Last week’s news looks like a horror chamber of economic and business disasters: The unemployment rate surged to 7.20% (the highest in 16 years), December retail sales missed everyone’s estimates (including the major companies’ own estimates), the financial sector looked vulnerable to more selling on talks of further spin-offs of brokerage subsidiaries, new allegations of theft regarding Bernard L. Madoff Investment Securities, LLC surfaced, and a major new fraud scandal in India all made headlines.
On Friday, stocks dropped sharply on the opening as the impact of the surge in unemployment hit, but they stabilized until just before the close when a round of new selling took center stage. The renewed selling came about following an announcement by Citigroup (C) that former former Treasury Secretary Robert Rubin would resign from its board and as senior counselor for the company.
At Friday’s close, 28 of the 30 Dow (DJI) stocks closed lower, with Citigroup leading the selling, off 5.73%.
The Dow (DJI) fell 143 points to 8,599, the S&P 500 (SPX) was down 19 points at 890 and the Nasdaq (NASD) lost 45 points, closing at 1,572.
The New York Stock Exchange traded 1.1 billion shares, with decliners exceeding advancers by a margin of 2-to-1. On the Nasdaq, 777 million shares crossed and decliners there were ahead by 3-to-1.
Stocks had their worst week since November, with the Dow off 4.8%, the S&P 500 off 4.4%, and the Nasdaq down 3.75%.
On Friday, crude oil for February delivery fell 87 cents to $40.83 a barrel, and the Amex Energy SPDR (XLE) fell $1.69, closing at $48.64. The pattern of the XLE looks remarkably like the chart of the major indices with support now at the conjunction of its 20- and 50-day moving averages at about $48.
Although gold finished lower for the week by 2.8%, on Friday the February contract ended up 50 cents at $855. The PHLX Gold/Silver Index (XAU) fell $2.88 to $114.53.
What the Markets Are Saying
For the past six weeks, volume has been declining to the levels seen prior to the market low made on Nov. 21, which is about 1.2 to 1.4 billion shares per day on the NYSE.
On Friday, Nov. 20, the Dow (DJI) fell 445 points, made a new closing low at 7,552, and traded 1.6 billion shares. The next day, the market opened lower but closed higher by 494 points on 2.4 billion shares — completing a reversal — and many said that a bear trap had been sprung on the shorts.
On Friday, the Dow broke under its 20- and 50-day moving averages, setting up the possibility of another challenge to the Nov. 20 low. With that in mind, what are the chances of the short seller being again caught in another “bear trap?”
Before I answer that question, let’s first consider the conditions needed to spring the trap.
According to investment information site, Qwoter.com: “A bear trap occurs when a stock breaks down through a support level, looks like it is going lower, then suddenly reverses back up through the previous resistance and continues higher. All the people who were looking to profit from further downside action by selling short are now ‘trapped’ and begin to suffer losses as the stock moves higher.
“The completion of a bear trap can often lead to a big upward move due to the number of buyers competing to buy stock. At this point, the buyers who overcame the selling and forced the stock higher will become more aggressive.
“Another group of buyers will see a big surge in volume and be attracted to the potential for quick profits, which helps deplete any supply quicker.”
Then a group of market professionals will “squeeze” the shorts by buying stock and forcing them to cover at any price. Bear traps usually occur on stocks with low capitalization but can also occur in the broader market, too.
Surely the November reversal was a bear trap but that’s not to say that there was a plan on the part of major holders to spring such a trap. More than likely, the Nov. 21 reversal started with programmed buying. Then many pros jumped on board with the knowledge that there had been heavy shorting and therefore bet that the shorts could be “squeezed.” Prior to the low there was widespread knowledge that short-interest was very high.
The latest reports on short-interest showed that in the period ending Dec. 15, short-selling on the NYSE (short-interest) slid 3.1% from Nov. 28. The same is true for the Nasdaq (NASD).
The next short-interest data is due today and should be reported in today’s Wall Street Journal and, if it’s reported, I’ll comment on its meaning tomorrow.
Today’s Trading Landscape
Earnings of note to be reported include: Alcoa (AA), Dynatronics (
DYNT) and Peoples Educational Holdings (PEDH).
There are no major economic reports due today.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
