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Is Stock Market Now Bomb-Proof?

By Rick Ackerman Posted on April 20, 2010, 2:37 am EDT Last Updated April 20, 2010, 2:38 am EDT

We used to joke here that it might take a nuclear war to end the bear rally begun nearly 14 months ago, but we’re starting to wonder whether it’s actually true. There was a time when a one-two punch of exceptionally bad news such as occurred last week would have knocked the stock market for a loop. There was a natural disaster in the form of a volcanic eruption in Iceland that brought air travel throughout Europe practically to a halt. Then, on Friday, the SEC brought civil fraud charges against banking-sector locomotive Goldman Sachs that left the firm fighting for its reputation. The Dow responded with a mere 126-point drop, so perhaps we shouldn’t have been surprised on Monday when selling appeared to dry up with the blue chip average down just 40 points. That was about as bad as things got before shares turned higher around mid-day, eventually recouping the lost ground and then some. The Indoos closed at 11092, up 73 points.

At the opening bell on Friday, we’d taken a small short position in the form of some Diamond May 108 puts bought for 0.86. They traded as high as 1.52 within hours, allowing us to take partial profits that knocked our cost basis down to .0.46. On Monday morning, however, when slowly building strength in the underlying shares drove put options lower, we sold our remaining short position for 0.96. Since that’s more than we’d effectively paid for the puts, we were able to book a theoretical gain of 0.50 per option.

For Frustrated Bears

We have employed this same strategy over and over, getting short every time a stock or futures contract that we follow closely rallies to a promising Hidden Pivot target.  For frustrated bears in particular, this strategy has worked well (although past performance is no guarantee of future success. You can verify the results for yourself by going to the Rick’s Picks archive and looking up trades in the E-Mini S&P, which has been our main vehicle for picking tops.) This has been our way of coping with the paradox of a stock market that wants to go higher even though the underlying economy has not improved for most Americans. We don’t come to these trades with the idea of hitting a home run – only to take short positions with home-run potential whenever the technical signs seem opportune.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • Chuck Griffiths April 21, 2010, 12:15 am

    Sure it is !!! So was the Reichstag

  • gary leibowitz April 20, 2010, 10:08 pm

    Smart politial move to hit Wall Street with a warning shot along its bow as the new financial reform package takes hold. Having banks place large reserves in a pool for future bailouts is as smart as you can get.

    The market is driven right now by earnings, and the street has not disappointed. So far the script that is being followed is one that was followed in 1930, except this one is on steroids.

    Commodities has been following the stock markets good cheer for a long time now. I don’t see how they will disconnect when the equities market falls.
    Once the street realizes that deflation is the number one enemy stocks will fall hard and fast.

  • Call me Parinoid April 20, 2010, 9:55 pm

    How is GS being thrown under the bus here? This legislation is a great deal for GS and the timing of all this news make me wonder if they are not going out of thier way to outrage the public to ensure its passage.

    As for the lawsuit…I doubt that the government will prevail. This will wind up not costing GS a dollar in fines; but will instead set up a permanent bailout facility that will lower their borrowing costs below the competition forever, guaranteeing they wind up the only people in the business. They will be the new Fannie and Freddie. The taxpayer will bear all the risks and they will keep all the profits.

  • Other Paul April 20, 2010, 7:14 pm

    A lot of financially starving, income-oriented “bench-warmers” are starting to hum the theme from the movie “Bull Durham”–“Put me in coach, I’m ready to play…” no matter what inning it is, who their opponents are, or whether the umpires have been paid off.

  • strainer April 20, 2010, 7:06 pm

    Even though the market remains stubbornly bullish, at least gold is continuing to hold up well. And speaking of gold, I just saw this interesting story on a bidding war in the gold stocks sector involving Newmont Mining:

    http://www.goldalert.com/stories/Newmont-Mining-Should-Bid-for-Lihir

  • Rich April 20, 2010, 5:08 pm

    http://www.shadowstats.com/alternate_data/money-supply-charts

    Dow low so far 6449.95…

    • PhotoRadarScam April 20, 2010, 11:50 pm

      If you’re referring to my comments about money in the market, it doesn’t necessarily correlate to the money supply. My reference is to the tremendous amount of money already in the market that’s sloshing around. The money lent to the banks by the feds… the banks are reporting some great earnings, but it’s not from lending money. It’s from trading stocks…

  • Rich April 20, 2010, 5:07 pm

    Whenever someone repeats the myth we are swimming in liquidity with Helicopter Ben, we look at the Fed monetary base, down -90% in a year, far more than 2000 and remember the Crash of 2008 began with a declining M3, now -4%.

    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=BASE&s%5B1%5D%5Btransformation%5D=pc1

    More to the point Today Show today featured 18% of mortgage defaults that are voluntary “strategic” defaults, people skipping their mortgage payments to pay down other credit to raise credit rating, then bailing.

    Hardly the stuff of the American dream. This market has been rising on dreams, fumes, hope and hype, hardly a lasting foundation for American prosperity.

    The volcano in Iceland is getting bigger and badder, not exactly helpful to European economies, and Google grazing goats at HQ.

    Meanwhile, AAPL lost their new phone in either a PR stunt or a mistake, and wants it back from the company that paid $5000 to the finder.

    Are these the last days of lost morality or what?

    Until we return to the golden rule for both corporate government and everyday life, we may continue to decline and twist in the stormy wind and waves.

    The Dow peak so far is 11154.55…

  • rmsimc April 20, 2010, 4:56 pm

    IMO…The point that we are dealing with civil action as opposed to criminal charges speaks volumes as to the hidden agenda. All of us in the know realize that many in the gov’t are in bed with GS. This is the “compromise” attack on the evil wall street banking scum that Obama needs to help push through his takeover of the financial sector. He stirs up the masses with yet another example of Wall Street greed and fraud; but offers nothing more than what amounts to as a fine to his friends at GS. We all know how deep their pockets are. They are quietly happy that this is the extent of the fallout.

    My opinion of the perpetual motion machine that has been created on the Wall Steet averages is also quite jaded. I believe that the “wealth effect” that higher stock prices impart upon the masses will make all of the coming confiscation through taxation a bit easier to swallow. It is the spoonful of sugar that helps the medicine go down. Or…if you will…the opium that puts us to sleep whilst they reach into our pockets.

    Unfortunately, the beat goes on.

  • FranSix April 20, 2010, 4:44 pm

    Couple of charts which caught my interest. As with the decline in the $IRX (the discount rate) and the 3mo treasury yield closer and closer to zero, lower interest rates will have an outsize effect on all values. Policy rates are roughly double short term yields.

    http://dshort.com/charts/N225-SP500-deflation-series.html?N225-SP500-overlay-real-peaks

    http://www.nowandfutures.com/forecast.html#bear_markets

  • QQQBall April 20, 2010, 4:21 pm

    GS is about power. “If we had the financial reform bill in place, e could have prevented this from happening”.

  • photoradarscam April 20, 2010, 4:05 pm

    With low interest rates and tons of money sloshing around in the market, stocks are going to go up, and keep going up, whether it makes sense or not. The only way to stop it is to raise rates and take money out of the system.

  • Edward April 20, 2010, 3:57 pm

    Make that,

    Wait, I think I see one flying (against the FAA’s explicit prohibitions) through an ash plume coming from a small, frigid island in the north Atlantic.

  • Edward April 20, 2010, 3:55 pm

    “They” will continue to do their level best to make hoi polloi feel that the stock market is, indeed, bomb proof, but I can say with absolute certainty that there are several flocks of black swans preparing to take flight at any moment. Wait, I think I see them one flying (against the FAA’s explicit prohibitions) though an ash plume coming from a small, frigid island in the north Atlantic.

  • Mark Loeffler April 20, 2010, 2:55 am

    The news at the top of the food chain must be awful. For the government to throw GS under the bus it must mean a lot more than we know. It seems to me that the bellwether sign has been given and some unusual if not downright terror is going to be released on the financial world. Our government is doing what they do best — create a fall guy, sell it to the public, and slither into a dark corner while watching the collapse. The scum will sink to the bottom and be unseen until the poison punch has been consumed. If Barney Frank is involved you know it stinks to the heavens. The jackals are now doing the damage-control jig and it ain’t good enough for dancing with the stars. Their goose is cooked and they can feel the heat.


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