With today's opening bell we saw Wall Street do exactly what it was signalling yesterday afternoon, they reversed the downtrend and bounced the market up at the 108 EMA. The Nasdaq had a nice 15 point gap up at the open. At first glance everything appeared fine and we were off to the races. One problem, they gapped the market up with a market wide lift rather than a big cap lift. There is a night and day difference as to what happens after each of these two.
In a "big cap lift" gap up they all focus in on the 15 biggest capitalized stocks on the exchanges and bump them up considerably and all the rest of the thousands of stocks can be left to sit where they are at. This allows for the indexes to gap up substantially because they are market cap weighted. The 15 biggest companies are so big in market cap that when they move in unison they control the indexes no matter what is going on with all the other smaller stocks. A big cap lift is expensive to do though, there has been speculation on how much it costs to big cap gap the market. The estimates range from $50m to as high as $200m but the results are worth it because when they raise the price substantially on just the 15 biggest stocks the advance decline ratio hardly moves at all from the negative 3000 buy area because very few stocks are advancing leaving the number low with plenty of room to rally up all day long and maybe into the following day.
In a "market wide lift" (the cheap alternative, because it is quite easy for them to bump up the price any stock just a little without spending any money) they lift all stocks just a little bit to do the work of gapping up the indexes. The problem is that this also causes the advance decline net ratio to jump up to net positive 3000, the sell area. All professional traders know the play is to short big at the open when the advance decline jumps from the -2500 buy area up to the plus 3000 sell area in an instant at the open, leaving the breadth of stocks with nowhere to go but down. Also, they know to not even think about shorting a big cap lift gap up because they know they will get crushed because the market continues climbing after the gap throughout the day and possibly into the next day.
This raises the question...who was at the wheel this morning? Before Geithner's team took over the responsiblity of monitoring and helping the markets when it had to be done, you could always count on getting a big cap lift gap when we were at a critical pivot point. Since then, this will be the third time that they had a colossal error in judgement as to whether they really needed to spend the money to do a big cap lift. They paid dearly today for that error.
Today absolutely had to be a big cap lift gap up. Instead they did a market wide lift gap up causing the advance decline to be postive 3672 with the opening of the market, a shorters dream. The bears came into the market and kept coming. They quickly drove the indexes back down thru the 108 EMA causing a flood of selling programs to kick in. It took them until lunch to stop the selloff. The market sold so hard during the first 2.5 hours that the advance decline went from overbought back down to negative 2624, the buy area. The entire round trip in a period of 2.5 hours instead of the typical 2.5 days. While they spent the rest of the afternoon pumping with huge block buys, they only salvaged it slightly. We are back on shaky ground now. I'm sure even the huge short biased hedgefunds were scratching their heads over such an incredible gift for the bears.
Seems to me there are only 2 possible scenarios behind this, either Geithner is delegating key responsibilities too low on the chain or we are starting to see the effects of the government admittedly having to pull in the reins on bailout spending. I'm not sure which is more unnerving to the bulls but it is what it is.
On the 3 stocks I bought premarket, all three were high enough quality setups to weather today's market fiasco. MBI is up 1%, BYD is up a fraction of a percent, and CIGX is up 4%. On MBI and BYD the damage was substantial to their charts though and I'm going to have to seriously consider whether or not to exit them in premarket. CIGX is a special stock and I feel like it has a good chance of continuing up.
As for tomorrow's market outlook, the Dow's chart is fairly salvagable. The Nasdaq's 2 day chart is broken but it's weekly bar's chart shows today's intraday bottom was a perfect touchdown to both the weekly 5 EMA and the weekly 10 MA. On any other day that would be really bullish, but after today's bailout miscue this feels like a wait and see what the new day brings situation.
Alan
