Archive for February, 2009
The Dow Drops to a New Low
Posted by Jody Eisenman | Filed under Uncategorized
As I wrote two days ago (“A Short Technical Analysis Primer”), the fear was that if the market closed below its’ technical support, it could drop rapidly. The DJIA closed today at 7466, the lowest level since October 2002. It is now down about 15% for the year, and the year is not even two months old! The financial stocks continue to get destroyed. Citi closed at 2.51. If you feel adventurous, you can buy 5 year Citi paper that will yield over 10%. The trick is that Citi has to stay alive long enough for you to collect. Right now, the CDS on Citi are at 410 basis points, which means that you would pay over 4%/year to “insure” against default. Bank of America closed at 3.93. It seems like ages ago, but the stock actually traded in the mid 30s in early October. Even among the non-financials, there was heavy selling. Alcoa closed at 8.50 last Monday. It closed today at 6.35, or a drop of over 25%. 283 stocks hit new 52 week lows today. Prominent names include Ashland (6.42), American Express (12.87), Caterpillar (26.86), and Dupont (20.75). There doesn’t seem to be much pockets of support anywhere. About the only positive thing I can say is that I can’t find anyone who is bullish anymore. Everyone seems to think that it’s a foregone conclusion that the market is going to continue to fall. Generally speaking, when you see that, it could be a sign of capitulation, and the market rallies. However, I have no idea what economic event will actually trigger some real buying here. Lets hope for the best.
A Really Bad Day on the Street
Posted by Jody Eisenman | Filed under Uncategorized
Unfortunately, the market started weak and closed down almost 300 points. The S and P 500 (which we discussed yesterday), closed at 789, below its’ technical support level. Many well known companies got hammered. Led by Alcoa and American Express, over 600 companies on NYSE, AMEX and NASDAQ closed at new 52 week lows. There were very few places to hide.
In other news, GM and Chrysler are seeking over $20 billion additional in return for job cuts that could exceed 50,000 workers. The state of California is in a deep deficit crisis. There appears to be another potential Madoff type fraud, as the Texas based Stanford group is accused by the SEC. Stanford has over $40 billion under management, and they have allegedly sold very high interest certificates of deposit that seemed too good to be true. There is an old Chinese saying (some think it’s actually a curse), “May you live in interesting times”. That certainly seems to be the case today.
A Short Technical Analysis Primer
Posted by Jody Eisenman | Filed under Uncategorized
Technical analysis of stock prices (or any security such as commodities or bonds) is very popular today. Simply put, this analysis assumes that past prices can predict the future. Pure technical factors tend to ignore fundamentals (such as earnings, growth rates, etc.) and believe that “the tape tells everything”. In other words, all you need to know in order to trade a stock is to look at the past history via charts. I must admit that I felt this methodology to be some sort of junk science for many years. However, I know now to give it more credence (although I cannot ignore fundamentals) simply because it works quite often. Now, I’m not really sure if it works because the past can foretell the future, or because enough traders believe that it does so that it becomes a self fulfilling prophecy.
For example, lets say stock X has traded in a range of between 20 and 24 for past 2 months. Three times the stock has traded down to 20, and each time it “bounced” and went higher. One would then consider 20 to be a bottom (when it happens three times within a relatively short period, it’s called a “triple bottom”). Therefore, one way of trading stock X might be to buy it just above 20, and put a stop loss just below 20, say at 19.80. You are basically relying on the past that stock X will once again trade higher. If it breaks 20 to the downside, this would be very negative for the stock, and it might trade down to its’ next support level ( the next price where buying seems to be). Of course, there’s much more to this, but I just want to give readers a rudimentary understanding.
Now, relating this to the current market. If you look at a chart of the S and P 500, you will see that the index closed at around 826 last week. You will also see that for the past 6 weeks, the index has traded down to the 800-810 area and then “bounced” off it and traded higher. On Thursday, it looked like we were going to break through to the downside, but then Obama announced a new mortgage initiative, and the market rallied. From a technical standpoint, I view this level to be somewhat significant. If we were to close below it, it’s hard to tell how low we could drop. The market made a low of 741 in November, but there is no real level of support (meaning sustained buying interest) for at least a couple of hundred more points. Now, I’m not necessarily saying that this would happen, but we could drop pretty hard and fast if we break this support level. What seems to be more disheartening is that the markets’ reaction to Geithners’ bank plan and Obamas’ stimulus plan much the same it reacted to Paulson: with skepticism. Therefore, although there are always trading opportunities, I remain cautious on the overall market even at these levels.
