Nov 26, 2009: How markets move the news

Markets are closed on Thanksgiving? Oops!

Joe Weisenthal had a wonderful starting line in his blog today: You thought markets were closed Today? Ha.

Not to spoil anyone's thanksgiving, but I too noticed that after the Wednesday euphoria of closing near the highs in US markets, futures were down unusually sharply (e.g. the Russell 2k futures were trading -3.40% below their Wednesday close). Barring any major great news, this means the S&P500 should open at about 1085 on "Black Friday" - give or take. Here's the picture of the /ES minis (S&P500 January futures) this Thanksgiving morning.

Reaction to news? Or is it backwards?

If you follow the markets closely, you already know that every day there are some news that are good, and some that are bad. So how do markets supposedly move "in reaction to the news"?

Call me cynical, but they move up after the big/smart money has moved "all in" and they tank after the big/smart money has cashed out. This happens over and over again. If you watch price action while looking at the news tickers from the likes of Bloomberg, AP, Thompson/Reuters etc. it becomes so obvious it is almost farcical. Insiders always know ahead of you what the news will be (by this I mean financial news, not "power of nature" kinds of news), and they, or actually their close connections, would always move ahead of you.

Since the "almost new highs" on Wednesday, were a perfect exit point for the smart money, my expectation was that "real soon now" some relatively big negative news will come out. This piece of bad news would of course, be amplified and shouted off the roof tops by the big boys who have just lightened-up and are now sitting on a bit too much cash which needs to be 'redeployed' at better stock prices.

The excuse this time is Dubai's imminent default.

This is not really news since anyone paying attention already knew back in early October that Dubai was nearly out of cash after being so leveraged when oil prices tanked last year. Yes, that's right: Standard and Poors actually warned on Oct 11, 2009 that this default is coming.

The only difference: now was a convenient point in time to wait for a related piece of news, and make it the 'excuse du-jour' for the big sell off so the big boys can again pick some assets at much lower prices.

Where are the markets going from here? If I had to come up with a wild guess, I would say: Friday we open 2-4% lower, then the markets slowly climb up after the daily supply of "small investor sells in panic" is exhausted.

The Monday after? it depends: if we had a big move from the lows on Friday, we may get another leg down, perhaps even exceed the Friday lows. BTW: all of this shouldn't be taken too seriously since it is just a WAG.

Longer term though, I have a feeling that we are going lower so I'm cautious (no 100% longs or leveraged longs for me). The markets have run up too much too fast, negative divergences abound, and some correction on the order of more than 10% (which we didn't have since March) is a long time in the making.

Friday end-of-day update: at the market close I find the major indexes short-term (1-5 days) oversold, so I expect early next week to be _positive_ for the markets -- though not necessarily for weaklings like financials and small-caps -- as they shake off the Dubai scare as "insignificant". I'm now slightly (short-term) net-long but ready to move back to neutral and possibly slightly short on extreme spikes up.

S&P500 and DJI daily action was positive. They followed exactly what I yesterday wrote they would likely do. Open at lows, then recoup some of the losses.

But again, look below the surface and you'll see the cracks. Small caps were in a rout. They closed much closer to the opening lows (albeit nicely above the pre-market panic action):

  • Russell 2000 ETF (IWM) today: -2.95%
  • Underperformance gap of IWM vs SPY at EOD: -1.32%.

Will the generals (SPY, DIA) make a new high? Possibly, but SPY's failure to make one since almost 2 weeks ago (Monday @ 111.69) despite repeated attempts doesn't make it a sure thing.

The weekly summary:
100% buy-and-hold longs at the highs on Monday who weren't actively trading, are now down about -2% if invested in large-caps (SPY), and about -4.5% if invested in small caps (IWM).

The markets keep narrowing down. I don't see how can we go on to new highs when over 60% of the stocks including financials, are repeatedly making new (intermediate) lower highs and lower lows.

As always, this isn't intended as investment advice. It merely reflects my own thinking and actions at the time of writing. In the immortal words of John Maynard Keynes "When the facts change, I change my mind. What do you do, sir?"

Every investor should make up his own decisions based on his risk tolerance, time-frames, comfort-zones, convictions, and understanding.

I have no holdings in Dubai bonds. I've just learned -- the hard way, I should add -- to be cautious around market euphoric highs.

Any feedback is welcome.

-- ariel