Economaton

Confirmation bias looms like a spectre today. My forecast on the 23rd called for a market bottom, and today’s broad 3% selloff counts as a point against that hypothesis. After looking at the charts, I can find a number of reasons to stick to my guns and regard the lower prices today as a great buying opportunity. Of course, the danger is that I may be seeing what I want to be seeing.

Trading psychology dictates that I must see what is happening in the markets, not what I want to see. Naturally, I want to be right about the calls I make, like everyone else, so I must guard carefully against any tendency to see only evidence that confirms my theories. On the other hand, I also have to be careful not to go too far in the other direction and ignore valid evidence that confirms my theories simply out of an abundance of caution and overcompensation. After considering the matter, I’m going to stick with my forecast for now. I did call for lots of volatility before the overall targets were hit, and today has certainly borne that portion of the forecast out. I’m going to roll the dice and still call this a buying opportunity.

We all know about the services report. The Institute for Supply Management’s index of nonmanufacturing business activity, 54.4 in December, fell to 41.9 in January. Federal Reserve Bank of Richmond President Jeffrey Lacker said still more rate cuts “ultimately may be warranted,” but that failed to stem the tide. The Dow closed down 370 points, almost 3%. The S&P was down 44 points, over 3%. The selloff was broadbased, unlike the selloff that prompted my January 23 analysis - just 17 issues in the S&P 500 closed up, and 29 of 30 Dow stocks closed lower. Financials were especially hard hit; the XLF financial sector ETF closed down over 4%, and Citigroup was down 7.43%.

But I’m not worried. The S&P top of May, 2006 was at 1326, establishing a support zone for today that has still not been breached. Stocks briefly penetrated below this level around the 23rd; we stil haven’t hit a lower low, which would be strong evidence that I was wrong. On the other hand, this most recent rally up failed to make a higher high, and we didn’t even get close to breaking the channel. The most optimistic scenario now is a period of rangebound, high volatility sideways trading here in roughly 1326 to 1400, an accumulation zone for the turn back up to come. This seems likely if the Fed continues its policy of turning a firehose full of money on the market after every little hiccup in the markets, as they’ve been doing. Remember, Bernanke built his career on the premise that the Fed could have avoided the Great Depression by simply passing out money from a helicopter.

The Charts: C, SPY, BSC..

One despairs at C. Down over 7%… pretty steady decline all day… and no redemption till the last hour, which is easily written off as a short-covering rally.

SPY, the S&P 500 tracking ETF, is pretty much a mirror of C, but with a much smaller up-bar in the last hour…. hmmm…

XLF, the financial sector ETF, lacks the late rally. The last candle was flat. Is it possible that, amidst so much turmoil in the broad market, only C was being aggressively shorted in the entire financial sector? I doubt it. Someone was buying up C to keep. This bears further investigation..

Let’s check out Bear Stearns. Bear is our bright spot. BSC’s selloff was almost entirely in the first two hours - panic sales from the economic report. The rest of the day doesn’t look so bad. In fact, it looks like a rounding bottom. Despite a high-volume candle at 3, price barely budged downards. There are wicks to the downside on most of these candles, indicating there was still selloff, and lots of others successfully fighting it, buying BSC back up. The support defined by Thursday’s low, and by the Friday before that, held nicely.

Goldman Sachs: GS looks as bad as Citigroup, sans the ending rally. But GS also halted its decline at support (in this case the low of Monday of last week.) GS was simply bought up more; it had farther to fall. Nonetheless, it posted an ugly 11% loss today. On the other hand, it was up $1.22 after hours on very thin volume..

Merrill Lynch.. MER is somewhere between C and BSC in terms of action today. The decline doesn’t look as steep, but it was still pretty steep. It did level off a bit in the afternoon, though.

Another positive sign: MBIA, the market’s whipping boy as of late, closed flat after rallying significantly despite the selloff and despite fresh news that Fitch is reconsidering MBI’s AAA credit rating. Its twin Ambac (ABK) was similarly flat.

Gold is also interesting. In the face of a looming recession with widespread doubt and a broad market selloff, one would expect a rally in gold as a flight to safety. Gold opened lower today, rallied a bit in the morning, and gave back the gains for a small loss at 2% on average volume. Euros also lost ground versus the dollar. Treasury bond yields also barely budged today- the ten year dropped 20 just 0.020, and the 6 month was flat.

This all suggests to me that the prognosis for the US economy is not as grim as is currently expected by the market, though there is undoubtedly a rough patch just ahead. We’re riding through it at full tilt. For the moment, I’m still looking at it as a bargain buying opportunity — with the caveat that the situation can change in a moment. The markets are on a hair trigger right now. Any unexpected bad news could send it careening down the slope fast. I don’t think it’s likely, but it’s very possible. The news is mixed but still slightly tilted to the positive side for now. Set your stops carefully so that you get out if you have to; meanwhile, enjoy the ride.

As always, I welcome your feedback. I’m no expert on these things, and I’d love to hear other viewpoints. Please leave a comment using the form below.