Week's Summary: In With A Bang, Out With A Whimper

By Dr. Duru written for One-Twenty

March 30, 2008

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The excitement was in the air as we started off last week with some impressive follow-through to the prior week's inspiring buying. Bulls and buyers stepped right in last Monday as if to prepare for some classic end-of-quarter mark-up action. Unfortunately, this week-opening bang slowly but surely gave way to a week-ending whimper by Friday. I had claimed that we needed to take March's two monster rally days seriously and prepare for a significant (and classic) bear market rally. Instead, overhead resistance has provided a stubborn cap to the action. In fact, last week's action could mark another critical failure that, if confirmed with new 2008 lows, will lead to S&P 1200 in short order.

Almost like magic, the S&P 500 rallied right to the 2007 lows and reversed on a dime.

S&P 500

Note well the three lower highs for 2008 and two lower lows. Very ominous. The two previous highs now look like fake-out breaks above the overhead resistance produced by the two climactic lows of 2007 (March and August). The Nasdaq is printing a very similar chart.

The lower highs and lower lows are even more convincing for this technology-heavy index.

While the enthusiasm fades from the stock market, the VIX is idling by in a very eerie way. It almost looks like it is biding its time before it resumes its climb ever higher.


As I noted in an earlier missive, the last spike in the VIX did not convince me that we reached a climax in selling fear. "Everyone" was watching that index with eager fingers trembling over the buy buttons. I do not see fear when the VIX collapses so readily after punching upward toward January's highs. I see a lot of bravado and conviction in a double-bottom. A CLOSE at new highs and several days of the VIX staying above 30, maybe even 35, would mark some real fear in the market.

The most damaging aspect of the whimper that ended the week was that the financials crumbled so readily after leading the way higher. The financials were emboldened after the Fed heated up the currency printing presses to white hot levels. But it looks like the Fed will have to keep cranking. On Thursday, March 27th, Oppenheimer analyst Meredith Whitney summed up the lingering fears in the financials: "Even the financials I like, I don't like" (click link for her very informative CNBC interview). The financial stocks are darn cheap, but the mysteries remain regarding the soundness of their books. We have all seen how easy it is for financial firms to create book value out of thin air and how easy it now is for the market to deflate the hot hair right back to reality. The toxic paper that has been pushed into the stratosphere for years still haunts the halls. The next step will be for the Fed to further extend our tax dollars to buy the toxic paper in outright Superfund style.

Citigroup's recent chart says it all: two significant island reversals (volume not shown) in short-order show how quick folks are to make a move in or out of the financials. Is one side about to be violently wrong?


Finally, as I predicted last week, the dollar's snapback rally proved all too temporary. For a hot minute, the market wanted to believe in the faith and credit in the United States and express some renewed confidence. Reality has quickly returned the dollar right back to its multi-decade lows. We should prepare to go lower as the Fed continues to print money as fast as it can to keep up with its desperate credit rescue efforts. The market is also anticipating that the Fed will have to continue to lower interest rates in its mad scramble to head off (soften?) recession in the United States. At the same time, the European Central Bank (ECB) refuses to play ball. It has sat on interest rates citing such antiquated, Old World notions as the moral hazard of saving people from unwise and greedy risk-taking and inflation fears - notions that we in America have freely discarded in favor of a consumption-heavy, debt-addicted, and highly leveraged economy.

U.S. Dollar

Be careful out there...!

DR. DURU®, 2008