Investors are dropping stocks at record rates. The TrimTabs.com cash flow report today showed that outflows from mutual funds were accelerating. After losing more than $15 billion in all of August the first week of September, including the holiday, accounted for -$10 billion of outflows from stock funds. OUCH! There are also rumors of stock funds being forced to liquidate like the big hedge fund scandal from a couple years ago. Fund liquidation? Now that would be a really big hurdle for the already shaky markets to overcome. We all know that money in funds may go up and down with the markets but suddenly a scare of losses due to liquidations, that would shake ma and pa investor back into CDs and cash in mason jars. These are only rumors but you can bet the boys at the Fed would meet this problem head on and do everything possible to avoid any messy public fund failures.
We don't need any fund failures when we already have a really messy market failure. We are quickly heading below the April lows on some indexes and not far away on others. The S&P-500 low on April 4th was 1103.25 and the close today at 1105.94 was only a hair above it. The Nasdaq 100, not the comp, set a new 52-week low today at 1361 by slipping below the 1370 April low. The Dow has over 800 points to cover before being in danger of the 9106 March low but at the current rate of fall that is only about a week. Other global markets are continuing to fall with the German Dax also setting a new 52-week low today.
Traders can no longer complain that they are waiting for volume to return after Labor Day. The NYSE posted 1.3 billion shares and the Nasdaq a whopping 1.84 billion shares. The internals were very bad with decliners beating advancers 2:1. The put/call ratio rose to almost 1.0 as investors feeling real fear bought puts to protect portfolios. Speaking of fear the VIX has now risen to a five month high of 32.42 after seven straight days of gains. The last time we were at these levels....April. Can we go higher from here? You bet, the VIX spiked over 40 several times in Feb/March of this year. The VXN, the Nasdaq equivalent, hit a four month closing high of 62.01 but well below the April high well over 80. The TRIN also closed at 2.31 with a spike over 4 at the open this morning. What does all this mean?
The market internals and indicators mentioned above show that the market is very oversold again. In fact it is indicating a possible relief rally on Friday. I have said here many times that nothing goes straight up or straight down. We all know that stocks and markets oscillate from overbought to oversold and back again. Sometimes quickly, sometimes slowly. If funds are truly liquidating to raise cash to pay those redemption requests then we could become a lot more oversold before we see any real bounce. When investors call for their money the funds have no choice but to sell anything with value to raise that cash. It makes no difference how good a deal the fund managers think stocks may be at these levels, the investor rules and they have to raise cash. -$35 billion has left stock funds in the last five weeks and with September and October still ahead of us the cash drain may not be over. 17% of the Nasdaq-100 hit new 52-week lows today but investor sentiment still shows over 40% of analysts are still bullish. Until the indexes see a washout of this sentiment we will not see a bottom.
The global economy is still a factor. Japan continues to fall and is only days away from even more serious problems. Intel said tonight that sales in Japan had fallen significantly and the outlook was worsening. Brazil markets hit another 52-week low. As investors we need to be aware of the world around us and not be so introverted that we are fixated on some index number like S&P-1100 or Nasdaq 1638. These numbers would be critical in any normal market as clear turning point signals but in today's environment they may be meaningless.
The forecast for Friday is a good possibility of a relief or short covering rally. Highly profitable shorts may want to clear the table and start over on Monday. However, last Friday, while positive did not really show a rush to cover. Shorts are becoming more confident that the markets have much farther to fall and therefore are less likely to cover. There are no bargain hunters. There will be some investors averaging down but funds will be using any bounce to raise cash and that is not a recipe for a long term rally. Sell the rally is the battle cry and until that strategy fails it will continue to create repeat profits for those who trade the trend instead of their beliefs.
Definitely, enter passively, exit aggressively!
-Premier Investor |
