Breaking Down the Current Market Action

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"...a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1.

Lots to go over both inside and outside the market.

Nothing has changed in the market. Bullish areas remain GOLD/SILVER, AGRICULTURE, BEVERAGES, FERTILIZERS, TOBACCO, UTILITIES, HMOS, HOUSEHOLD PRODUCTS, DRUGS...and that's about it. As I have said, these areas are either inflationary or recession resistant. Is it any wonder the overall market is in trouble? This remains a classic bear cycle in both the action in the market and reaction of the pundits. Short-term aside, which remains oversold, 75-80% of stocks are in a bear market, 95% of the sectors I follow are in a bear market and most world markets are going along for the ride. This is not a garden variety correction whether or not major indices hit the 20% threshold. BUT...I do have some things to say on a short-term basis.

On a short-term basis, there may be some light at the end of the tunnel. SENTIMENT has become extremely bearish. Not only has everyone now said we are headed to or in recession, but the most recent survey from the AAII shows over 58% bears and 19% bulls. We have not seen these kind of numbers since February 03. Keep in mind, things were bottoming then. Right now, that is not the case. Also, I am now seeing spikes in the equity put/call ratio. These spikes last occurred in late February, mid-August and the mid-November lows. Keep in mind, sentiment tends to be a different animal in bear markets.

Monday is day 4 off the lows...so we are in an attempted rally here...and will be looking for a follow-through day where a major index is up 1.5% or higher on heavier volume. Of course, we will also need to see a plethora of stocks breaking out of sound bases...which is nowhere to be found right now. But a follow through could set the stage.

A few points to make:

SMALL CAP continues to lead down. As I have told you, SMALL CAPS have and would continue to be the weak link. This has been going on since May of last year. The RUSSELL and the SMALL CAP 600 almost reached the 20% number...where then and only then, it would be called a bear market.

Pundits are just not getting it when it comes to the FINANCIALS. One of the characteristics of a bear is that every time something rallies, it is called the bottom. In the past few days, FINANCIALS have received a better bid. But this is not out of strength, it is out of weakness. It is normal to bounce every now and then in a brutal bear market. I suspect the FINANCIALS could bounce back into the declining 50 day average just like they did into the 12/11 top.

RETAIL continues to crash. Yes...I said crash. When I called the top on a technical basis in July, little did I know. As usual, we are only finding out months later what the market knew back then...that the consumer is in deep doo-doo. One great example is Mens Warehouse (MW). The stock had already been trashed from $56 to $25 when they reported this week earnings would be down 60% below estimates.

On several occasions, I have told you I expected a publicly traded HOMEBUILDER or two to file bankruptcy. Put Standard Pacific(SPF) on your radar as the stock is acting like a bankruptcy is not far away.

CITI is rumored to be taking another $24 billion loss. MERRILL is rumored to be taking another $15 billion loss. What the heck is going on here? I have a few problems. Isn't there a law that says public companies are not supposed to sit on major news that could impact stock prices? If this is all true, aren't these companies violating this law? My other question has to do with the upcoming announcement that both comapnies are going to receive billions more in capital from outside entities. Why don't these companies just sell? They are already in the midst of killing shareholder wealth. Why not just sell? Every time they raise capital, they are diluting shareholders anyhow. And when will these comapnies find an abacus that works? Their calculators are certainly not.

Countrypuke Financial playing the victim. Ok...Angelo Mozilo is playing the victim. He states that they are victims of an imploding housing market. Who is he trying to kid? About two years ago, yours truly was called by Countrypuke. Their salesman told me I was nuts to keep my 4.75%-10 year fixed mortgage...and that I should get into an interest only mortgage and pocket the difference every month. When I told this blithering idiot that I could afford my mortgage and that every time I made a payment, over 75% of my payment went to equity, he told me I had no idea what I was doing. I invited this wonderful human being to sell me on his mortgage live on my radio show...for all of my audience to hear. I also told him I would email the Attorney Gneeral of Florida to listen to the show. Mr. Countrypuke never called me back. Now...I consider myself somewhat of a smart guy when it comes to loans. I can only imagine what they did to the masses. Angelo Mozilo benefitted with these crappy loans when prices were headed up. Greedy borrowers were able to make all kinds of money WITH NO MONEY DOWN...as long as prices kept going up. None could fathom that things could change. There was only one outcome once prices headed down...and that was disaster...for both the slimy lenders and the greedy borrowers. Admittedly, many borrowers were unsophisticated...and admittedly, Countrypuke was not alone.

I have stated that the next big bull market was going to be in legal fees for all the bad guys. I am letting you know I am now expecting indictments in the future. Yes...indictments. For what? Probably a long list. I am just starting to hear rumblings that many states are now on the case and for lack of a better word, are pissed at what has happened. I was thinking for a while that the culprits would be let off the hook...that the "I had no idea how bad things would get" defense would be enough. Not any more. This is going to get fun.

Lastly, I am tired of hearing from Greenspan et al that there was nothing they could do about what we are now seeing as a financial disaster. Here are a few tidbits I have found out.

Federal Reserve Governor Edward Gramlich warned Greenspan many years ago that lenders were getting out of hand...and that it was starting to feed on itself. He asked Greenspan to investigate. Nothing happened.

In 2001, Treasury official Sheila Bair tried to get outside monitors to check on lenders' compliance with loans. Nothing done!

John Gamboa and Rober Gnaizda of the Greenlining Institute warned the Fed in 2004 about what was occurring. They met with Uncle Al. They have been quoted as saying that "he just wasn't interested."

Greenspan was warned on many fronts...from many people. Nothing done. What did we get from Uncle Al? This quote that gives you a clear understanding of the buffoonery.

"Innovation has brought about a multitude of new products, such as sub-prime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in sub-prime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

I can go on and on about the missteps that were made. I am in hopes that previous mistakes are not compounded by the Fed and the regulators that missed the boat in the first place.

Gary Kaltbaum