[My apologies, for, amidst Halloween doorbell mayhem, I forgot to include the source of today’s commentary when I copied-and-pasted the article into my text editor. The essay comes from my good friend Chuck Cohen and is reprinted with his kind permission. He wrote it originally for publication at LeMetropole. The chart is my own and replaces the one Chuck had included.]

Each day more and more bottom-callers throw their hats into the ring. They include almost all of the famed prognosticators plus many of the unknown ones who are hoping to make their reputation by calling the conclusion of this painful market. Most of their optimism is based upon the nearly 50% decline in the market over the past year, plus the sense that stocks are now fairly valued based upon normal market conditions. But the problem is, these are not normal times.

There is also a gnawing sense that certain technical prerequisites that have preceded other bottoms during the past few years are lacking. I want to focus on one that we should see when the market is really ready to rally: downward gaps on bad news. If you can go back to the few times that the market has rallied significantly -- in June and July of 2006, in February 2007, and in August 2007 -- the drops that preceded the rallies served to flush out all the bears. Most of the time, the washouts took place on bad news and, very often, on Fridays. But strangely, this time most of the panics, except for the 500-pointer a few weeks ago, occurred not on the sell side, but on heavy buying.  

Where’s the Fear?

Think about it. The market has dropped almost 6,000 points, and yet the players have not been fearfully dumping stocks, but buying them out of fear they'll miss the bottom. This is incomprehensible unless there is something far worse coming down the pike. And what nearly every mainstream pundit is missing is that this is not just another fleeting bear market, but a once-in-history financial phenomenon. And yet, what the Street evidently fears most is looking foolish for having missed the bottom. (I won't even get into a comparison of the gold shares and bullion, which have experienced at least ten selling panics for each buying panic.)

In this vein, I want to go out on a limb with a prediction about where the next bomb might detonate, based on my buying-panic theory. I have occasionally mentioned Goldman Sachs, Deutsche Bank and UBS as possible triggers to a financial panic, but as I looked more closely at Citigroup, I noticed an extremely unusual and frightening sign. Take a look at its chart of the past 6 months to see what I'm getting at:

At the beginning of May, Citigroup was trading at nearly $30; it then proceeded to drop 50% in a little more than two months. But this huge decline was surprisingly orderly, and it contained only one unfilled downward gap of $1. But then, in July, following a low at $14, the stock gapped up sharply for two consecutive days, only to fall from $21 to around $13 in September. Then, amazingly, another buying panic hit with a $2 gap in the midst of it. Again, the rally failed. Then, after a slight consolidation, Citigroup tried to break out at around $24 but failed, and a downward gap of about $1.50 followed, leading to last week's 12-year low at 11.54. But the Street was impatient, and there immediately ensued two more buying panics, the second a $3 leap that pushed Citi to $19. And now, here we are at the end of October, back down near the lows once again.

Remember Bear Stearns

Do you get the picture?  Buying panics, except at major bottoms, are a negative sign. Here is one of the largest banks in the world -- one that most investors would view as high-quality -- and yet it acts as though it is on its death bed. One would expect to see the exact opposite -- i.e., panics by investors trying to avoid being bagholders in yet another potentially bankrupt financial company. But Wall Street continues to see everything through rose-colored lenses. From what I see, Citigroup could be the next disaster, possibly bringing down the whole shaky edifice of jerry-rigged bailouts. Improbable? Impossible? Too big to fail? I have two words for you: Bear Stearns. Once a revered company, its CEO pronounced it healthy on March 12 with the company’s stock selling for $60 per share. Four days later, Bear was out of business, liquidated for peanuts.  Because of this we should be prepared for anything, for there is surely much more, and much worse, to come.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Sunday, 2 November 2008 | Digg This Article