Last Wednesday, the Obama administration proposed a plan to buy up the toxic assets of financial institutions — creating a “good-bank” and a “bad-bank” — and the stock market rallied for a gain of more than 200 points.
But on Friday the plan seemed to be coming unglued when CNBC and others said that it had been put on hold “indefinitely” over confusion as to what to pay for the assets. Reports now say the administration will not spend time on the “bad bank/good bank” plan.
And with that, despite a positive opening for the last day of the trading week, stocks began a day of gradual sell-off that was helped along by a report that GDP contracted by 3.8% in Q4.
At day’s end, which was also month’s end, the Dow Jones Industrial Average (DJI) was down, finishing the worst January since the Dow was created 113 years ago, with a monthly decline of 8.84%.
What is most troubling is that the Dow’s January record is most often a harbinger for the year — accurately foretelling its performance 75% of the time. Since 1950, the S&P 500’s (SPX) January record is even more impressive, according to the Stock Trader’s Almanac), predicting the market’s outcome 91.4% of the time.
At the close, the Dow Jones Industrial Average (DJI) was off 148 points to 8,001, the S&P 500 (SPX) fell 19 points to 826 and the Nasdaq (NASD) was down 31 points, closing at 1,476.
The New York Stock Exchange traded 1.5 billion shares, with advancers ahead of decliners by 11-to-4. On the Nasdaq, decliners were ahead by 2-to-1 with volume at just above 900 million shares.
For the week, the Dow fell 8.8%, the S&P 500 was down 8.6% and the Nasdaq was off 6.4%.
On Friday, crude oil (March contract) ended at $41.68, up 24 cents, and the Amex Energy SPDR (XLE) fell 66 cents to $46.92.
Gold (February contract) closed up $22.20 at $927.30, and the PHLX Gold/Silver Index (XAU) closed at $124.01, off $1.48.
What the Markets Are Saying
The struggle between the bulls and bears continued on Friday with what appeared to be a victory for the bears. And, long-term, they do have the edge since there is little doubt that every major index is still pointing south.
Friday’s close at 8,001 on the Dow (DJI) surely got the bulls’ attention since that round number appears to have some psychological importance to the investing public. But it has little technical significance since the support line that has held since November (with the exception of the bear trap of Nov. 20 and Nov. 21) is actually at around 7,940. And the numbers that most technicians refer to as “the” market’s support is at the zone between S&P 500’s (SPX) 800 and 820.
For guidance at crucial moments I prefer to check out the most reliable internal and sentiment indicators.
Our internal indicators are at an oversold status, with momentum in an extreme oversold area. But on Friday, the slow stochastic issued a sell signal suggesting a brief near-term pullback.
As for the sentiment indicators: The numbers that measure public sentiment are showing extreme fear, while insiders continue to load up on stocks and that is good.
One indicator that is a bit perplexing is the CBOE Volatility Index (VIX), which closed at 44.84 on Friday after an intra-day low of 33.48 on Wednesday. This seems low compared to the high recent numbers of 96.40 on Oct. 26, 81.26 on Nov. 20, and 57.36 on Jan. 20.
Should we expect the VIX to be at a higher number and showing more “fear” than it does now at the currently critical support area? If so, the question is: “What is the significance of this week’s low VIX — is it less fear or perhaps something else?”
The key, I think, to understanding the VIX comes from a study of the past.
The triple-bottom-making process of the last bear market produced the following readings:
• 48.46 on July 21, 2002
• 43.09 on Oct. 11, 2002
• and 34.40 on March 4, 2003.
Notice not so much the level of the VIX at critical support areas, but that at each key bottom the VIX was declining just like the last three VIX numbers of this bear market and that the final number at 34.40 is even lower than the current one.
I believe that the reason for declining VIX numbers is not so much one of lower fear but of an increase in total capitulation. And capitulation is the final emotional phase of a bear market — we may be at the bottom now and the VIX could be telling us that.
Today’s Trading Landscape
Earnings of note to be reported include: Actuate Corp (ACTU), Aflac (AFL), Alumina Ltd (AWC), Anadarko Petroleum Corp (APC), Banco Bradesco S.A. (BBD), BE Aerospace (BEAV), Black Hills Corp (BKH), Brookfield Homes Corp (BHS), Buckeye GP Holdings LP (BGH) and Buckeye Partners (BPL).
Coachmen Industries (COA), Corn Products Int’l (CPO), Crown Holdings (CCK), Dover Downs Gaming and Entertainment (DDE), Dover Motorsports (DVD), First Marblehead Corp (FMD) and Gladstone Investment Corp (GAIN).
Hitachi Ltd, Hologic (HIT), Humana (HUM), ICU Medical (ICUI), Lacrosse (BOOT), Liberty Property Trust (LRY), Mattel (MAT), PartnerRe Ltd (PRE), Peapack-Gladstone Financial Corp (PGC), Piper Jaffray (PJC) and Plum Creek Timber (PCL).
Rent-A-Center (RIC), Rochester Medical Corp (ROCM), Rockwell Automation (ROCK), SanDisk Corp (SNDK), Sysco Corp (SYY), Tessera Technologies (TSRA), Unica Corp (UNCA) and W.R. Grace & Co (GRA).
The following economic reports are due: December Personal Income (the consensus expects negative 0.4%), December Personal Spending (the consensus expects negative 0.8%), December Institute for Supply Management (ISM) Manufacturing Index (the consensus expects 32.0), and December Construction Spending (the consensus expects negative 1.0%).
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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.
