Tuesday, February 10, 2009

Buy the Rumor, Sell to Who?

Today the Dow fell 380 points and the SPX was down over 40, blamed on Congressional testimony by Timothy Geithner and a few other things. This is more of the same that has been going on for some time, really nothing at all. Making money in the market the past 20 years has been too easy.

Buy the rumor, sell the news used to be a real play in the markets. It was a speculator ploy that the news would provide the buyers to sell out and take the profits for the next trade. Now, it is buy the rumor, sell to who because the who's that can buy have already bought. This is contrary to the past and one of the reasons this bear market is going to break more speculators than any in history. Not speculators who got trapped on the top, but speculators that are continually hit on the way down. The bag passers become the bag holders as they acquire stock in an attempt to pass it onto the next guy on the next hot chance.

We have had the greatest set up in history for this bear market, one of the least volitile periods ever between early 2003 and early 2007. There was hardly 2 really bad days in a row during this entire period, which almost doubled the SPX in 5 years. Put together with the prior decade where the market losses were never very permanent and we have a market where many are looking to step in and find a buying level that will be left behind in a few weeks, never to be seen again. The 2000-2002 bear was really one of the worst in history, but the winners appeared to be those that never got out and missed the next 5 years.

There is a misnomer that money gets out and on the sidelines when the market goes down, that it is sold down by money being pulled out. This is far from the truth as the money taken out by the seller is replaced by money paid in by the buyer and the money on the sidelines is the same. Also, the SPX is worth in excess of $8 billion a point, making the loss today around $336 billion in that index alone. This is around the amount of money that was being put into mutual funds around the year 2000 annually, so one years deposits were swallowed in a day. The losses keep piling up and faith in the market gets smaller, as those that stayed in the last time now have a loss to show for their efforts.

I believe the big thing is that companies aren't as cash flush as has been advertised. Pfizer made a takeover bid for Wyeth and the effect was to devastate Pfizer due to the size of the cash deposit needed to do the deal. There was a time this money would have been used to buy back stock, giving liquidity to speculators that were buying rumors and selling news. This money isn't there any more and the effort to get out in front of the news leads to lower prices over and over.

As the bull market continually gave longs dips to add to winning positions, this bear market is doing the same for big money shorts. The buyers buy and then they attempt to sell while bears are adding position. It was a definite that the Obama election was going to rally the market, when upon it being final, the market fell some 2000 points in a little more than 2 weeks. It rallied from there and the rally was supposed to carry over into January and get a boost from the official installation of Obama. Now the next stage is the bank bailout and the stimulous package. A friend of mine had been following a market direction service and getting good results. He told me at the beginning of the year they were calling for a nice rally to last several days. They changed their direction and were right again, but then around January 20th, they called for another rally, saying it would gather steam as news about the package passing and all that went on. I don't believe these guys, because they are using bull market readings to predict the actions of an all time bear market and that won't work. The rally lasted all of 3 days and Janaury finished with the worst loss in history for January. That makes every month down since August, even though they told the entire world that October 10th was bottom. So, October, November, December, January and now February have a good chance of being down after the bottom is in.