Opportunity Always Dressed in Work Clothes
Jul 23 2008 - Mike Williams - Bull VS. Bear
Good Morning:
"If you don't change, reality in the end forces that change upon you."
— Stuart Wilde
Yesterday, the markets had every reason to move back down to test their lows.
The Darlings of the market have been hit in recent days, Google last week, Apple yesterday and RIMM even got a downgrade. Yet, in the midst of that, ugly numbers from AMEX and another terrible report from Wachovia, what happened?
The market opened down, touched levels about 1 percent off the previous close and then.....rallied. In yesterday's notes I suggested "if we could end within 1% of unchanged, that would be a good thing." I fully expected that 1% to be down....I was wrong..it was up.
The bears will tell you it is just short-covering. I would remind you that all rallies after extended corrections can be deemed short-covering. Crude oil is down $21 a barrel in 7 trade sessions. As your chart yesterday showed, this is a larger correction than any we have seen to date in this saga. They must fight back quickly or the top is in and perspective will shift aggressively.
History would suggest that we see Venezuela or Iran's leaders in the news shortly rattling their sabers. What you want to watch for is no reaction in the crude pit. IF we can see their bantering, fear-mongering and love for terrorism (in all forms) begin to have no impact on crude prices, we can begin to argue the fever has broken. IF that has happened....at the very peak of fear associated with same, you will see a rally in the markets that will have no reason we can point to.
Just like these notes pointed out yesterday, it is what we call a character shift. When the market begins reacting differently than the news....good or bad, it suggests the perceived risks are now priced.
Currencies
The Euro is weakening overnight as their industrial order books are really taking it on the chin. In a flat world, strong currencies ain't what they used to be. The Dollar gapped lower yesterday morning with stocks but then spent all day rallying back as well to end almost exactly in the middle of it's range since early February...with, by the way, no new lows set. Call me nutty but if the Dollar was still going down hard, the issues related to banks, AMEX, the consumer and the GSE's would have done the trick by now after months of wall-to-wall coverage.
The Pound and the Swiss are also struggling at their respective resistance points noted on your recent chart postings. Rates here are rising..but we should EXPECT the market to allow rates to rise as the fundamentals begin to roll stronger. Rest assured that after a few knee-jerk reactions from those who feel we are so weak, we "need" the additive injections of low rates, this market and our economy will begin to operate much better...with higher rates. I continue to argue that the ugliness we have had to suffer through in the last 5 weeks was nearly a direct result of the "flinch" we saw at the last Fed meeting. They should have raised rates then.
When they do, expect in currencies what we have recently seen in crude....
We Will Get Through
I am getting a ton of calls and emails about how bad it is in the markets. Really? I hadn't noticed. I am kidding! The number of empty TUMS bottles in my office is becoming embarrassing.
But, alas, as a wise man recently shared with me...."focus on the 90% that is right, not the 10% that is wrong." Know this....the market, as it was designed, is not operating properly when multi-billion dollar capitalizations see 10% and 12% swings (up or down mind you) in one day. Rest assured, missing by a penny or a nickel does not mean the company is dead and is not going to ever recover. I call that the Enron syndrome....not all companies that miss are Enron. Likewise, just because they beat by a penny or a nickel does not mean all future quarters will be better than expected....it goes both ways.
We will all learn to change in ways that help us individually to adapt to new circumstances and in return, the whole will improve. After all, like it or not, we are all from the same cloth.
Warning: It is easy to assume that just because you can breathe for a moment means it is all clear. This would not be prudent. I do not suggest this as some kind of dire warning. I suggest it only as a point: ugly periods in the market do end. The next time you see one...use it as Warren does....for shopping.
Warning 2: As stated in a piece yesterday posted inside, the investor's fears will continue to be his/her worst enemy. Our psychology is not meant to do battle with markets, especially if we have any emotional attachment to our money. I know this thought is a repetitive one here....but as long as I continue to see the very same mistakes made that I have watched for the better part of two decades (the first 5 years, no one knew how to find out their account balance so they did better : )!), I will continue to remind us where we swerve off course. There is too much evidence. It is overwhelming. We get lost in the darkness of the valley's in the markets.
Warning 3: That which we are disgusted by most today will be what we chase 3 to 5 years from now. Writedowns will eventually become writeups, when you least expect it.
Hunker Down: Gut Check Time Part II
Use 2 to 3 days setbacks as a place to shop. It is HIGHLY likely we will get a few of those over the next week or two. Alas, if we do not, the market will have taught us all another lesson. When it seems the darkest, the lows are being set....and sometimes, you never get another chance to act that cheaply.
If we can get crude crushed, the dollar moving out of the price band of the last 5 months and the Fed raising rates by a tick or two, this market is poised to surprise substantially to the upside. If this unfolds, there will be very few places that you will be "comfortable" buying because the ghosts of corrections past will convince you there is more downside fear ahead.
I have stated this many times before, it is prudent to remember:
You must be a long-term investor. I know few, if any, who are successful short-term investors and none who have retired that way. The market and crowd emotions always work as follows: As the trend improves to nosebleed sections (expensive) and the realization that stocks grow to the sky (any sector), the drive is to "fill the boat" with "comfortable investors". As prices fall and value explodes for the long haul investor, the boat empties and the market works very hard to make sure the crowd is standing on the dock when the ship leaves.
Check your charts from this week's postings inside.