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.
No comments:
Post a Comment