Buying on the dip? You may want to think twice as the market weakens
Filed under: Investing, Goldman Sachs , Morgan Stanley
Just when you thought it was safe to wade back into the equity waters, the surf looks to be getting choppy again.The market rally really hit a wall in October, with the S&P 500 ($SPX) losing two percent on the month. True, securities never move in a straight line and consolidation and corrections are a natural and healthy part of a market healing itself after a nasty trauma like the one it suffered earlier this year.
But there are some spooky signs underpinning the recent weakness that should give investors pause, says ever-bearish David Rosenberg, chief economist and strategist at Gluskin Sheff (and formerly of Merrill Lynch), who was probably as prescient as anyone on calling the collapse. As Rosie told clients Monday: "This is one dip you may want to avoid buying."
The market's torrid rally off the March bottom has been a low volume event, driven mostly by hedge funds, the high rollers on the trading desks at places like Goldman Sachs (GS) and Morgan Stanley (MS), and "flash trading," where computers execute thousands of orders a second to capture fractions of a penny in profit.
In other words, the rally has lacked conviction. But not so the sell-offs, which are higher volume affairs, and that's an ominous sign, Rosie says.
"It looks as though the hedge funds, pretty well the only buyers outside of the massive amount of short-covering in a rally populated by extremely low volume, are locking in their fortunate gains experienced since the government safeguarded the large banks last winter," Rosie wrote Monday.
Perhaps more distressing is the action on the Chicago Board Options Exchange Volatility Index, or VIX ($VIX). Known as the "investor fear gauge," the VIX went bonkers on Friday, surging 24 percent. "[That's the] largest single day increase since Oct. 22, 2008 and the highest level since July 8," Rosie wrote.
Even more alarming, the VIX has popped like that only 18 times going back to 1990, "and the sharp bounce in the past week -- up 48 percent since Oct. 22 -- is a really big deal, in our view," Rosie says.
In other words, the folks behind the market rally are starting to get pretty hinky. What that means: Don't be surprised if the wild market swings we experienced last week keep coming back in wave after nauseating wave.
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Reader Comments (Page 1 of 1)
11-02-2009 @ 3:18PM
CHRIS said...
If the expert is connected with Merrill Lynch it's hard to believe he has a mind of his own and can forecast anything.
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11-02-2009 @ 3:36PM
Richard said...
Rosie has a good record. The S&P500 will correct, and eventually take out 900.
Look out below.
Rich
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11-02-2009 @ 3:49PM
Bill said...
Doesn't anyone look at real numbers like production, jobs, and PE ratios...there are so many opinion related scales and charts that when it comes down to it's all about production and buying ... it's almost as if these numbers and data are thrown out ot conterdict each other ... giving bad news when good earnings come in and good news when the market is given out dismal statistics... Bill
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11-02-2009 @ 4:59PM
Don J. said...
The generalities continue to flow. Did you happen to notice the manufacturing index in countries across Europe and the US? Do you think there is any hope left or should we all respond to the Friday VIX and cash out. You don't suppose a lot of experts have overbought without considering valuations? That does not seem possible, they are experts. In my view Bill's comments to this article are pretty much on point.
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11-02-2009 @ 4:47PM
Iridium said...
Over the past year insider trading and accounting manipulation has perhaps been at the highest levels in history. The real truth of the rally is that the banks got the rules changed in April which led to being able to hold massive amounts of government infused capital on the books as profits.
The money really didn't exist but it was invested in the market and massive speculation just like the spring and summer of 2008 took off.
Look at the insane valuation of some stocks, especially the pharmaceuticals. Fine HGSI's drug showed some promise in a trial. Does that warrant over a 1000% increase in stock value over the past 6 months? How can that be supported? The market is valuing a company that loses a quarter of a billion dollars at $4 billion. A company that will probably continue to lose billions for years on end.
It seems the new low P/E is 40. IN fact you can even have a negative P/E and see your stock skyrocket. All based on the speculation of future revenue. So far the future revenue that was priced into the market has yet to come.
Again back to the reality of the market. THE STOCK MARKET HAS NOTHING TO DO WITH EMPLOYMENT, SALES, AND CONSUMPTION!!! If it did a drop in revenue and a massive decrease in consumption would send shares down, not up. The largest increase in supplies in decades would not send the price of oil up by 125%.
The market is being driven by hedge funds fueled by insider trading using supercomputers programmed to take the news and profit by increasing trading volume at certain times. The computers were programmed to increase the value of the market in order to create a profit making selling opportunity. A trader can only book profts if they can sell the shares they hold.
Why is it that the sell periods have been such high volume and the drive up so low in volume? Easy, the hedge funds and brokerages like Goldman Sachs are using the computer trading models to drive the market up slowly. If they drove the market up with huge volume trades it might draw suspicion. Once the market hits pre-programmed sell points the computers are triggered to sell the lot generating massive profits. The slow run is then re-established.
Meanwhile the brokerages try to bring the single investor back in the market to buy shares right before the computer driven sell point. That is why the news gets so good right before a selloff. Wall Street has been telling the lone investor to get in the market for months. Then the lone investor is told that if they don;t get in now they will lose out big during the next leg of the rally.
Look at last week for example. You have to be an idiot to think that Goldman Sachs didn't know the GDP number long before Thursdays release. They and other top tier investors drove the market up creating the illusion of a buying opportunity. Why wouldn't people buy on such a seemingly good report on economic health? All of a sudden Friday saw the biggest selloff in months. A pre-triggered sell event to lock in profits. If the market was really that good there wouldn't have been a selloff on Friday.
The stock market is 100% manipulated and 100% corrupt. Hopefully the government will crack down even further on the insider trading ring. If they go deep enough they will find corruption that will make the Mafia look like a Girl Scout cookie sale.
I was not surprised to find out that that many CEOs and managing directors of major corporations all sit on the boards of other major corporations. You don't think these guys share insider information do you?
It is such an unbelievable con game. There is no other solution other than shutting the whole Wall Street system down. I am not talking about this solution as a communist or socialist but rather as a free market capitalist. The free market is supposed to prevent corruption. A manipulated and corrupt market system is anything but free.
A few wealthy individuals that control the game doesn't sound like free market capitalism, it sounds a heck of a lot like the Soviet Union. The con is that Wall Street is a capitalist institution. That is the furthest thing from the truth.
But people say, "SO what, get in the market and make money. Stop rationalizing." It is the point that the market isn't real and the money isn't real. At some point the system has to collapse. Each time we forestall the collapse we just build the dam a little higher. When it eventually collapsed the damage will be far more catastrophic than it would have been if the collapse happened in the past.
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11-02-2009 @ 10:07PM
Brachiate said...
You stated quite accurately something I've believed for years. Great comments.
11-03-2009 @ 10:15AM
rwol said...
WOW someone really gets it. All of you really smart traders have been conned for so long. All the brokers preaching buy and hold. Yep you listened you bought you held Year in you watched the money that was really worth somthing at the time you put it in , all the whille over the years the Fed is steady devaluing the money. And all that time the take the good money and use it to make the money they needed to finally gain total control over you. You see The same People that Print the money control the markets the private bankers. THE FEDREAL RESERVE. But who am I to tell you whats really happening I am but a conspiro-nut as you so call me. A Ron Paul KOOK, who over the years took the time to look to see if it was the truth. I also have been trying to warn everyone but now I am afraid it really is just to late.
11-02-2009 @ 4:47PM
kevin said...
Not that it couldn't happen. But you do realize, they been talking like this since last March.
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11-02-2009 @ 8:19PM
dpc2224 said...
Wow, with all that stimulus dough out there and still in the dump.? How am I supposed to pay off my $38,000 share of the national debt?
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11-03-2009 @ 12:23AM
MADDAT52 said...
Obama gives Pakistan 7.5 billion for job creation while Americans continue to lose jobs by the thousands per week. What’s wrong with this picture?
The military is reporting high recruiting numbers in the US due to the lack of any other reasonable job opportunities and there job will be fighting to protect Pakistan and Afghanistan from themselves.
Let me get this right, the only jobs available in the US are government and military but we are sending both the lives of our young people and 7.5 billion dollars to Pakistan to create jobs over there.
Call me crazy but that sounds wrong and it also sounds like another gift to Islam from the President of the United States.
We need jobs here in America not our people being hired by the military to help create jobs in Pakistan. What the hell is wrong with our executive branch and congress. We are turning into the forgotten ones while Obama nation builds in the heart of radical Islam.
The congress better act before all of the news outlets start reporting the truth about Obama or they will have a real country full of anarchy right here. These facts should enrage the American public and I believe it will if they ever hear it on all of the news stations as they should.
The left wing media is intentionally and in some cases by order of George Soros ignoring the fact that this white house is intent on the destruction of any possibility of us returning to free market capitalism and no doubt driving the US dollar through the floor.
God help us if we do not unite against the enemies in our own house and force a return to rebuilding our own economy before we try to, as Obama said himself “SAVE THE WORLD” I guess he meant everyone but us?
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11-03-2009 @ 4:27AM
Aron said...
it has nothing to do with this one person i am neither for or against Obama. But putting blame on Obama isnt the way to go its not just him making decisions. I agree completely that what is going on is terrible but there is no use in playing the blame game. I have no faith in Obama to fix these problems and the way it looks these problems are only going to be pushed farther and farther until they reach a breaking point.
11-03-2009 @ 12:26AM
MADDAT52 said...
When you stand on the shores of the oceans wave goodbye, because whats left of money in America will catch the next boat if we don't get the socialists out of our house!
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11-03-2009 @ 7:37AM
JOHN said...
Does the obvious fact of some level of economic recovery reflected in 3Q earnings mean anything to these idiotic techno-manipulators on Wall Street? We need to return to older standards for investing. Also, most of these clever children, so-called experts, have been wrong most of the time this year.
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