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When the Market Runs Out of Lifeguards, Will You Sink or Swim?

by: Graham Summers September 04, 2008 | about stocks: DIA / QQQQ / SPY    

Graham Summers

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We’re treading water.

Wherever I go these days, as soon as people find out I work in investing they want to know what I think of the market. My answer is the line above, “we’re treading water.” As hard as it is to believe, most of the damage this bear market’s done to stocks occurred before 2008 even began (hat tip to Greg Feirman of Top Gun Financial for pointing this out).

Between its peak of 1,562 on October 10, 2007 and its intraday low of 1,270 on January 23, 2008, the S&P 500 declined roughly 20%. Since then, the S&P 500 has been largely range bound between 1,250 and 1,400. As I write this, the market just closed at 1,237, worse than the level it hit back in late January.

Like I said, we’re treading water. In light of this, it’s difficult to gauge where the market will head for the remainder of 2008.

Or is it?

One item few individuals in the mainstream financial media have noted is that all of the rallies we’ve seen in 2008 were the products of interventions by various regulators AKA lifeguards.

The first rally came shortly after the Bear Stearns deal. With the Federal Reserve planting a perceived backstop for the financial industry and establishing itself as “lender of last resort” for investment banks, investors piled into the market believing Wall Street CEOs’ proclamations that “the worst was over.” That rally lasted two months.

The second rally came after a dual intervention between the SEC — which tightened restrictions on short-selling — and the Treasury Dept — which convinced Congress to write a blank check for Fannie Mae (FNM) and Freddie Mac (FRE).

This rally was even feebler than the last and was largely the result of investors covering their shorts. If you look at the above chart again you’ll notice that this rally only lasted a month before losing steam: the S&P 500 has been turned away at 1,300 four times in the last month.

We’ve now seen the Federal Reserve, the SEC, and the Treasury Department throw everything they’ve got at the stock market. Yet none of their actions have resulted in a sustained rally driven by genuine bulls.

Stocks may continue to trade sideways for some time. However, to me, it seems pretty clear the overall market is heading downward, as it did today. In the history of markets and regulators the latter group have NEVER once solved the former’s problems.

I’d strongly suggest establishing several shorts in preparation for what’s to come. If the S&P 500 breaks below 1225 we’re in for a very, very nasty fall.

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This article has 9 comments:

  •  
    Sep 04 01:41 PM
    Come on darling! Why don't ya point out the AWESOME Parallel downtrend channels in both the SPY and DIA charts? This most recent rally is just a bounce off the lower trendline.

    cyclingscholar
    Reply
  •  
    Sep 04 01:44 PM
    your right.whatever happened to a free market;pure capitalism;without the gov't bailing everybody out.i am looking by the end of the year,if not sooner,a s&p of about 1100.whatever it is.this market is headed south,way down!
    Reply
  •  
    Sep 04 02:03 PM
    Actions by your "trusted regulators" based on shell game risk maneuvering, incompetence and political self-preservation are no substitute for real leadership - which in the interest of "tough love" would let the markets bomb. I say this not out of discontent, but rather opportunity.

    Perhaps Congress will throw out another "stimulus bone" to everyone unemployed with their hands out in the name of "national security", or we'll start another "War on ___". This is an election year after all, not to mention the final farewell to an elitist president and mafia administration that didn't fool this Republican voter back in 2000 only to reinforce to all what a joke the decisions the rich make always seem to end up a turd sandwich for the rest of us. That is, those of us that actually care.
    Reply
  •  
    Sep 04 02:26 PM
    The bailouts will make it worse on the stock market. The fed will hold bad assets against the loans they are making to keep up the banks.....or they will force banks to pay back and crash the banks.

    either way foreign investors will not want in to the US like they used to (this is already happening ie...the slowness of foreigners to help Lehman).

    I think 1100 is very wishful thinking, we're going lower than that.

    concisetrading.blogspo...
    Ryan
    Reply
  •  
    Sep 04 05:03 PM
    Look at IWM - this shows the idea that the damage was done last year even better than the S&P 500.
    Reply
  •  
    Sep 04 07:29 PM
    This Administration screwed up the economy in a big way. I suggested that in order to contain the housing bubble that interest rates should have been raised about 5 years ago. We would have been thru this crazyness if the Fed did that. Now we are going to pay thru the nose for years and years. As far as I'm concerned, if you can hold on to your capital and not lose you will end up a big winner......forget about any gains...just stay afloat...cd and treasuries might and only might be safe as asset backed paper and the assets themselves unwind....Marvin the Maven
    Reply
  •  
    Sep 05 12:02 AM
    Marvin, think what you're saying. If we're going to pay through the nose for years and years because regulators keep screwing the pooch, what form do you think that payment is going to take? That's right: more borrowing. Those "stimulus checks" you heard about (but almost surely didn't receive)? Borrowed money. The next ones will be, too. Raising taxes will only lead to capital flight and deepening of the recession. The bottom line is that Treasury supply is huge and only going higher. The market is betting big on the dollar going higher, but wait until the Fed starts printing in earnest. I've gone on record as saying the Fed's next move will be down, and I stand by that assessment. ZIRP anyone?
    Reply
  •  
    Sep 05 02:56 AM
    I agree with bearfund, the next Fed move will be 'down'. Recent 'strong' GDP number is the courtesy of weak dollar and not strong domestic economy. And not to forget, the current situation increasingly looks like a prolonged slow growth environment, rather than a quick painful plunge and a sharp rebound. With rising unemployment, cost pressure will eventually subside, and the lack of growth and continued bleeding of Wall Street will force Fed to cut the rates.... and it could well be as soon as pre-Christmas (to boost consumer "morale") or the new year, as the new administration (whichever) will be eager to impress the countrymen.
    Reply
  •  
    Sep 05 11:16 AM
    Marvin,

    Given real inflation (not the government's fairy tale numbers), treasuries and CD's are not only a losing proposition, they are risky. There's already too much paper out there and the only short term solution for the current fiscal problems is to print more money. I would avoid paper assets like the plague.
    Reply
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