As a father of three daughters, I cannot avoid “American Idol.”  Every Tuesday and Wednesday nights during the first five months of the year, our flat screen in our family room is tuned to Fox as we watch the birth of this country’s next big star.  During the five years of our devoted viewing, no contestant has commanded as much of our attention as Sanjaya Malakar, arguably the worst singer ever to grace the Idol stage as part of the competition’s Top 24.  The reason he grabbed such a focus from the show’s audience was his resiliency to survive no matter how negative the criticism he received from the judges, most notably the highly influential Simon Cowell.  In the end, an exasperated Mr. Cowell threw up his arms and bellowed sarcastically toward the tone deaf singer after another dreadful performance, “it really doesn’t matter what I say to you, so maybe this will get you sent home.  You were terrific!”

Sure enough, America voted Sanjaya off with the aforementioned caustic commentary dooming him to a career of cruise ship crooning.  I by no means claim that my analysis of the markets compares to the talent Mr. Cowell has in finding the next recording superstar.  However, after being dreadfully and embarrassingly wrong in predicting the path of equities for the past six trading days, I throw up my arms in bewilderment in wondering what it will take stocks deservedly to bottom and claw back some of the massive losses sustained in the past few weeks.

I easily could make mention how my most reliable bearish sentiment indicators, the various average monthly NYSE TICK readings and open interest figures in the futures, have extended to levels beyond those from the fall of 2008 and moved into record territory. I could also highlight yesterday’s -1,331 closing TICK that matched the worst reading since the first trading day after 9/11.  On the fundamental side, I am tired of discussing the attraction of cheap valuations even if the forward P/E for 2012 sits sub-10.0x, tantalizingly approaching the spike down low from the first week of March, 2009, and current S&P 500 prices suggest earnings of $75 over the next 12 months, a full 30% less than estimated despite most major corporations boosting forecasts this past reporting period.  Alas, in my best British accent and with apologies to the prescient Simon Cowell for stealing his tactics, I now declare, with full tongue in cheek, equities are overvalued and overbought, and the S&P 500 merits a move down far below the 666 level it achieved over two years ago.

The spin on why the market collapses seems to find a different excuse every day.  Analysts have started to move away from the European sovereign debt crisis as Spanish and Italian bonds had their best day on record thanks to the announced ECB bond purchase program.  Surely, S&P’s downgrade of anything with the moniker “Made in the USA” had an impact, but the massive upward move in the treasury curve belies that as the true cause as well.  Arguably, the fear of a double dip recession has garnered the most attention in ascertaining the impetus for such a violent selloff.  Consequently, I supply a simple chart below comparing the corresponding moment during the 2008 crisis to today’s environment using six obvious, but critical metrics in predicting a slowdown in growth:




October, 2008

August, 2010

Nonfarm Payrolls

-159K (<0 for prior 7 months)

+117K (>0 for prior 10 months)

Jobless Claims

+497K (trending to 26 year high)

+400K (trending to 3 year low)




Rates Curve

Inverted during 2006-07

Flattening, but still steep

Corporate Finances

LEH bankrupt; credit frozen

Expanding earnings.  Record cash on balance sheet

Government Risk

Failed TARP vote; 2008 Election

Partisan gridlock; Regulation


While I recognize that the financial crisis from 2008 represented a once in a 75 year event, the current landscape suggests an economy that is slogging along, but not plunging to the depths from three years ago.  Ironically, I suppose the recent destruction in market capitalization could precipitate a reversal in the recovery by stripping the consumer of confidence to weaken demand.  I remain befuddled as the overnight futures market extending the volatility, spanning a gigantic 71 handle range in just five hours.

Investors usually can count on the Fed to backstop the current slide with some creative monetary tinkering to relieve pressure on equities and remove volatility.  Under different circumstances, I easily can visualize a win-win result from today’s meeting as the FOMC can either proclaim the recovery continues to move forward or announce a new policy measure that entails another form of accommodation.  However, thanks to their launching QE2, the central bank has a credibility issue.  Given the current tone in the market, any affirmation of the economy may be perceived as burying one’s head in the sand while any action could be construed as panic.  I suspect the Fed will decide to do nothing or, at most, eliminate any interest payments on deposits made by member banks.

I always envisioned this inevitable moment, but as I wrote two weeks ago, I imagined it would not arrive for another two years.  I still do not believe the data warrants this climax and continue to search for an imminent bottom, but traders who have made a lot more money than I have the past several days clearly disagree with me.


S&P 500 SEP E-Minis Key Technical Levels

Support:  1100.00/1099.25, 1090.00, 1080.50/79.50/77.00, 1061.00, 1050.00/48.25, 1039.25/37.75

Resistance:   1148.00/49.00, 1168.00, 1178.25, 1200.00, 1212.75/15.50


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