By Frank Barbera CMT. January 8, 2008
a. The act or process of failing to function or continue.
b. A typically sudden collapse.
Well, today's action and the action of 2008 so far rates as a Breakdown, and very likely a Breakdown for the Ages. Over the last few months, we have consistently been pointing to the huge topping process taking place on the S&P 500 with the idea of alerting readers to the high risk contained within the stock market. How could it be that the banking system of the United States, and indeed a good chunk of the Western World is literally brought to its knees by a bad debt problem, and the S&P would manage to hold up with no collateral damage? Does this thought process really make sense? Certainly not from our point of view. Instead, we have continued to monitor what has been a steadily building distribution top in the S&P and a host of other global indices, with the results leading into the serious downside breakdown below key support at 1410 on the S&P seen today. Going back to our December 2007 article, "The End of Denial," we pointed out that there would be plenty of sucker rallies along the way as the market started its inexorable slide. We stated,
"Slippage soon becomes the order of the day and quietly or not so quietly the S&P slips below the November lows. Breaking below 1400, the index violates the 200 day lower band falling toward the low 1300 area. The last gasp of Denial then carries the day with a failing rally back to the underside of the Double Top structure with 1420 to 1425 strong resistance. The feeling on behalf of the crowd is often most intensely hopeful on these short but powerful up thrusts from below the topping structure. They are easy rallies to get suckered back in, yet they evaporate like a mirage in the desert and yield new lows and snowballing downside momentum within almost no time at all. It is the striking contrast of fleeting hope followed by a crushing downward thrust in close succession which is the anatomy of a pre-crash lead in pattern."
Such a failing rally to the underside of the Double Top was seen over the last few hours, with a peak earlier today at 1430.28. Of course, seeing the stock market advance, many were probably not troubled by the stunning 17% downward open in Countrywide Financial (CFC) or the early 5 to 6% declines in Ambac or MBIA. Yet, as the financial sector continued to decline during the day, wasn't it only a matter of time before the larger scale sell programs kicked in to bash the S&P? At the end of the day, not only was the news ugly, but the price damage reflected the grim mood with prices accelerating sharply lower into the close, the rally evaporating like a mirage in the desert yielding a nightmare of a major support breakdown on the S&P.
At the close, Countrywide ended lower by 28.27% at the lowly price of $5.48, with other members of the walking wounded posting big losses as shown by MBIA down $3.67 or 20.83% at $13.95, Ambac down $3.95 at $19.53, a loss of 16.82%, Freddie Mac down 2.39 at 26.77, a loss of 8.20%, Fannie Mae down 2.56 or 7.48% at $31.67 and Citicorp down 1.13, or 4.00% at $27.10. All of this speaks volumes as to a financial chain reaction, a domino style meltdown still in full swing. For its account, the real message of the day appears to be the inability of Central Banks to cope with the problem. To be clear, it is this author's view that government should be "hands off" and allow the private sector to clean up its own mess. Slashing the Fed Funds Rate would only weaken an already sick US Dollar and probably open the Pandora's Box to an even larger currency crisis, highlighting a Dollar collapse. This would encourage more import price inflation - which is already soaring out of control and penalize the broad swath of average Americans who never made reckless loans in the name of quarterly earnings or fat year end bonuses. Why should we pay for a bailout from problems we didn't create?
Yet, mini personal rant aside, from Wall Street's point of view, the agony is unbearable and the Fed is seen as the be all, end all shining ray of hope. If the crisis is to be brought under control and the bleeding stopped, from Wall Street's point of view, it is the Fed that must act. To that end, the steady plunge in 2 Year Note yields to readings near 2.90% is now 135 basis points BELOW Fed Funds which stands at 4.25%. This is Wall Street's version of begging the Fed for dramatic action, action it hopes to see shortly in the form of a 1/2 point cut. Unfortunately, given the latest inflation data and comments out earlier today from Fed Governor Prosser, it is very unlikely that the FRB will be voting to slash rates by a 1/2 point any time soon.
From CBS Marketwatch by Rex Nutting
WASHINGTON (MarketWatch) - At least one member of the Federal Open Market Committee believes further cuts in interest rates probably won't be required to heal the economy. In a speech in suburban Philadelphia on Tuesday, Philadelphia Fed President Charles Plosser said he believes the weak U.S. economy will "improve appreciably" by the second half of the year, before the effect of any additional rate cuts would be felt.
At the same time, Plosser said he saw "worrisome signs of underlying price pressures." He said "we should not rely on slow growth to reduce inflation." Plosser did hold out some chance that he could support further rate cuts if the economic outlook becomes "substantially weaker" than he now expects. His forecast is for the economy to be "quite weak" for another few months, with the unemployment rate rising "somewhat above 5%." He doesn't expect any "significant improvement" in the housing market until next year.
Yes, "Gradualism" may continue to prevail with another 1/4 point cut, but for Wall Street now overcome and overtaken by the specter of a Credit Market Deflation, the lagging action by the Federal Reserve Board shown by the Fed Funds - 2 Year Bond Spread, will very likely trigger a broad scale run for the exit doors, especially where Institutional big money investors are concerned. In our view, the Fed is likely to ease aggressively only AFTER a major market crash, and in light of today's weak close and sudden breakdown, that is exactly what appears to be on the horizon dead ahead.
Above: the Fed Funds Rate (Bold) and the 2 Year Bond Yield.
Above: the S&P 500 with 200 day Bands, closing outside the lower band. Can you say, "Bombs Away?"
In our view, it would be hard, if not impossible, to place enough emphasis on how very bearish today's close was for the S&P. Not only did the index breakdown below the lows of last August and November, but in doing so, it has now activated the large Double Top pattern which has been building for nearly a year. Measuring from the high of the pattern at 1550 to the neckline of the pattern at 1410 (rounding off a bit), we calculate the height of the pattern at 140 S&P points; 140 S&P points over the value of the floor level/neckline at 1410 is a 9.92% measurement. That means we need to deduct 140 S&P points from 1410 to arrive at a figure of 1270, which becomes the minimum downside measuring objective for this huge and likely very powerful distribution top.
Now, a word about measuring rules. These are minimum downside targets. Very often, in the real world following a top of this amplitude, the minimum is met and often greatly exceeded. In my work, I believe there is an excellent chance that the S&P could crash into the 1100 to 1200 zone in the first six months of 2008, with a further possibility of prices wiping out all of the gains of the last four years during the course of 2008. In this vein, I would not be surprised to see the S&P closer to 800 near year-end, something few currently expect on Wall Street, but something I have been talking about since the July highs last year at 1550. Put another way, today's close is the official starting gun sounding to what promises to be a severe bear market, a bear market that before it is complete is very likely to be substantially more severe then the 2000-2002 bear seen just a few years ago. For most investors, survival is at stake, and survival will only be found with capital outside the equity market sphere. Are there any hiding places, any asset classes that will go higher? Maybe Bonds, maybe Gold, but both with substantial question marks still outstanding and hard to tell. With yields at record levels, and a fiscal situation so bad it could make eating grasshoppers a more appetizing alternative, Bonds hold no interest of any kind, and are sure to live up to there 1980's mantra of being "Certificates of Guaranteed Confiscation." Perhaps there is a final decline in yields on a "flight to quality" panic in the wake of a market crash, but overall, when foreign creditors finally pull the plug on US Treasuries, the upside geyser in yields will make Old Faithful look like a garden hose.
Gold, is of course, the ultimate asset of last resort, and in many ways, today's calamity looks custom tailored to press Gold prices into orbit. That may very well still happen straightaway, but there is concern stemming from the leverage speculating community, which is taking it in the chops right now on multiple fronts. The old adage of a "redemption bank" could end up ringing true for a short time for Gold, and perhaps for Energy related assets, as these are areas, -- some of the few areas -- where profits still reside. What do you do if you are the average money manager on Wall Street and your portfolio is melting down? Well, if you lock in all your losses and the markets subsequently rally, you end up looking really bad, and besides that, it's never good to book losses. Thus, the path of least resistance for JQ Money Manager is sell your gainers and book your profits! Brilliantly stupid, I agree, but it is logic you can count on to prevail every time. Down goes the Exxon Mobil, down goes the Conoco Phillips, and down goes the Suncor, and perhaps, down goes the Gold. Why? Profit taking and hedge fund managers offsetting huge and expanding losses by booking their only remaining gains. While nothing is certain except for death and taxes, for the time being, we believe it is best to reserve judgment on Gold just a little longer. Certainly, if there is one asset, one single solitary investment that has a fighting chance of moving higher, it is the non-defaultable, shining brilliance of the Yellow Metal -- the barbarous relic so despised by the Wall Street establishment.
In the meantime, we focus on the S&P, which today not only broke down below its second rising fan formation line, a sign of progressive and intensifying weakness, but also closed outside its 200 day lower band, an action that signals a powerful downside continuation pattern. Will the market crash in the weeks ahead? We think there is a good chance that several years of chickens are about to come home to roost, only these chickens are really very hungry, 500 pound Grizzly bears, now trying their very best to knock down the front door. While some technicians would calmly say "relax," the stock market is now "oversold," we would caution that the stock market, even after 8 days of selling on the NASDAQ, is presently nowhere near oversold. The reason, in bear markets, you are usually dealing with a whole order of magnitude of difference when it comes to what is oversold, and what types of technical readings will cause the market to spring back from the depths of a panic sell off. From my point of view, the front door is now unlocked and the only avenue of escape is to run out the back and make for the safety of cash -- this stock market is nowhere close to the kind of technical readings needed to put in a major low -- although if the DJIA drops 1,500 to 2,000 points in the next few weeks, we will probably then see more genuine "oversold" readings.
Above: DJIA one year, breaking down from huge complex top.
At the close, the DJIA ended lower by 238.42 index points, a loss of 1.86% to close at 12,689.07, with the NASDAQ Composite down 57.73 index points at 2441.73, a loss of 2.31%, with the S&P 500 down 25.99 index points or 1.84% to close at a reading of 1390.19. The 10 Year Bond Yield ended at 3.84% with nearby Comex Gold up 18.80 to finish at $887.60, a new All Time closing high for the yellow metal. That's all for now,
© 2008 Frank Barbera