Stocks Fall On Bank Woes

by Richard Gorton, The Resourceful Bear Blog | June 4, 2008

Madlen Read, AP Business Writer writes that stocks fell sharply on downbeat economic data, and new worries about financial sector health.

Two key economic reports indicated that the economy is still struggling. As expected, the Institute for Supply Management's manufacturing index for May showed its fourth straight monthly decline, and the Commerce Department said construction spending dipped in April for the sixth time in seven months due to a drop in home building.

S&P's review of the financial sector suggested there could be more write-downs coming, though likely not as large as in recent quarters, and "further sharp deterioration" in mortgage loan portfolios and residential construction."

Brian Gendreau, investment strategist for ING Investment Management, said the markets have been "hypersensitive about anything to do with credit" in recent months, and the combination of the S&P cuts, the bank news and comments in an overseas speech by U.S. Treasury Secretary Henry Paulson weighed on the market.

"Basically, he suggested that there were further problems to come in the banking and financial sector," Gendreau said. "That's just toxic for stocks."

Sectors leading the way down today included:
KCE, Investment Bankers, -2.3%
KBE, Banks -1.5%
RWR, Reits -1.5%
IYR, Real Estate, -1.4%

The chart of the Russell 1000 Growth Shares, IWF, manifested bearish engulfing, relating that the TAF, TSLF, PDCF, and yen carry trade rally, that began on March 18, 2008 with the Federal Reserve assisted JP Morgan buyout of Bear Stearns is over. Confirmation of an immediate downturn in the stock market and the need for a short seling investment strategy or a commodity investment strategy comes from the chart of the overall stock market, VTI, relative to the financial sector, IYF: VTI:IFY. The dark cloud covercandlestick two weeks ago and this weeks lollipop, means that the overall stock market is going to be drawn lower by the financial sector.

The dollar, $USD, was basically unchanged at 72.96; gold, $GOLD, was unchanged as well at $891.

Overseas, Japan, EWJ, closed up 0.22% manifesting a darken lollipop hanging man candlestick serving as a dark cloud cover finale to its nine week long rally. Germany, EWG, fell 1.52%, France, EWQ, fell 1.84%, Italy, fell 1.77%, Spain, EWP fell 2.42% and the BRICS, EEB, fell 1.25%.

The EUR/JPY, FXE:FXY, which is the barometer for the yen carry trade, fell to close at 1.63. The Yen, FXY, rose 0.79% while the Euro, FXE, fell 0.40%: I see risk aversion rising; and thus the yen carry trade unwinding. Confirmation comes from the evening star in the yen carry trade darling Mexico shares EWW.

Interest rate differential loans unwound today as the Loonie, FXC, and the Aussie, FXA, fell sharply.

The short term US Treasury bonds, SHV, finally broke loose to fall lower, in sympathy with their longer term peers, such as TLT, which have already sold off: now there is a run on all US government bonds. Market place interest rates, such as the rate on the 30 Year US Bond, $TYX, are on the way up destroying long term bond, $USB, and zero coupon, BTTRX, bond wealth. One should, at the very least, be short bonds, via investing in the bear ETF, TBT, or the Rydex mutual fund RYJUX.

I see some things as having such terrific fall potential:
QTEC, Nasdaq 100
QQQQ, Nasdaq
IYT, Transportation
SMH, Semiconductors
BDH, Broadband
EWJ, Japan

The chart of $VIX, shows volatility rising. Fear is rising to terminate calm and and confidence, so one could go short:
1) Go short with any some of these 55 ETFs that I've selected as having the greatest falling potential.

Possible ETFs, include, NLR, which is overbought with a Declining RSI; and XSD, semiconductors which has manifested a lollipop hanging man candlestick in a pennant in its weekly chart.

2) Go short with these 11 bear market ETFs and ETNs.

One of these is EWV, 200% short of the Japanese stock market, which fell to almost a double bottom at 68.60, making it an excellent short selling opportunity given the Toru Fujioka and Jason Clenfield Bloomberg report that: "Japan's household spending fell the most in 19 months, factory production dropped and unemployment climbed, stoking concern the longest postwar expansion is coming to an end. Spending decreased 2.7% in April from a year earlier� The jobless rate rose to a seven-month high of 4% and industrial output fell for a second month." Another bear ETF, is QID which rose today from a double bottom to close at 38.20.

3) go short with these stocks, or even these stocks as well; these seemed viable as short selling opportunities a week ago; but may have sold off in the last week to become less desireable options. Excellent sellers include:

Subprime automobile lender Nickolas Financial, NICK, closed at $6.99, that is at the middle of a pennant; stocks usually fall from such patterns.

Also the chicken producers, Sanderson Farms, SAFM, as it is overbought with a declining RSI, and has risen in a terrific ascending wedge; and Tyson Foods, TSN, whose daily chart shows bearish engulfing; and whose weekly chart shows rising price on falling volume.

And consumer discretionary sector leader, Children's Place Retail Stores, PLCE, which on the weekly chart shows a return to its July 2007 value; and on the daily chart shows a parabolic turn lower.

Bombardier, BBD/A.TO has likely topped out manifesting a hammer with three white soldiers topping out due to likely short sell covering.

However, I do not recommend short selling as it involves having a dollar denominated portfolio. The TAF, TSLF and PDCF rally, which by today's action is definitely over, sent the US Dollar, USD, relative to the Yen, FXY, zooming up as seen in the Andrew Sheldon chart and article The USD-JPY On A Knife Edge: gains coming from short selling will be quickly destroyed by a falling US Dollar. Yahoo Finance shows that the USD/JPY fell today from 105.5 to 104.5.

I suggest that one dollar cost average an investment in gold at BullionVault.com over the next three weeks as I see a financial emergency likely coming via the current "credit crunch" morphing into "credit gridlock" as the banks and commercial credit providers conditions further deteriorate.

The US went from being the largest creditor nation to the world's largest debtor: President Nixon took the US off the gold standard because of bankruptcy due to the military industrial complex aggressive spending in the Vietnam war.

President Clinton repealed the Glass Steagall Act and the banks and investment bankers financialized, that is securitized investments to the ruination of capitalism and sound investing; and today the bill has come due.

The Laissez Faire Ones such as Charles Prince, using neoliberal Milton Friedman economic principles, have had free reign over capitalism and investment, and their party is over. No amount Ben Bernake 'Cat In The Hat' magic can restore financial stability.

Elaine Meinel Supkis in Bernanke Will Hand Out $225 Billion In June provides the Jeannine Aversa Associated Press report that The Fed To Make Fresh Batch Of Bank Loans". Such loans are unlikely to help the banks, the liquidity is most likely going to effect speculative loans in the futures market, or to buy currencies which would be used to short the US dollar, or to go short stocks.

Through the bankers' financialization, the US currency has been debased; the debasement that came through securitization has inflated the Euro, and commodities, especially oil and gold.

I do not know if Commodity prices, $CRB, which is traded by the ETN, RJI, will continue to soar; and I do not know if oil, $WTIC, which is traded by the ETF, USO, will pause only to go higher.

The current chart of the gold EFT, GLD, shows a pennant; prices usually fall from such patterns, that is why I recommend that one 'dollar cost average' buy gold at BullionVault.com over the next three weeks. Should gold fall in value, its fall will be substantially less than that of stocks and bonds. The value of gold relative to stocks as seen in GLD:VTI is stabilizing and is for sure going higher over time.

Related
Jesse's Charts of the Nasdaq Composite, $COMPQ, the Down Jones Industrial Average, $INDU, the US Dollar Index, and the S&P 500 $SPX, show today's trading action.

The Capital Provisioning Infrastructure Is Burned Out And Bone Dry ... Lending Resources Went Into Commodity Futures is my article of last Friday, which serves as a helpful introduction to today's article.

Lamdar's monthly chart of the S&P, $SPX shows a 'broadening top pattern' going back to November 13, 2006; it's as Street Authority says: "When you see the broadening top, the market will eventually drop": it's ripe for a drop.

Keywords
billcomedue, charlesprince, catinthehat, LaissezFaire

Copyright © 2008 Richard Gorton, The Resourceful Bear Blog
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Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

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