The Market Ticker

This is getting verrrry interesting.



That would be the SPX in the sphincter. It has fallen out of the channel, got just back into it yesterday, and now is out to the bottom today.

Now look at this, our friend the Dow



The Dow popped the channel to the upside yesterday, attempted to pull back today inside of it, failed at the top line and closed above!

And finally, our friend the Nasdaq:



Which today continued establishing a downtrend channel. (The Russell, by the way, came along for that ride)

The SELLs on both the Russell and Nasdaq continue to be posted, and in fact the MACD continues to deteriorate for both. The SPX is at Decision Day - literally - tomorrow.

And the Dow appears to be breaking out to the top.

What is someone supposed to make of this? "Primary uptrend intact"? Uhhhhhhh no.

Today we had further evidence of the economy deteriorating. The LEIs were down, making it now six straight months that they have declined on a composite basis. You didn't hear that reported very loudly, did you? Yet this, when coupled with an inverted yield curve, are two of the most reliable recession indicators available!

Now let's add a few more things. New highs and lows on the Nasdaq continue to be in the danger zone, both over 75. This is a solid indication of a major top, and it continues today as it did yesterday.

On the NYSE, we had 202/46 on new highs/lows, a big increase in new lows over yesterday, but not in the "major market top" range (both north of 70-75 meeting that criteria)

Capital flows on the indices were dislocated from the advance/decline line. The Dow posted almost a 2:1 decline on capital flows, while the S&P showed actual capital flows on the advance side were higher, while the A/D line was 9:15! The Russell 2000 was almost 2:5 on the A/D line yet capital flows were flat. This indicator is therefore flat.

One final thing - the 10 year Bond rose in yield to 4.76%, a full five ticks higher than yesterday, continuing to reinforce the market's view that real interest rates are going higher, not lower.

So as I see this is what we've got as of today:

• All three primary indices took a run at higher territory today and failed.
• Credit costs are going up, not down. If your bullish and your thesis requires falling interest rates, you're screwed and need to rethink your premise, as it appears that's simply not going to happen.
• The Nasdaq and Russell continued to establish a downward channel, and the S&P is now out of room. Therefore we are now at "Decision Time", and tomorrow may well be the day, simply because the S&P is out of room - and a thesis that 30 stocks can levitate 500 is a fanciful field of dreams.

Tomorrow, being option expiration, is only going to make this more interesting. I would not be surprised to see a 300-point swing on the DOW, although its by no means a certainty which way this goes.

If we get a break above on the S&P, then at least for that index I'm inclined to play the long side on both it and the DOW for now - but with a 2% trailing stop. The profitable trade I've had in QIDs will have its stop tightened up and if the market takes me out, so be it.

On the other hand if the break comes tomorrow for the S&P I'm adding SDS and even more QIDs.

Certainly looks like it.

Futures are down across the board.

As I said last night, the divergences showing up in this market are disturbing for the health of this "rally". Looks like we're headed lower today at the open.....

Last night after the market closed Countrywide (CFC) announced a 4 billion convertible offering. I am typically incredibly bearish on these things, and this one smells more than most.

Companies issue convertibles when they need cash and also want to entice people with something more than just a plain bond offering. The "carrot" is the conversion feature which acts kind of like a warrant - a right to the common stock at a given ratio. In this case the acquisition price is quite high, there's a discount off LIBOR (which I wouldn't buy) and, perhaps more troubling, there is the dynamic of what nearly always happens when these are issued.

That is, short interest spikes.

Why? Because if you buy the convertible then the risk you're taking on is that the stock (or perhaps the company itself!) will go severely into the ditch, destroying any value of the conversion feature and perhaps impairing your principle on the "bond" portion itself. (The nightmare, of course, is that the coupon doesn't get paid!)

Anyway, the way you hedge against this is by shorting the stock - either directly or you go into the options market and sell CALLs against the conversion "feature". You're really short now but its a "covered" write because the conversion feature "saves" you if the stock runs, yet you profit if it collapses. This creates a "neutral" position that is very-well insured against loss, yet you still have the coupon.

The problem is that a deal like this is not worth the risk unless you hedge like this, especially when we're talking about doing it under LIBOR! After all, you can just buy 10 year Treasuries with zero risk at 4.7% or so (if the government goes bust you've got bigger problems!)

Anyway, the consequence of an offering like this for common stock holders is that it is dilutive and generates instant short interest, neither of which is good for the share price.

It may also indicate desperation.

The company claims $55b in cash on the balance sheet. Is this "real" cash or is it impaired in some fashion? One must wonder - $3b looks awfully puny sitting next to a $55b pile of cash, so what's up here? And why issue this debt in part to buy back shares (although the buyback is extremely small too - $900m or thereabouts, which sounds big, but its only about 2.5 days worth of average trading volume.)

So what's going on here? My read on this is that the company has a liquidity problem, and this is the only way to get their hands on some truly liquid money fast. $3b for "general corporate purposes" eh? I suppose Mozillo expects us to all believe that they their $55b shown on the balance sheet is good money when they issue toxic crap like this into the market?

Oh, and lest anyone think the M&A rumors are real, this deal threw about a ton and a half of Arsenic on the balance sheet too. It includes a "PUT" option allowing the holders to force the company to buy back the full face value of the bonds (all $4b of them!) in the event of a change in control. This sort of "poison pill" is universally hated by the LBO guys because it effectively adds a $4b cost in sunk cash to the deal requirements. In other words, to do it you have to throw $4b down the toilet instantly for which you receive zero value!

That ought to kill the M&A rumor mill, at least for those market participants who have an IQ larger than their shoe size.

One more thing - the 10 year bond is now at 4.74%, out of the trading channel. While conventional wisdom is that this is money flowing out of treasuries and into stocks, I'm not buying that explanation. I instead believe this may be an indication that US Debt is being sold due to currency and market price concerns, and the money is starting to rotate into international currency-denominated assets.

If this is in fact happening, and I believe the argument can easily be made based on money flows for both acquisition and dispersion over the last few days, as I've noted in the blog before, then this is the credit markets doing what it always does - its presaging trouble in the equity markets.

When you add to this the bearish divergence between the Russell/Nasdaq and the DOW, I believe that this is a time to be extremely cautious. Today and tomorrow we are subject to large whipsaws due to options expiration, but ignoring this for a moment, we have the S&P getting squeezed by its channel, which is going to force either a breakdown or breakout within days.

Given the pattern here - first the Russell rolls over, then the Nasdaq, and now the S&P is weakening, leaving the DOW as the "last bastion", I would be extraordinarily cautious with long positions here and I'm completely out of my Russell and Nasdaq longs across the board - including in my IRA.

While conventional wisdom is that the S&P is going to break its all-time high, I'm not taking the bet - and if it does, that is not necessarily an indication that we will continue to run. On the contrary - we may ping off it and then roll over!

PS: The LEIs came in negative 0.5%. The index is now 0.7% below the April 2006 level. Based on revised data, we now have an official recession marker, in that it decreased through April on a composite 0.2%. Six months of declining LEIs on a composite basis is a recessionary marker and indicate that a recession is imminent.

Good luck.......