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Memo from the Money Men?


Although the trend obviously remains up, scores of leading stocks are ripe for profit taking.


Weren't you at the Coke convention back in 1965?
You're the misbred, grey executive I've seen heavily advertised.
You're the great, gray man whose daughter licks policemen's buttons clean.
You're the man who squats behind the man who works the soft machine.
--Memo From Turner (Jagger/Richards)

"Money doesn't talk, it swears."
Bob Dylan

We all love reasons. We adore explanations. Any explanation is better than none. There is no fear like fear of the unknown. Explanations make us feel comfortable, like we have a handle on things, like we're in control– you know, the kind of control and self-assuredness that comes from the conviction of crowds.

You know, the kind of explanations of stock behavior such as the idea that stocks that go through $80 go to $100 and stocks that go through $100 go to $120. All those years in college, all that tuition money my folks paid, all those books I've read about the markets, all the time I have spent studying the market. How silly of me. What a waste of time and energy, when all along all I had to do was buy $80 stocks and go to the golf course.

All this time the Holy Grail of the stock market was right in front of me in the Little Golden Book of Trading: pass $80, collect $100, pass $100, collect $120. The check is in the mail. Pass Go, collect $200. The Cliff Notes version to "How to Profit in Financial Funny Markets". Now there is a visual– Greater Fools lined up in front of tattoo parlors waiting to get Ponzi's mug shot emblazoned on their chest in full color– like some sort of crusader rabbit multiplying profits.

Be that as it may, the market continues to act like it just sent another gold-leafed get-out-of-jail free card to Hoofy, who continues to give shorts... uh... "the hoof".

We all love explanations. What was the catalyst for Thursday's rip-snorter? It's obvious to me that it was simply Hoofy's commemoration of the recent running of the bulls in Pamplona. Apparently Hoofy couldn't make it to Spain because he sprained a leg in June, not to mention a serious run-in with the matador last Tuesday.

Some Wall Street wags presented a simply marvelous explanation for Thursday's rally: some say reports by a few retail chains such as Wal-Mart (WMT) presumably indicated that the consumer is not comatose after all.

In other words, we were supposed to buy into the idea (literally) that Thursday's retail ray of sunshine completely supplanted Tuesday's rain cloud, which had stocks slipping and sliding on subprime sludge.

However, Friday's commerce department fess-up that retail sales actually dropped 0.9% to a two-year low kind of puts the lie on the whole shebang. Buy hey, the bulls never met an excuse to snort and kick up the dirt and run around the ring that they didn't like. Bulls never met a toreador in tight pants that wasn't a bullpen joke until blood was drawn.

Then, pray tell, what could have been the catalyst for such momentous momentum on Thursday – appropriately, perversely enough, affixed closely to the tail end of Tuesday's carnage?

Given the lack of a meaningful fundamental catalyst it's interesting that the breakout occurred just as the S&P was on the brink of a technical breakdown:

  • The S&P had closed below its 50 day moving average once again on Tuesday.
  • This follows a cluster of six such closes below its 50 day moving average in late June.
  • Further downside follow-through could have triggered beaucoup technical damage as the S&P would have been flirting with the break of double-bottom support below 1490.

Consequently, Thursday's surge was strikingly curious but conspicuous in its coming.

I surmise that, taken by surprise in February, there is a better than average likelihood that following Tuesday's jittery jerk-down, money was pushed by the men behind the soft machines into the hands of securities dealers through coupon passes in a pro-action protective plunge varsity effort.

Once the 1521 S&P pivot was recaptured, the shorts could feel the hook being tugged and the reality of being reeled onto the 1540 deck just above and a triple top breakout (Rule of Four Breakout).

On alert, given what Treasury Secretary Paulson earlier this year called "the systemic risk posed by hedge funds and derivatives," on high alert since the February 27 416-point plunge in the most intense selling since 1987, Paulson and Co. were most likely on double secret probation detention alert due to the surfacing sludge of subprime concerns which threatened to slime the markets.

How indeed did the markets reverse Tuesday's whiff of panic?

Retail fund flows are small. Does smart money chase a breakout after a five-year run without as much as a 10% pullback? Are institutions and pension funds all of a sudden reading charts and jumping on a breakout after a parabolic move this year? Perhaps.

Hedge fund money may chase a breakout but it has no loyalty to the idea of the sustainability of a move and is just as quick to abandon its positions on any sign of hesitation. Indeed, how did the market reverse Tuesday's grip of panic?

I characterize much of Thursday's rally as short covering. Although the trend obviously remains up, scores of leading stocks are ripe for profit taking.

Last week I stated that the financial panic of '07 may have begun. I didn't know we would get a two-fer– a panic down and a panic up. Obviously the selling panic I am anticipating is more than one day and will not stop at the March low if it plays out at all. I have been looking for a cyclic peak to occur before the end of July. Now that last week's breakout has fulfilled the move above the March 2000 high of 1552, an agenda has been satisfied. Now we have the potential of an M-A top on the S&P coming into play.

If cycles are tracing out a top, what remains is the trajectory for the A of the pattern.

A classic blowoff could last through Friday's option expiration. But a serious hesitation could indicate the possibility of a Spike Reversal Pattern and that Thursday was a Misdirection day (on the Thursday the week before options expiration).

After finally scoring an all-time intraday high on the S&P, I would not be surprised to see a down day on Monday (just as the new closing high on the S&P over the March 2000 closing high at the end of May met with consolidation) and then another trajectory to potentially higher targets that I will flesh out later on.

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