AAII sentiment came in this week at almost a 2:1 ratio of bears vs bulls. This is in line with what happened near the July 2009 and November 2009 lows. Also, AMG data reported almost a near $17 Billion outflow out of equity funds in this week alone. Combine this with last week's figure and you got a $21 Billion dollar outflow. This is the biggest outflow by far since March 2009 and is a very bullish contrary indicator because these mutual fund saps have been getting whipsawed like crazy for over a year. They shunned the rally for the most part in 2009 and then finally started getting back in a couple months ago and now they have pulled out in 2 weeks everything they put in for the past 2 months.
This behavior from the dumb money above gives me confidence that this is indeed just a correction. It is also consistent with sentiment at previous bottoms. In the ST however, "market action" as I like to call it, is not favorable. This day looks a lot like the dead cat bounce day after the flash crash.... we gapped up huge and grinded higher into the close. That bounce had some follow through the next day but ultimately it failed.
Not all gaps however get filled especially when sentiment is very favorable in the direction of the gap. There's an unfilled gap in early July which powered the market out of a bottom. Given the very favorable conditions in sentiment as per above it tells me 1 of 2 things will happen
1) The correction is over and we will simply power higher from here for the next couple weeks without any major dips.
2) Any significant pullback...even a lower low to sub 1050 won't be too damaging and will lead to a major bottom.
Bottom line.....bears are doomed one way or the other.
Thursday, May 27, 2010
Wednesday, May 26, 2010
The problem with yesterday's reversal
Ok, the market did the reversal I was looking out for. So is the bottom in? Well, I'm not so sure. The problem with the reversal was that the VIX dropped far too much. I always consider it a bearish sign when the VIX closes down significantly when the market is in the red (like Monday) or flat (yesterday).
What this may indicate is that too many traders are eager in picking the bottom. Also notice how we gapped up today to start this bounce and the VIX has collapsed back to 30 so easily. Not a good sign of a sustainable move and is more indicative of a dead cat bounce just like what happened after the flash crash.
Now, we are so oversold that there could be some follow through today and perhaps longer but I'm not so convinced we are out of the woods just yet....we're close but not quite there IMO. What also makes me suspicious of this reversal is how we conveniently bounced off of "support". I think a true bottom will be less obvious which would require another test or even break of the 1050 level first.
Perhaps I'm getting too picky and asking for too much and we did in fact bottom. It won't be the first time I've done this. That's OK, I have no qualms buying on the way up even if that means missing the bottom. However, I think unlike with the February bottom I don't think we're going to hit a bottom and go straight up making new 52 week highs shortly after. I think there will be some consolidation for the next month or 2 as all this shit in Europe blows over. These sorts of "contangions" tend to take several months to fully play out although the market will bottom ahead of its end when it senses the worst is over and enough steps have been taken to stem the crisis. It seems to me with the recent problems in Spanish banks that there could be more shoes to drop and signs of credit stress like rising LIBOR are starting to appear. That is reminiscent of 2008 isn't it? I doubt it will get as bad but rising credit stress is not a good thing.
Bottom line: We're much oversold and entitled to a bounce...perhaps even a big one. But it seems as if too many traders realize this and are too eager to bottom pick which makes me leery that we've seen the worst. Meanwhile, there appears to be more shoes dropping in Europe with no clear cut resolution to the crisis. The big $1 trillion bailout is good but it seems as if not everyone in Europe is not on the same page and the market might want even more steps to be taken like debt restructuring and a rate cut. Once again, the best thing to do is nothing IMO unless you trade in the very ST (which I typically don't).
I might end up doing nothing until after the World Cup. I want to watch it in peace!
What this may indicate is that too many traders are eager in picking the bottom. Also notice how we gapped up today to start this bounce and the VIX has collapsed back to 30 so easily. Not a good sign of a sustainable move and is more indicative of a dead cat bounce just like what happened after the flash crash.
Now, we are so oversold that there could be some follow through today and perhaps longer but I'm not so convinced we are out of the woods just yet....we're close but not quite there IMO. What also makes me suspicious of this reversal is how we conveniently bounced off of "support". I think a true bottom will be less obvious which would require another test or even break of the 1050 level first.
Perhaps I'm getting too picky and asking for too much and we did in fact bottom. It won't be the first time I've done this. That's OK, I have no qualms buying on the way up even if that means missing the bottom. However, I think unlike with the February bottom I don't think we're going to hit a bottom and go straight up making new 52 week highs shortly after. I think there will be some consolidation for the next month or 2 as all this shit in Europe blows over. These sorts of "contangions" tend to take several months to fully play out although the market will bottom ahead of its end when it senses the worst is over and enough steps have been taken to stem the crisis. It seems to me with the recent problems in Spanish banks that there could be more shoes to drop and signs of credit stress like rising LIBOR are starting to appear. That is reminiscent of 2008 isn't it? I doubt it will get as bad but rising credit stress is not a good thing.
Bottom line: We're much oversold and entitled to a bounce...perhaps even a big one. But it seems as if too many traders realize this and are too eager to bottom pick which makes me leery that we've seen the worst. Meanwhile, there appears to be more shoes dropping in Europe with no clear cut resolution to the crisis. The big $1 trillion bailout is good but it seems as if not everyone in Europe is not on the same page and the market might want even more steps to be taken like debt restructuring and a rate cut. Once again, the best thing to do is nothing IMO unless you trade in the very ST (which I typically don't).
I might end up doing nothing until after the World Cup. I want to watch it in peace!
Monday, May 24, 2010
moment of truth comming soon......
First of all, a mea culpa for my prediction that the fat finger bottom wouldn't be retested. I was clearly wrong about that. I didn't get punished for my call however because I don't bottom pick when "market action" stinks. By market action I'm not just talking about if the market is going up or down but rather the way it goes up or down. For instance, when the market rolls over from a high and starts heading down and then gets slammed for greater than 1.5% closing near the low of the day, that's what I call “poor market action” because the only thing that prevented more downside was the closing bell. Sometimes you get a dead cat bounce the next day but new lows or a retest ultimately tend to happen.
When it comes to trying to pick a bottom during panic conditions, what I look for are days when the market gets slammed after already in the midst of a downward spiral and then reverses course by the end of day finishing in the green or flat. If you look at ST and even LT bottoms, they tend to happen this way (take a look at the Feb 5th bottom as an example) We did see such a reversal day on Friday but the problem with that reversal was that the gap down was immediately bought which to me doesn't indicate the white knuckle fear you see with this reversal bottom pattern I'm talking about. Typically a "true" reversal happens later in the trading day.
Now, I'm not going to bother talking about the specific fundamental issues about Europe. The way I look at it, you have to decide whether you believe this is a similar to the subprime crisis whereby it will lead to a chain of events that create another 2008 style collapse or you believe that this crisis can be contained similar to what happened in 1997 with the Asian Contagion and in 1998 when Russia defaulted causing the collapse of LTCM.
Let's look at historical data for some clues and see how it matches up to the current crisis.
At the height of the crises in 1997 and 1998 we saw the market drop about 13% and 21% respectively from the peak to the intraday low. So far we've seen about a 13.5% drop.
At the peak of the fear in the market ,the VIX (which was calculated differently at the time, ticker is now VXO) hit 55 and 60 in 1997 and 1998 respectively. So far we've hit as high as 45 (using VXO).
Ok, so when you look at the % decline and VIX spike we've seen thus far and compare it to the crises in 1997 and 1998, it suggests there’s potential to go down more but don't kid yourself ... an extreme ovesold market, 45 VIX, put call ratios soaring to the moon and government bonds yields collapsing shows we have massive fear in the market to make a important bottom right here right now. But again, until market action confirms it would be premature to call one just yet.
The best thing to do right now is to be patient and let the dust settle for a little bit longer. All the ingredients for a bottom are there but market action still needs to confirm. It’s not going to surprise me to see 1050-1055 get retested at least once but we are very oversold right now and so some sort of bounce wouldn’t surprise me either. Let’s also keep in mind that the market can in fact go lower as it did in the 1998 and still be considered a correction within a bull market. I still think this is just a correction but if it’s not I’m hopeful I will be able to determine so by carefully observing market action.
When it comes to trying to pick a bottom during panic conditions, what I look for are days when the market gets slammed after already in the midst of a downward spiral and then reverses course by the end of day finishing in the green or flat. If you look at ST and even LT bottoms, they tend to happen this way (take a look at the Feb 5th bottom as an example) We did see such a reversal day on Friday but the problem with that reversal was that the gap down was immediately bought which to me doesn't indicate the white knuckle fear you see with this reversal bottom pattern I'm talking about. Typically a "true" reversal happens later in the trading day.
Now, I'm not going to bother talking about the specific fundamental issues about Europe. The way I look at it, you have to decide whether you believe this is a similar to the subprime crisis whereby it will lead to a chain of events that create another 2008 style collapse or you believe that this crisis can be contained similar to what happened in 1997 with the Asian Contagion and in 1998 when Russia defaulted causing the collapse of LTCM.
Let's look at historical data for some clues and see how it matches up to the current crisis.
At the height of the crises in 1997 and 1998 we saw the market drop about 13% and 21% respectively from the peak to the intraday low. So far we've seen about a 13.5% drop.
At the peak of the fear in the market ,the VIX (which was calculated differently at the time, ticker is now VXO) hit 55 and 60 in 1997 and 1998 respectively. So far we've hit as high as 45 (using VXO).
Ok, so when you look at the % decline and VIX spike we've seen thus far and compare it to the crises in 1997 and 1998, it suggests there’s potential to go down more but don't kid yourself ... an extreme ovesold market, 45 VIX, put call ratios soaring to the moon and government bonds yields collapsing shows we have massive fear in the market to make a important bottom right here right now. But again, until market action confirms it would be premature to call one just yet.
The best thing to do right now is to be patient and let the dust settle for a little bit longer. All the ingredients for a bottom are there but market action still needs to confirm. It’s not going to surprise me to see 1050-1055 get retested at least once but we are very oversold right now and so some sort of bounce wouldn’t surprise me either. Let’s also keep in mind that the market can in fact go lower as it did in the 1998 and still be considered a correction within a bull market. I still think this is just a correction but if it’s not I’m hopeful I will be able to determine so by carefully observing market action.
Friday, May 21, 2010
Wahappend?
Out of town for 2 days for some R&R and I miss out on all this mayhem! Lots of catching up to do it seems!
Wednesday, May 19, 2010
Germans vs. speculators
German chancellor Angela Merkel has been making strong statements lately along with spearheading decisive action in defense of the euro and european bonds. She said she feels it's her vs. the speculators. If the speculators could respond I'm sure it would be along the same lines as to what Mr. Burns says here below
I sense we are getting close to a bottom here. The panic is palpable. The put/call ratio is off the charts right now at 1.66 and the VIX is closing in on 40 again. As always though, market action needs to confirm and it's not yet. I'm getting a shopping list of stocks prepared.
I sense we are getting close to a bottom here. The panic is palpable. The put/call ratio is off the charts right now at 1.66 and the VIX is closing in on 40 again. As always though, market action needs to confirm and it's not yet. I'm getting a shopping list of stocks prepared.
Monday, May 17, 2010
A replay of 1997 or 2007? I'm thinking the former
Last Monday's reflexive rally was retraced as I expected. Now the question is this… is there more retracement to come or was today's reversal the end of it? My gut says to be suspicious of this reversal....I still think one or 2 stabs lower lie ahead somewhere but I don't say that with great conviction. Both sides of the market look dangerous in the ST.
We got word last week that there was no apparent "fat finger" that caused the meltdown on May 6th. That should be concerning to the bulls because it "legitimizes" that move down and strongly suggested a challenge to at least 1100ish. This is what I believed coming into this week. Now, was today's move to 1115 "enough" ? Again, I'd have to say no but if it turns out to be the case I'm not going to be surprised much. I know this sounds wishy washy but that's just the way I feel about things. Bottom line....I'd wait for a few more cards to be played before making any big bets.
Based upon what I'm hearing in the financial media and from all the message board/blogger bears I track, I'm getting a sense of dread that reminds me a lot of late September 2009. At that time the market was in free fall on its way to dropping over 30% in 10 trading days on top of losses already accumulated YTD and we all know why...but this time things are a lot different. This time the economy has been strengthening for months not weakening and the market had been trending up for months not down. People are calling this a "European Debt Crisis". Typically such a phrase would be associated with a market that's been collapsing, yet here we have market that is down less than 10% from its most recent peak only 3 weeks ago. A market that since hitting bottom 14 months ago is still up some 70% despite this drop. Yet, when I listen to all these bears chest thumping saying "I told you so" I laugh and say told you what? You've been getting humiliated and slaughtered at least since the market broke out from 850 back in the spring of 2009 if not lower. You've been saying I told you so during every single pullback since this bull market started and when you took it up the kiester, most of you have shown no humility, never admitting to being wrong. Bears, you have a long way to go before you can truly say I told you so and even if you can, most of you have lost so much money shorting these past several months you won't even be able to profit from it much! Look, don't think I'm taking this "crisis" lightly. Never take anything lightly.
The way I see the market is like this...we got 2 possible scenarios here.
1) The sovereign debt crisis in Europe is just the beginning of an even larger crisis just like subprime was the begining in 2007. Sooner or later it's going to spread to the larger countries in Europe and eventually to the USA. All of this is going to derail the recovery and send the markets down to retest or break the 666 low.
2) The sovereign debt crisis will be dealt with without too much damage in the markets much like the Asian Contagion in 1997. The strengthening economy will overpower this crisis and naturally help reduce deficits.
Keep in mind the Asian contagion took about several months to completely pass from the first symptom to the last. Here's a good summary and time line of it. Notice the text I have bolded....
Early May (1997) - Japan hints that it might raise interest rates to defend the yen. The threat never materializes, but it shifts the perceptions of global investors who begin to sell Southeast Asian currencies and sets off a tumble both in currencies and local stock markets.
July 2 - After using $33 billion in foreign exchange, Thailand announces a managed float of the baht. The Philippines intervenes to defend its peso.
July 18 - IMF approves an extension of credit to the Philippines of $1.1 billion.
July 24 - Asian currencies fall dramatically. Malaysian Prime Minister Mahathir attacks "rogue speculators" and later points to financier George Soros. Aug. 13-14 - The Indonesian rupiah comes under severe pressure. Indonesia abolishes its system of managing its exchange rate through the use of a band.
Aug. 20 - IMF announces $17.2 billion support package for Thailand with $3.9 billion from the IMF.
Aug. 28 - Asian stock markets plunge. Manila is down 9.3%, Jakarta 4.5%.
Sep. 4 - The peso, Malaysian ringgit, and rupiah continue to fall.
Sep. 20 - Mahathir tells delegates to the IMF/World Bank annual conference in Hong Kong that currency trading is immoral and should be stopped.
Sep. 21 - George Soros says, "Dr Mahathir is a menace to his own country."
Oct. 8 - Rupiah hits a low; Indonesia says it will seek IMF assistance.
Oct. 14 - Thailand announces a package to strengthen its financial sector.
Oct. 20-23 - The Hong Kong dollar comes under speculative attack; Hong Kong aggressively defends its currency. The Hong Kong stock market drops, while Wall Street and other stock markets also take severe hits.
Oct. 28+ - The value of the Korean won drops as investors sell Korean stocks.
Nov. 5 - The IMF announces a stabilization package of about $40 billion for Indonesia. The United States pledges a standby credit of $3 billion.
Nov. 3-24 - Japanese brokerage firm (Sanyo Securities), largest securities firm (Yamaichi Securities), and 10* largest bank (Hokkaido Takushoku) collapse.
Nov. 21 - South Korea announces that it will seek IMF support.
Nov 25 - At the APEC Summit, leaders of the 18 Asia Pacific economies endorse a framework to cope with financial crises.
Dec 5 - Malaysia imposes tough reforms to reduce its balance of payments deficit. Dec 3 - Korea and IMF agree on $57 billion support package.
Dec 18 - Koreans elect opposition leader Kim, Dae-jung as new President.
Dec 25 - IMF and others provide $10 billion in loans to South Korea.
Jan 6 - Indonesia unveils new budget that does not appear to meet IMF austerity conditions. Value of rupiah drops.
Jan 8 - IMF and S. Korea agree to a 90-day rollover of short-term debt.
Jan 12 - Peregrine Investments Holdings of Hong Kong collapses. Japan discloses that its banks carry about $580 billion in bad or questionable loans.
Jan 15 - IMF and Indonesia sign an agreement strengthening economic reforms.
Jan 29 - South Korea and 13 international banks agree to convert $24 billion in short-term debt, due in March 1998, into government-backed loans.
Jan 31 - South Korea orders 10 of 14 ailing merchant banks to close.
Feb 2- The sense of crisis in Asia ebbs. Stock markets continue recovery.
The first point I highlighted sounds a lot like the comments the Greece President has made when complained about speculators being responsible for the trashing of Greek government debt. By the way, it's always a red flag when you see a president of a company (or in this case a country) blaming shorts like this. Typically this means company is indeed in trouble.
The second point I highlighted is very similar to what Greece is in the process of doing now and which I'm sure the other PIIGS will do as well.
The third point I highlighted shows the similar use of a word commonly heard these days..."austerity".
Now, here's what the S&P did from May 1997 - February 1998
Here's the market since December
I know there are some major differences when you compare the facts of Asian Contagion of 1997 to that of today's European Contagion and I also know that no two charts ever play out the same way wiggle for wiggle even if there were very similar facts, but I can't help but notice the amazing similarity in the charts and I have highlighted a major one so far.
Notice how in both periods the US market was able to ignore/shrug off initial symptoms of the crisis making new highs but then as the months passed they eventually became affected by it.
Come late October 1997 as the Hong Kong dollar came under attack, fear finally hit the US markets as it dropped 12% in less than a week. A similar thing happened in the US in early May with the "flash crash".
That very sharp drop in late October 1997 never got retested but there was indeed a partial retracement of the move from the low. After that the market chopped sideways for a few months as the crisis was unfolding and being dealt with. Are we going to see a similar outcome this time around? Time will tell...but I think yes. But just keep in mind again that no two charts ever play out exactly the same way wiggle for wiggle...but so far we are seeing quite a similarity.
Ultimately, the Asian Contagion didn't take down the rest of the world not only because of the bailout but because the underlying strong economic momentum which was in place prior to it was not overly dependent on what was happening in small Asian countries such as Malaysia, Thailand, Hong Kong and South Korea. Those were the equivalent to today's PIIGS. Now, obviously, there are other issues at stake here like the viability of the Euro and the threat of a crisis in confidence of all sovereign debt issued by nations running large deficits which would therefore result in a systematic crisis of confidence similar to what we saw in the fall of 2008. I won't deny that this is a serious threat and something like that happening could overwhelm all of the LT contrarian bullish underpinnings I've been talking about here since last spring.
But let's keep in mind the following...government budget conditions tend to look their worst towards the end of a recession and just after a recession and they tend to look their best just prior to one. Therefore, there's a very good chance these deficit concerns will go away on their own as the economy continues to recover (since tax receipts go up and social assistance spending goes down).
There was a time when the US was running a government surplus and the unemployment rate was 3%. Ask the average Joe if he would invest in stocks when the economy is in such circumstances. He would say "absolutely yes". Guess what year it was when this was the case.....1999. Sure enough, everyone loved to invest. The economic sky was blue as the mainstream penetration of the internet had dawned a new era of permanent prosperity. We all know how that story ended.
Now we have a situation where the unemployment rate is 10% and there are deficits as far as the eye can see. Even despite the a rip roaring 13 month 80% rally the average Joe is shunning stocks are evident with mutual fund flows. How do you think this story will end? Perhaps a lot better than what people think.
OK, let me play devil's advocate (or should I say the bear's advocate) here. I think I've made a solid case over the past several months that the general public is still quite bearish about the market which in turn has made me LT bullish. What could make me wrong about my LT bullish contrarian thesis? It would have to be this...and this is not pretty. For me to be wrong it would mean that the crash in 2008 was a mortal wound to the financial system as we know it and the seeds have been sowed for its imminent collapse. This historic bull run that we've experienced was simply a last hurrah, a final reprieve, before the collapse that was already set in motion, would continue to unfold. If this were the case, it would be wrong to view the ingrained bearishness of the public as a signal to be bullish but rather it simply reflects the reality of an economy and stock market that is critically broken and can't be fixed until a complete wipeout has occurred.
The above "doomed market" scenario is always something I have in the back of my head. I respect all possibilities in the market because if anything can happen eventually it will. But here's why I don't think we are in the above scenario. For the above to be true, it would have to mean that the 14 months 80% rise in the stock market was one big giant bear market rally that just ended. There has simply never been a single time in history that a bear market rally went this high for this long....not even close. This run up we have seen has been accompanied by a massive surge in earnings which "legitimizes it" not to mention tremendous skepticism from the public which only further confirms it given that the public have been wrong in the past when they do this.
Here's another chart which makes me very doubtful that we've seen a major top in the market
Bears like Prechter say that there was so much optimism leading to this top but can you honestly believe that when you look at this chart? Yes, there were signs of froth with option traders and newsletter sentiment but those are only applicable to the short term. Longer term sentiment drives longer term moves and if you look at things like mutual fund flows and consumer confidence you will get a much better handle on sentiment from a LT perspective and right now LT sentiment is nowhere close to signaling optimism....it still heavily favors the bulls.
OK so what now? Well, I suspect we may not be done yet on the downside here but we are close. ST measures of sentiment such as the put/call ratio, Rydex data and sentiment survey's are either at or close to levels that were reached during previous correction lows of the past 12 months. If we did put in a bottom Monday and we start heading up again, it's likely that the market will chop sideways for the next couple of months as the drama in Europe unfolds in addition to other concerns that may pop up such as a slowing China. Such market action would be consistent with what took place during the Asian Contagion and would also be consistent with the consolidation phase of a new bull market after it completes its initial thrust from a bear market low.
What would clearly invalidate this bullish resolution? A break below 1000.
We got word last week that there was no apparent "fat finger" that caused the meltdown on May 6th. That should be concerning to the bulls because it "legitimizes" that move down and strongly suggested a challenge to at least 1100ish. This is what I believed coming into this week. Now, was today's move to 1115 "enough" ? Again, I'd have to say no but if it turns out to be the case I'm not going to be surprised much. I know this sounds wishy washy but that's just the way I feel about things. Bottom line....I'd wait for a few more cards to be played before making any big bets.
Based upon what I'm hearing in the financial media and from all the message board/blogger bears I track, I'm getting a sense of dread that reminds me a lot of late September 2009. At that time the market was in free fall on its way to dropping over 30% in 10 trading days on top of losses already accumulated YTD and we all know why...but this time things are a lot different. This time the economy has been strengthening for months not weakening and the market had been trending up for months not down. People are calling this a "European Debt Crisis". Typically such a phrase would be associated with a market that's been collapsing, yet here we have market that is down less than 10% from its most recent peak only 3 weeks ago. A market that since hitting bottom 14 months ago is still up some 70% despite this drop. Yet, when I listen to all these bears chest thumping saying "I told you so" I laugh and say told you what? You've been getting humiliated and slaughtered at least since the market broke out from 850 back in the spring of 2009 if not lower. You've been saying I told you so during every single pullback since this bull market started and when you took it up the kiester, most of you have shown no humility, never admitting to being wrong. Bears, you have a long way to go before you can truly say I told you so and even if you can, most of you have lost so much money shorting these past several months you won't even be able to profit from it much! Look, don't think I'm taking this "crisis" lightly. Never take anything lightly.
The way I see the market is like this...we got 2 possible scenarios here.
1) The sovereign debt crisis in Europe is just the beginning of an even larger crisis just like subprime was the begining in 2007. Sooner or later it's going to spread to the larger countries in Europe and eventually to the USA. All of this is going to derail the recovery and send the markets down to retest or break the 666 low.
2) The sovereign debt crisis will be dealt with without too much damage in the markets much like the Asian Contagion in 1997. The strengthening economy will overpower this crisis and naturally help reduce deficits.
Keep in mind the Asian contagion took about several months to completely pass from the first symptom to the last. Here's a good summary and time line of it. Notice the text I have bolded....
Early May (1997) - Japan hints that it might raise interest rates to defend the yen. The threat never materializes, but it shifts the perceptions of global investors who begin to sell Southeast Asian currencies and sets off a tumble both in currencies and local stock markets.
July 2 - After using $33 billion in foreign exchange, Thailand announces a managed float of the baht. The Philippines intervenes to defend its peso.
July 18 - IMF approves an extension of credit to the Philippines of $1.1 billion.
July 24 - Asian currencies fall dramatically. Malaysian Prime Minister Mahathir attacks "rogue speculators" and later points to financier George Soros. Aug. 13-14 - The Indonesian rupiah comes under severe pressure. Indonesia abolishes its system of managing its exchange rate through the use of a band.
Aug. 20 - IMF announces $17.2 billion support package for Thailand with $3.9 billion from the IMF.
Aug. 28 - Asian stock markets plunge. Manila is down 9.3%, Jakarta 4.5%.
Sep. 4 - The peso, Malaysian ringgit, and rupiah continue to fall.
Sep. 20 - Mahathir tells delegates to the IMF/World Bank annual conference in Hong Kong that currency trading is immoral and should be stopped.
Sep. 21 - George Soros says, "Dr Mahathir is a menace to his own country."
Oct. 8 - Rupiah hits a low; Indonesia says it will seek IMF assistance.
Oct. 14 - Thailand announces a package to strengthen its financial sector.
Oct. 20-23 - The Hong Kong dollar comes under speculative attack; Hong Kong aggressively defends its currency. The Hong Kong stock market drops, while Wall Street and other stock markets also take severe hits.
Oct. 28+ - The value of the Korean won drops as investors sell Korean stocks.
Nov. 5 - The IMF announces a stabilization package of about $40 billion for Indonesia. The United States pledges a standby credit of $3 billion.
Nov. 3-24 - Japanese brokerage firm (Sanyo Securities), largest securities firm (Yamaichi Securities), and 10* largest bank (Hokkaido Takushoku) collapse.
Nov. 21 - South Korea announces that it will seek IMF support.
Nov 25 - At the APEC Summit, leaders of the 18 Asia Pacific economies endorse a framework to cope with financial crises.
Dec 5 - Malaysia imposes tough reforms to reduce its balance of payments deficit. Dec 3 - Korea and IMF agree on $57 billion support package.
Dec 18 - Koreans elect opposition leader Kim, Dae-jung as new President.
Dec 25 - IMF and others provide $10 billion in loans to South Korea.
Jan 6 - Indonesia unveils new budget that does not appear to meet IMF austerity conditions. Value of rupiah drops.
Jan 8 - IMF and S. Korea agree to a 90-day rollover of short-term debt.
Jan 12 - Peregrine Investments Holdings of Hong Kong collapses. Japan discloses that its banks carry about $580 billion in bad or questionable loans.
Jan 15 - IMF and Indonesia sign an agreement strengthening economic reforms.
Jan 29 - South Korea and 13 international banks agree to convert $24 billion in short-term debt, due in March 1998, into government-backed loans.
Jan 31 - South Korea orders 10 of 14 ailing merchant banks to close.
Feb 2- The sense of crisis in Asia ebbs. Stock markets continue recovery.
The first point I highlighted sounds a lot like the comments the Greece President has made when complained about speculators being responsible for the trashing of Greek government debt. By the way, it's always a red flag when you see a president of a company (or in this case a country) blaming shorts like this. Typically this means company is indeed in trouble.
The second point I highlighted is very similar to what Greece is in the process of doing now and which I'm sure the other PIIGS will do as well.
The third point I highlighted shows the similar use of a word commonly heard these days..."austerity".
Now, here's what the S&P did from May 1997 - February 1998
Here's the market since December
I know there are some major differences when you compare the facts of Asian Contagion of 1997 to that of today's European Contagion and I also know that no two charts ever play out the same way wiggle for wiggle even if there were very similar facts, but I can't help but notice the amazing similarity in the charts and I have highlighted a major one so far.
Notice how in both periods the US market was able to ignore/shrug off initial symptoms of the crisis making new highs but then as the months passed they eventually became affected by it.
Come late October 1997 as the Hong Kong dollar came under attack, fear finally hit the US markets as it dropped 12% in less than a week. A similar thing happened in the US in early May with the "flash crash".
That very sharp drop in late October 1997 never got retested but there was indeed a partial retracement of the move from the low. After that the market chopped sideways for a few months as the crisis was unfolding and being dealt with. Are we going to see a similar outcome this time around? Time will tell...but I think yes. But just keep in mind again that no two charts ever play out exactly the same way wiggle for wiggle...but so far we are seeing quite a similarity.
Ultimately, the Asian Contagion didn't take down the rest of the world not only because of the bailout but because the underlying strong economic momentum which was in place prior to it was not overly dependent on what was happening in small Asian countries such as Malaysia, Thailand, Hong Kong and South Korea. Those were the equivalent to today's PIIGS. Now, obviously, there are other issues at stake here like the viability of the Euro and the threat of a crisis in confidence of all sovereign debt issued by nations running large deficits which would therefore result in a systematic crisis of confidence similar to what we saw in the fall of 2008. I won't deny that this is a serious threat and something like that happening could overwhelm all of the LT contrarian bullish underpinnings I've been talking about here since last spring.
But let's keep in mind the following...government budget conditions tend to look their worst towards the end of a recession and just after a recession and they tend to look their best just prior to one. Therefore, there's a very good chance these deficit concerns will go away on their own as the economy continues to recover (since tax receipts go up and social assistance spending goes down).
There was a time when the US was running a government surplus and the unemployment rate was 3%. Ask the average Joe if he would invest in stocks when the economy is in such circumstances. He would say "absolutely yes". Guess what year it was when this was the case.....1999. Sure enough, everyone loved to invest. The economic sky was blue as the mainstream penetration of the internet had dawned a new era of permanent prosperity. We all know how that story ended.
Now we have a situation where the unemployment rate is 10% and there are deficits as far as the eye can see. Even despite the a rip roaring 13 month 80% rally the average Joe is shunning stocks are evident with mutual fund flows. How do you think this story will end? Perhaps a lot better than what people think.
OK, let me play devil's advocate (or should I say the bear's advocate) here. I think I've made a solid case over the past several months that the general public is still quite bearish about the market which in turn has made me LT bullish. What could make me wrong about my LT bullish contrarian thesis? It would have to be this...and this is not pretty. For me to be wrong it would mean that the crash in 2008 was a mortal wound to the financial system as we know it and the seeds have been sowed for its imminent collapse. This historic bull run that we've experienced was simply a last hurrah, a final reprieve, before the collapse that was already set in motion, would continue to unfold. If this were the case, it would be wrong to view the ingrained bearishness of the public as a signal to be bullish but rather it simply reflects the reality of an economy and stock market that is critically broken and can't be fixed until a complete wipeout has occurred.
The above "doomed market" scenario is always something I have in the back of my head. I respect all possibilities in the market because if anything can happen eventually it will. But here's why I don't think we are in the above scenario. For the above to be true, it would have to mean that the 14 months 80% rise in the stock market was one big giant bear market rally that just ended. There has simply never been a single time in history that a bear market rally went this high for this long....not even close. This run up we have seen has been accompanied by a massive surge in earnings which "legitimizes it" not to mention tremendous skepticism from the public which only further confirms it given that the public have been wrong in the past when they do this.
Here's another chart which makes me very doubtful that we've seen a major top in the market
OK so what now? Well, I suspect we may not be done yet on the downside here but we are close. ST measures of sentiment such as the put/call ratio, Rydex data and sentiment survey's are either at or close to levels that were reached during previous correction lows of the past 12 months. If we did put in a bottom Monday and we start heading up again, it's likely that the market will chop sideways for the next couple of months as the drama in Europe unfolds in addition to other concerns that may pop up such as a slowing China. Such market action would be consistent with what took place during the Asian Contagion and would also be consistent with the consolidation phase of a new bull market after it completes its initial thrust from a bear market low.
What would clearly invalidate this bullish resolution? A break below 1000.
Monday, May 10, 2010
a few comments on today's action
Ok we got the gap up and flat line which to be honest, is indicative of dead cat bounce behavior. But as I said before, this could be the reflexive rally that once retraced leads to the rally that gets us out from the bottom.
An interesting thing about today was that the put/call ratio closed at 1.02 showing tremendous skepticism since such high readings are normally seen when the market is down big not up big. This suggests that this bounce could still keep on going or if we drop, strongly re-inforces that a bottoming process will be in making as pessimism like this continues to rapidily build. THe market is still oversold despite this monsterous rally believe it or not. This is why I don't belive we will retest that "fat finger" low if the market starts heading down again.
I tuned into BNN a lot today to get an idea as to what the "gurus" they interviewed thought about this latest bailout. Everyone was skeptical basically saying that at best it's a temporary fix and that another crisis could still lurk. The LT wall of worry is still well in tact.
An interesting thing about today was that the put/call ratio closed at 1.02 showing tremendous skepticism since such high readings are normally seen when the market is down big not up big. This suggests that this bounce could still keep on going or if we drop, strongly re-inforces that a bottoming process will be in making as pessimism like this continues to rapidily build. THe market is still oversold despite this monsterous rally believe it or not. This is why I don't belive we will retest that "fat finger" low if the market starts heading down again.
I tuned into BNN a lot today to get an idea as to what the "gurus" they interviewed thought about this latest bailout. Everyone was skeptical basically saying that at best it's a temporary fix and that another crisis could still lurk. The LT wall of worry is still well in tact.
Fear is the best motivator
On April 27th I concluded by saying Until some sort of blanket bailout package for PIIGS is announced or is suspected, be on the defensive here in the ST
Well, it turns out that this was good advice. I believed at the time that the entire PIIGS problem, not just Greece, was bothering the market and had to be addressed. I wasn't sure about the time line but I figured before the summer would be over it would be addressed completely. For a while the market seemed to have ignored PIIGS (don't ask why...it just did...doing what it does best making fool of as many people as possible i.e. the bears, before finally turning). Last week's meltdown, fat finger or not, was triggered by the market's recognition of contagion fears. The market didn't care that Greece agreed to the bailout, it was concerned about who was next to buckle.
If there is anything government authorities learned is that doing nothing (ex. Lehman Bros.) is far worse than the "moral hazard" implications of bailouts. The lesson learned from 2008 is that dragging your feet or doing nothing results in severe punishment while bold action gets rewarded. In 2008 it took a series of unprecedented bold steps to stem the crisis. At first governments were in denial, especially in Europe. I remember in summer of 2008 hearing ramblings on TV about how Europe wanted to raise rates. I remember shouting at the TV at work calling them idiots. The markets were yelling and screaming that the economy was in danger and these clowns were talking about raising rates! lol! What bafoons I thought. Well, they certainly got a rude awakening.
Ever since the recovery started last year, governments around the world still worry about another 2008. Put yourself in their shoes. We were basically at the brink of complete collapse in the financial system. Can you imagine the intense fear and stress that government authorities experienced? A lot of the bold, aggressive action they took was experimental and desperate. I'm sure even they had strong doubts it would work....but it did! They must have felt they pulled off a miracle and are so very grateful that the markets have calmed and the economy has turned. So, do you think they are going to get complacent and just sit there when a contagion threat like the PIIGS comes along after what they've been through just 2 years ago? Not a chance. Fear folks, fear. Memories of 2008 are still very fresh.
This weekend the EU has drafted a near 1 Trillion loan package available to any troubled European nation. This is exactly the type of "blanket bailout" I was expecting. This is bold action and why? Fear. The market action last week fat finger or not was reminiscent of late September 2008. Unlike before, the EU took their cue from the market and responded quickly and boldly. Quicker and bolder than even I thought.
So, what will the market do? Well, futures are through the roof tonight. As I said Friday, the market was extremely ST oversold and there was outright fear in the market place signaling an imminent bottom. This catalyst is certainly significant to trigger a bounce but will that be all for this decline? Well, typically at a bottom what you see a reflexive rally followed by a move down again...typically a retest or lower low. Given the unusual circumstances of the low put in (SPX 1065) we probably won't see it get tested, so therefore, I would look for a rally followed by move lower towards perhaps current levels or slightly lower (1100 or so). No matter what, I'm simply going to wait for my favorite indicators to give the green light. Some of them already have given it....other's haven't because it takes some time for them to turn from negative to positive and vice versa.
But to play the devil's advocate, we need time to see how the market responds to this bailout. And what about the UK? I don't think they are included in this bailout package (to be honest I don't know much about the details of it right now).
Should be for some interesting days ahead....
Well, it turns out that this was good advice. I believed at the time that the entire PIIGS problem, not just Greece, was bothering the market and had to be addressed. I wasn't sure about the time line but I figured before the summer would be over it would be addressed completely. For a while the market seemed to have ignored PIIGS (don't ask why...it just did...doing what it does best making fool of as many people as possible i.e. the bears, before finally turning). Last week's meltdown, fat finger or not, was triggered by the market's recognition of contagion fears. The market didn't care that Greece agreed to the bailout, it was concerned about who was next to buckle.
If there is anything government authorities learned is that doing nothing (ex. Lehman Bros.) is far worse than the "moral hazard" implications of bailouts. The lesson learned from 2008 is that dragging your feet or doing nothing results in severe punishment while bold action gets rewarded. In 2008 it took a series of unprecedented bold steps to stem the crisis. At first governments were in denial, especially in Europe. I remember in summer of 2008 hearing ramblings on TV about how Europe wanted to raise rates. I remember shouting at the TV at work calling them idiots. The markets were yelling and screaming that the economy was in danger and these clowns were talking about raising rates! lol! What bafoons I thought. Well, they certainly got a rude awakening.
Ever since the recovery started last year, governments around the world still worry about another 2008. Put yourself in their shoes. We were basically at the brink of complete collapse in the financial system. Can you imagine the intense fear and stress that government authorities experienced? A lot of the bold, aggressive action they took was experimental and desperate. I'm sure even they had strong doubts it would work....but it did! They must have felt they pulled off a miracle and are so very grateful that the markets have calmed and the economy has turned. So, do you think they are going to get complacent and just sit there when a contagion threat like the PIIGS comes along after what they've been through just 2 years ago? Not a chance. Fear folks, fear. Memories of 2008 are still very fresh.
This weekend the EU has drafted a near 1 Trillion loan package available to any troubled European nation. This is exactly the type of "blanket bailout" I was expecting. This is bold action and why? Fear. The market action last week fat finger or not was reminiscent of late September 2008. Unlike before, the EU took their cue from the market and responded quickly and boldly. Quicker and bolder than even I thought.
So, what will the market do? Well, futures are through the roof tonight. As I said Friday, the market was extremely ST oversold and there was outright fear in the market place signaling an imminent bottom. This catalyst is certainly significant to trigger a bounce but will that be all for this decline? Well, typically at a bottom what you see a reflexive rally followed by a move down again...typically a retest or lower low. Given the unusual circumstances of the low put in (SPX 1065) we probably won't see it get tested, so therefore, I would look for a rally followed by move lower towards perhaps current levels or slightly lower (1100 or so). No matter what, I'm simply going to wait for my favorite indicators to give the green light. Some of them already have given it....other's haven't because it takes some time for them to turn from negative to positive and vice versa.
But to play the devil's advocate, we need time to see how the market responds to this bailout. And what about the UK? I don't think they are included in this bailout package (to be honest I don't know much about the details of it right now).
Should be for some interesting days ahead....
Friday, May 7, 2010
...
No title needed for this post. We all know the insanity that happened yesterday. Just when you think you've seen it all! As I'm sure even your grandmother has heard by now, they are blaming yesterday's 5 minute meltdown on a bad trade but let's call it what it is.... yesterday was a mini crash. Although some of the whacky trades were cancelled there are still a great deal that won't be.
Just prior to the meltdown I was eating some lunch. I flipped on the TV and noticed the market had tanked quite quickly with the NASDAQ at -70 and so I went to my computer to see if something was up. Then the words "holy shit!" came out of my mouth a few times as the meltdown took place. Flashes of late September 2008 no doubt. I figured there had to have been some really bad news that came out which triggered forced selling but I couldn't find any news or rumors that suggested such. Fortunately for me, the small/micro cap positions I still have were down only marginally as the meltdown took hold. I took the opportunity to reduce my exposure even further which now brings me to about 85% cash which is too low for my liking but because I had no idea at the time what the hell was going on...I obeyed the fail safe rule I have... "When in doubt get the fuck out" and because my stocks weren't in free fall like the rest of the market it's not like I was selling into a panic getting shitty fills.
The ironic thing about yesterday is that if it was indeed a bad trade that triggered this, it may have very well caused a major blow up of some big funds to take place which is what I originally suspected. Since only the trades that were 60% higher or lower than the prices registered at 2:40 yesterday got cancelled on the NASDAQ and NYSE, a lot of people still got screwed or were very fortunate depending on what side of the trade they were on. This is why you should never use market stop orders. Put a damn limit price on those stops.
Yesterday's action has pretty much solidified the beliefs of the conspiracy theorists and permabears. There's pretty much a zero chance now that these people will ever be converted to bulls after what happened yesterday. But to be honest, yesterday action does indeed give some justification to be skeptical about what goes on behind the scenes and the stability of the system. There was some whacky trades that took place which although will be cancelled, were mind boggling to have occurred in the first place. This is what happens when you use market sell orders and there's nothing but the stinkiest of stink bids on the board. 1 cent bids were hit on a few stocks yesterday taking them down essentially 100% in 5 minutes! Take a look at QID which is the double short NDX ETF. You would think that there would have been some whacky trades to the upside but it actually dropped some 70% during the chaos!
I'm not surprised to see the weakness in the market today after yesterday's drubbing even though the market rebounded quite a bit late in the day yesterday. With the PIIGs crisis escalating and memories of 2008 still fresh, you can't blame traders and investors for being skeptical about yesterday's "fat finger" explanation and as I said previously the mini-crash may have actually resulted in blowups and perhaps margin calls which spilled over today.
Here's the good news for the bulls. Any complacency that we saw prior to this correction has turned 180 degrees to outright fear. The market is extremely ST oversold...pretty much as severe as it gets if you exclude the 2008 meltdown (whereby such oversold readings never happened prior to it). The put/call ratio closed today at 1.21 which matches the extreme readings registered at correction bottoms in November 2009 and February 2010. The VIX also closed above 40 which is a far greater level of fear compared to what we saw at any prior low in the past 12 months. The flight to the safety of government bonds is also off the charts. All of this stuff points to an imminent bottom.
Offsetting these bullish factors however is the unique uncertainty that the market now face. First it was escalation of the PIIGS situation and now the shaken confidence in the market system to provide orderly liquidity.
Was this indeed a bad trade which coupled with a fragile market already on its way down, exacerbated the downside or is there something more sinister going on i.e. the market senses something really bad is happening or is about to happen like another Lehman. We’ll find out soon enough.One thing's for sure....this market is far from boring! I have a lot of planning and thinking to do over the weekend. I hope everyone has been holding up OK.
Just prior to the meltdown I was eating some lunch. I flipped on the TV and noticed the market had tanked quite quickly with the NASDAQ at -70 and so I went to my computer to see if something was up. Then the words "holy shit!" came out of my mouth a few times as the meltdown took place. Flashes of late September 2008 no doubt. I figured there had to have been some really bad news that came out which triggered forced selling but I couldn't find any news or rumors that suggested such. Fortunately for me, the small/micro cap positions I still have were down only marginally as the meltdown took hold. I took the opportunity to reduce my exposure even further which now brings me to about 85% cash which is too low for my liking but because I had no idea at the time what the hell was going on...I obeyed the fail safe rule I have... "When in doubt get the fuck out" and because my stocks weren't in free fall like the rest of the market it's not like I was selling into a panic getting shitty fills.
The ironic thing about yesterday is that if it was indeed a bad trade that triggered this, it may have very well caused a major blow up of some big funds to take place which is what I originally suspected. Since only the trades that were 60% higher or lower than the prices registered at 2:40 yesterday got cancelled on the NASDAQ and NYSE, a lot of people still got screwed or were very fortunate depending on what side of the trade they were on. This is why you should never use market stop orders. Put a damn limit price on those stops.
Yesterday's action has pretty much solidified the beliefs of the conspiracy theorists and permabears. There's pretty much a zero chance now that these people will ever be converted to bulls after what happened yesterday. But to be honest, yesterday action does indeed give some justification to be skeptical about what goes on behind the scenes and the stability of the system. There was some whacky trades that took place which although will be cancelled, were mind boggling to have occurred in the first place. This is what happens when you use market sell orders and there's nothing but the stinkiest of stink bids on the board. 1 cent bids were hit on a few stocks yesterday taking them down essentially 100% in 5 minutes! Take a look at QID which is the double short NDX ETF. You would think that there would have been some whacky trades to the upside but it actually dropped some 70% during the chaos!
I'm not surprised to see the weakness in the market today after yesterday's drubbing even though the market rebounded quite a bit late in the day yesterday. With the PIIGs crisis escalating and memories of 2008 still fresh, you can't blame traders and investors for being skeptical about yesterday's "fat finger" explanation and as I said previously the mini-crash may have actually resulted in blowups and perhaps margin calls which spilled over today.
Here's the good news for the bulls. Any complacency that we saw prior to this correction has turned 180 degrees to outright fear. The market is extremely ST oversold...pretty much as severe as it gets if you exclude the 2008 meltdown (whereby such oversold readings never happened prior to it). The put/call ratio closed today at 1.21 which matches the extreme readings registered at correction bottoms in November 2009 and February 2010. The VIX also closed above 40 which is a far greater level of fear compared to what we saw at any prior low in the past 12 months. The flight to the safety of government bonds is also off the charts. All of this stuff points to an imminent bottom.
Offsetting these bullish factors however is the unique uncertainty that the market now face. First it was escalation of the PIIGS situation and now the shaken confidence in the market system to provide orderly liquidity.
Was this indeed a bad trade which coupled with a fragile market already on its way down, exacerbated the downside or is there something more sinister going on i.e. the market senses something really bad is happening or is about to happen like another Lehman. We’ll find out soon enough.One thing's for sure....this market is far from boring! I have a lot of planning and thinking to do over the weekend. I hope everyone has been holding up OK.
Wednesday, May 5, 2010
Looks like just a correction to me
OK I lied. You know I just to chime in again given what's going on.
So, PIIGS the second act, has rattled the markets again. You're going to hear a plethora of opinions and arguments that as to how this is going to play out. I personally think Greek unions and protesters are in serious denial as to the alternatives they face. Either they accept these "savage" terms as they put it, or face even dire consequence. If Greece gets no bailout they will default on their debt causing any future borrowing to be done at terms that will be worse than now. As a result, the government will be in an even worse position to run deficits in order to finance the wages and benefits that these union workers demand. The inevitable result would be for unions to take even more drastic cuts or risk seeing the complete collapse of their economy. That would be far more "savage" than accepting what's being offered now. Another alternative is for Greece to leave the European Union and issue their own currency which would be the equivalent of monopoly money and watch inflation go through the roof creating utter chaos which again is a more "savage" outcome then accepting a bailout.
The situation in Greece reminds me of the dispute between NHL owners and players when negotiating the new collecting bargaining agreement (CBA) of 2005. Much like Greece, the NHL was not economically feasible in the state it was in coming into the agreement. Drastic changes had to be made as player salaries were soaring while most teams were losing serious money. So, owners demanded a salary cap which the players immediately rejected. The players said a salary cap demand was a "non starter" with respect to negotiation talks. This is the equivalent to the "savage" term being used by Greek unions. I remember laughing at the idiot NHL player union because they were in such denial. They figured if they held strong the owners would cave in just like they did at previous CBAs. But this time was different. The owners were far better off locking out the players and cancelling the season then to keep on going the way things were. And that's exactly what they did. They locked out the players. To salvage the 2005 season the owners sweetened the deal a little bit (which still included the salary cap) but the players rejected it.
When the NHL season in 2005 was cancelled a lot of NHL players played overseas for basically peanuts compared to what they were once getting. This reality check eventually sent the players back to the table with their tails between their legs. Not only did the players cave in, they accepted a deal worse than the deal that they could have received before.
Those revolting in Greece will have to come to terms with the same reality that the NHL players eventually faced. They will have to realize one way or the other what they were accustomed to and promised is not feasible. Are they going to learn this the hard way and suffer far more than what they will suffer if they accept the terms of the bailout or will they do what the NHL players did and come back to the table with their tails between their legs? I think they will cave. If not now then perhaps after they get a taste of the reality if they refuse just like the NHL players did.
Getting back to PIIGs, What if this sovereign debt crisis spreads to larger countries like the UK? That's certainly possible and that could make this correction a more serious one. But I think the "bond vigilantes" as they call them, are sending a clear cut message to governments around the world running large deficits and I think governments are going to listen. The 2008 crash is still fresh in thier heads.
No matter how this unfolds, I believe the markets will eventually get over this. I have faith that the rising tide of strong earnings and positive economic momentum will overpower this latest "crisis" because as the economy improves deficits will narrow. On top of this, from a sentiment perspective as I've been noting here for over a year, there is still such strong deeply rooted skepticism/pessimism out there which makes the likelihood of a long term market top being reached quite slim in my opinion. Somehow, someway I belive this "crisis" will be resolved without too much damage.
This correction already looks very similar to that seen in late January. Complacency is quick to turn to fear. We got some large gap downs in the chart, we have already seen a spike in the VIX into the high 20s (close to where markets bottomed during previous corrections) government bonds are soaring reflecting a strong flight to safety and the put/call ratio is already turning up big time. At this pace it won't be long before the gas tank of the bulls will be full again.
I suspect this correction is about 50-65% done. The market is probably going to be very whippy with huge morning headline risk for both bears and bulls. Notice how these corrections make it difficult for those bears that have been burned so badly for the past 13 months to capitalize on. A lot of them I'm sure got squeezed out on Monday or covered yesterday far too early expecting a bounce. I've already noticed this from some of the losers I track.
Bottom line: We got ourselves a correction here which I suspect is about half over. The VIX, put/call ratios and Rydex indicators are rapidly unwinding their complacent status. I'll be very interested to see what AAII sentiment will be come Thursday. The market is likely to be very whippy in the days and weeks ahead with high morning headline risks for either side of the market. Corrections are always a good time to see what your stocks are made of. If they have held their own and didn’t go down much (or better yet if they actually kept going up) it's a sign of great stock. Be careful though, because sometimes what appears to be a sign of strength can be a delayed reaction. Nobody said this game was easy folks. Above all, maintain discipline. If you have to take your lumps because a stop was hit....take your lumps. You can always buy back later on when the dust settles and if it has to be at a higher price then so be it.....get over it. This was something in the past that I found hard to do. Ego prevents one from doing this.
Although I trimmed positions before this correction started flush with cash, I still have some exposure and today I cut loose a position for a loss because it was acting too poorly violating a downside target price. Even though the stock could rebound now because it's oversold, I have no regrets if it does so. You have to have discipline and draw the line somewhere before a loss gets out of control. One thing I won't do is use the "hold and hope" strategy when a position goes against me by a certain ammount. I only hold and hope winning positions not losing ones. Taking a loss is never fun but its part of the game if you want to stay alive long term. Your ego will prevent you from taking losses early and you will get whipsawed at times when you try to do so but that’s the way the cookie crumbles. Remember, you can always buy it back if it starts acting better.
So, PIIGS the second act, has rattled the markets again. You're going to hear a plethora of opinions and arguments that as to how this is going to play out. I personally think Greek unions and protesters are in serious denial as to the alternatives they face. Either they accept these "savage" terms as they put it, or face even dire consequence. If Greece gets no bailout they will default on their debt causing any future borrowing to be done at terms that will be worse than now. As a result, the government will be in an even worse position to run deficits in order to finance the wages and benefits that these union workers demand. The inevitable result would be for unions to take even more drastic cuts or risk seeing the complete collapse of their economy. That would be far more "savage" than accepting what's being offered now. Another alternative is for Greece to leave the European Union and issue their own currency which would be the equivalent of monopoly money and watch inflation go through the roof creating utter chaos which again is a more "savage" outcome then accepting a bailout.
The situation in Greece reminds me of the dispute between NHL owners and players when negotiating the new collecting bargaining agreement (CBA) of 2005. Much like Greece, the NHL was not economically feasible in the state it was in coming into the agreement. Drastic changes had to be made as player salaries were soaring while most teams were losing serious money. So, owners demanded a salary cap which the players immediately rejected. The players said a salary cap demand was a "non starter" with respect to negotiation talks. This is the equivalent to the "savage" term being used by Greek unions. I remember laughing at the idiot NHL player union because they were in such denial. They figured if they held strong the owners would cave in just like they did at previous CBAs. But this time was different. The owners were far better off locking out the players and cancelling the season then to keep on going the way things were. And that's exactly what they did. They locked out the players. To salvage the 2005 season the owners sweetened the deal a little bit (which still included the salary cap) but the players rejected it.
When the NHL season in 2005 was cancelled a lot of NHL players played overseas for basically peanuts compared to what they were once getting. This reality check eventually sent the players back to the table with their tails between their legs. Not only did the players cave in, they accepted a deal worse than the deal that they could have received before.
Those revolting in Greece will have to come to terms with the same reality that the NHL players eventually faced. They will have to realize one way or the other what they were accustomed to and promised is not feasible. Are they going to learn this the hard way and suffer far more than what they will suffer if they accept the terms of the bailout or will they do what the NHL players did and come back to the table with their tails between their legs? I think they will cave. If not now then perhaps after they get a taste of the reality if they refuse just like the NHL players did.
Getting back to PIIGs, What if this sovereign debt crisis spreads to larger countries like the UK? That's certainly possible and that could make this correction a more serious one. But I think the "bond vigilantes" as they call them, are sending a clear cut message to governments around the world running large deficits and I think governments are going to listen. The 2008 crash is still fresh in thier heads.
No matter how this unfolds, I believe the markets will eventually get over this. I have faith that the rising tide of strong earnings and positive economic momentum will overpower this latest "crisis" because as the economy improves deficits will narrow. On top of this, from a sentiment perspective as I've been noting here for over a year, there is still such strong deeply rooted skepticism/pessimism out there which makes the likelihood of a long term market top being reached quite slim in my opinion. Somehow, someway I belive this "crisis" will be resolved without too much damage.
This correction already looks very similar to that seen in late January. Complacency is quick to turn to fear. We got some large gap downs in the chart, we have already seen a spike in the VIX into the high 20s (close to where markets bottomed during previous corrections) government bonds are soaring reflecting a strong flight to safety and the put/call ratio is already turning up big time. At this pace it won't be long before the gas tank of the bulls will be full again.
I suspect this correction is about 50-65% done. The market is probably going to be very whippy with huge morning headline risk for both bears and bulls. Notice how these corrections make it difficult for those bears that have been burned so badly for the past 13 months to capitalize on. A lot of them I'm sure got squeezed out on Monday or covered yesterday far too early expecting a bounce. I've already noticed this from some of the losers I track.
Bottom line: We got ourselves a correction here which I suspect is about half over. The VIX, put/call ratios and Rydex indicators are rapidly unwinding their complacent status. I'll be very interested to see what AAII sentiment will be come Thursday. The market is likely to be very whippy in the days and weeks ahead with high morning headline risks for either side of the market. Corrections are always a good time to see what your stocks are made of. If they have held their own and didn’t go down much (or better yet if they actually kept going up) it's a sign of great stock. Be careful though, because sometimes what appears to be a sign of strength can be a delayed reaction. Nobody said this game was easy folks. Above all, maintain discipline. If you have to take your lumps because a stop was hit....take your lumps. You can always buy back later on when the dust settles and if it has to be at a higher price then so be it.....get over it. This was something in the past that I found hard to do. Ego prevents one from doing this.
Although I trimmed positions before this correction started flush with cash, I still have some exposure and today I cut loose a position for a loss because it was acting too poorly violating a downside target price. Even though the stock could rebound now because it's oversold, I have no regrets if it does so. You have to have discipline and draw the line somewhere before a loss gets out of control. One thing I won't do is use the "hold and hope" strategy when a position goes against me by a certain ammount. I only hold and hope winning positions not losing ones. Taking a loss is never fun but its part of the game if you want to stay alive long term. Your ego will prevent you from taking losses early and you will get whipsawed at times when you try to do so but that’s the way the cookie crumbles. Remember, you can always buy it back if it starts acting better.
Subscribe to:
Posts (Atom)