htm
We are at a quarter century low on this data, need we say more? Eventually this indicator will turn and turn hard, but definitely not yet. Prior reading came in at 62.3, and now the consensus forecast is 61. POTC continues to feel the psychology of the current economic environment has continued to hurt the consumer more than inflation. When will the pain of rising gas prices, rising food prices, and real estate inventory over hang leave our thoughts, that is a lot more important than a one time poll/number/data release, yes?
New Home Sales and New Home Prices for the month of April are released at 10:00 ET.
Please take a moment and look at these ski slope charts:
http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/newhom.htm
The "what goes up must come down" law of physics held true here. When all the speculators leave the market, when there is no more blood left, then stability will come,
and only after the market becomes boring will it have another leg up through 1,440.
POTC believes the real estate turn will occur in bits and pieces. Just as it is a 'market of stocks', it is also a 'market of real estate', dynamic and diverse. Since the S&P has held up better than real estate, we at least have that to be thankful for. In March, New Home Sales came in at 526K, now the consensus forecast is 515K-520K, so economists are forecasting an improvement, and we agree.
Tuesday will be dead cat bounce kind of day, so set your trading positions to bullish before 10 ET, as Consumer Confidence and New Home Sales are two of the most anticipated negative data sets out there, cheers to the contrarians, for Tuesday at least!
Wednesday, May 28th turns out to fall on the second day of the week, so Wednesday will set the trend like most Tuesdays, got it? Ironically, with all the negativity expounded in the opening few paragraphs, short term market fluctuations work to fool the average investor/trader. Cramer will continue to avoid calling this a bear market rally, just watch
his show as the bear market rally continues for a few days. What he says on Friday is another issue, or actually it's the same issue he mistakenly brought up last Friday.
Until
POTC sees one or a combination the three events:
1) Legislation to drill in Alaska's ANWR
2) Fed raising rates to strengthen the greenback
3) The
Euro-ization of U.S. assets, POTC will NOT turn bullish long term unless the S&P breaks and stabilizes above 1,440 for at least one month. So for the time being Cramer,
Cramer, we'll call this a bear market rally, is that okay? Please vote your psychology in our poll whether the S&P breaks through 1,450 or 1,300 first. It closed at 1,376 last Friday.
Durable Goods Orders data will be released for the month of April at 8:30 ET.
http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/durord.htm
This is the only economic data release slated for Wednesday, and we see the bulls stampeding after it. Understand this data will come before market, so you should position your long trades before market close on Tuesday or miss the blip up on market open. The Durable Goods Orders measures the dollar volume of orders, deliveries, and not yet filled orders of a durable type. Orders have life spans of three years or more, so big ticket items. Prior reading came in at -0.3%, and now the consensus forecast calls for
+0.5% to -0.7%, we favor the higher number and are bullish for reasons too broad to list.
Thursday, May 29th Gross Domestic Product (GDP) is released for Q1 at 8:30 ET.
GDP is the broadest indicator and measure of economic activity and it has refused to go negative and signal a recession. In the face of many headwinds, the U.S. consumer continues to spend. The fact that exports are booming due to a weak greenback has been a silver lining, but how much can the average U.S. consumer take? POTC feels the fiscal stimulus checks will prop up and buoy the GDP data and string along the consumer. The consensus forecast is for between 0.9% and 1.0%, and when this number is posted at 1.0%, the recession bears will have to crawl back in their cubby holes for another week at least. Perhaps the first Friday of June (June 6th) will wield the bloodiest hammer to the bulls celebrating today, with the release of the Unemployment Report.
Crude Oil Inventories will be released at 10:30 ET. Most are expecting a draw down as warmer weather and the school cycle are upon us. Perhaps our Friday piece called it right about more people surfing the Internet Highway than driving down Route 66 with gas in the $4.00/gallon range. POTC likes Google (GOOG) this week. A rally of $30 is not out of the question and any option traders reading this should take notice!~Bear in mind, it's called "Profit Taking Friday" for very good, well established, historically consistent reason, so protect profits before Thursday's close~
Friday, May 30th Personal Income and Spending data for the month of April is released at 8:30 ET.
This data set is has not been volatile enough to cause any waves of worry. POTC sees the upward trend from Thursday continuing come Friday morning, but tread cautiously after 10:00 ET. Prior reading for Personal Income was 0.3%, now the forecast calls for a drop to 0.2%. The Spending data prior reading was 0.4%, and forecast has it pegged between 0.2% and 0.3%. Both will come in neutral in our opinion.
The Chicago Puchasing Managers Index (PMI) for May is released at 9:45 ET.
The fiscal stimulus checks should keep Chicago's manufacturing engine and temperature gauge running just fine. Also, the 'school's out for summer' Alice Cooper effect always shows up positively in this indicator in late May. Prior reading came in at 48.3%, now the consensus calls for between 49% and 49.5%. Anything above 50% shows manufacturing expansion and anything below 50% shows contraction, so we’re in a contraction stage. This adds fuel to our bear market rally argument, compared to Cramer's 'correction' mention on Friday's CNBC Mad Money show. POTC knows many are reading this and cannot understand how negative we were on the S&P and perhaps you missed the point. Bear market rallies are a cyclical phenomenon and we try to take advantage of them. POTC will never get trapped in a monolithic mentality as we fervently believe there are two sides to the market and Commandment #8 spells that out clearly. Our readers will never make money consistently if they refuse to buy puts or short a stock from time to time. A free market system is set up in order for risk to be minimized and the theory of selling short or buying puts actually makes the markets safer, as all short sellers must eventually buy the shares back. So, if a stock has a large short interest, perhaps that's a red flag signaling incompetent management or a business model lacking competitive barriers against entry.
Quick Psychology: When a stock with a large short interest bounces on positive news, wait 2-3 days until the false move up fails, then make money by trading with the usually 'smart short money' as dumb money and upward momentum fizzle out~ Too many traders chase stocks because they see an up move of 20% or more and that can be a mortal mistake IF the stock has a large short interest, as short interest is unusually smart and stubborn, two things the average trader is not. Please take advantage of large short interest stocks, as you will find it to be more a friend than an enemy in the long run. Learn to understand the market mechanics behind short positions and set up trades accordingly.
Michigan Consumer Sentiment for the month of May is the last economic release of the week at 10:00 ET. CAUTION: after this release, it’s all down hill from here.
Being at a 25 year low is mind numbing and has most economists and academics speechless. Do any of our readers really expect consumer sentiment to turn on a dime? In the face of oil, food, and real estate, POTC wouldn't be surprised to see the government scrap this poll altogether as it is the most psychological and dispiriting to the bulls bleeding today. POTC predicts a sell off after the Michigan Consumer Sentiment is posted. What was a nice bear market rally for the week suddenly runs into smart money booking profits and looking-forward. Our readers would be wise to either take our advice and buy Monday-Thursday, or just wait to make money on the short side come Friday; you decide. The market begins to discount the week ahead, as the biggest and bloodiest hammer of the month lays in its path. The Employment Report (on June 6th) is never a friendly report in the midst of a pure bear market rally. Please don't forget to copy, paste, Facebook, and email this hard working, educational, reader friendly blog spot to all your friends and family.
To all our return readers for their support, kind words, and attention, we wish you continued good health & wealth throughout 2008.
The Psychology of the Call team.
Psychology of the Call (POTC) believes a majority of a stock's price volatility in the short run (1 day - 3 months) is tied to investor sentiment/psychology. The remaining components are split between the underlying stock specific fundamentals (metrics/ratios), future cash flows, and the S&P 500 Index(S&P). Therefore anyone who trades without weighing investor sentiment/psychology first, perhaps placing a greater emphasis on accounting metrics, will eventually lose money as volatility washes them out. Even though the stock market is a forward-looking discounting mechanism in the longer term (6 months or more), in the short term a stock's price is more like a washing machine, churning and churning, not always showing the true threads of cotton or silk. We don't try to outthink and outsmart the short term volatility tied to sentiment/psychology. It’s better to use short term trends to your advantage, especially if the rest of the puzzle is convincing, i.e. rising future cash flows, superior technology patents, sound management. Perhaps First Solar's (FSLR) recent pull back from over $300 to $250 is the best example, as the psychology of crude oil and government legislation has recently gone against a still very promising company. Now for the Pillars we believe in:
POTC will monitor a couple of important factors this week. First, the Dow Jones Transport Index (DJT) has formed a double top, just 89 points away from a one year high. Will it close above the last high of 5514, or back off in the face of high food and energy prices? A very interesting element of market mechanics is unfolding in front of our eyes. Evolutionary scientists need not apply here, as we will have our answers within days. The week ahead is perhaps the most important week of 2008, and will dictate whether POTC becomes short term (3-6 months) bullish or bearish. As it stands now, we are optimistic as we see the unwinding of crude oil money acting as a fire starter, in a similar fashion to the weak dollar and strong foreign currency argument that we have been espousing for the last several weeks. The U.S. markets have a lot to be thankful for and ironically the rise in energy prices is one of those elements. Again, our bullish thesis will be greatly confirmed when the transports close above 5514 and settle there for at least one month.We think the transports will rally this week and close above that elusive 5514 mark, but perhaps back off on profit taking Friday. Here's the double top formation we pointed to last week and we urge caution from jumping in to stocks until this 5514 target is taken out: 
Dennis Gartman feels the run in many commodities is over in the short term (3-6 months), as he divulged on CNBC recently. So if we do see a greater than expected build in Crude Oil inventories, we will see the oil trade unwind perhaps below $110.00 this week. Anything below $110.00 would scare the inflation hawks and bears away and give bulls a reason to celebrate and relax by their camp fire. 
Dennis Gartman feels the run in many commodities is over in the short term (3-6 months), as he divulged on CNBC recently. So if we do see a greater than expected build in Crude Oil inventories, we will see the oil trade unwind perhaps below $110.00 this week. Anything below $110.00 would scare the inflation hawks and bears away and give bulls a reason to celebrate and relax by their camp fire. POTC believes that since crude oil failed to break through $120.00 in this incredible run oil could break $100.00 by months end unless there is a geo-political event with Iran.