You may have read about the latest federal actions targeted at making direct capital investments into our nation's banks (Bloomberg - Paulson May Invest). While the focus just one month ago was on getting liquidity back into the system so that we could all continue to go about our business, the delays in doing so and related lack of confidence have led to forced equity selling to raise cash and shore up the capital base.
A bank's leverage ratio is naturally defined by "Debt/ Equity," and the value of that equation's denominator has taken a plunge. It is easy to see that the most recent bout of selling has caused a vicious cycle whereby stock price devaluation means that our financial institutions could be as levered as ever. In spite of all the talk about "deleveraging," we may well effectively be back where we started at or worse, and banks are only permitted to become so levered. This means continued lending restrictions at best, and further contagion on an increasingly massive scale at worst.
I almost hate to bring it up, but the same is true for individual brokerage accounts. Regulation-T permits 1:1 leverage to be held overnight, and many brokers are even tightening this due to the recent volatility. Imagine the unintended leverage that buy-and-hold investors starting out a year ago are now holding. With the markets down some -40% from their highs, it's easy math.
I have recently written about economic multiplier effects and tipping points (see Why 'We've Got to Stick Together'). We are now somewhere between very near and well into the mouth of that rabbit hole. This market has got to firm up. Sour socialist implications of banking nationalization aside, a capital call or two at the individual level, and that hole is mighty hard to crawl out of.
www.marketrewind.blogspot.com
Goodness Gracious Late Cretaceous -- Equity markets were pummeled back to the stone age this week. (Alright...) Well, I am glad that I caveated my positive outlook for these last five days with a Black Swan comment, because that is exactly what we got. In one of the worst weeks in market history, equity commentators could only draw analogies to 1929. Once again, save some surprising US Dollar strength (UUP +0.3%), the S&P 500 (SPY) recorded a truly staggering -19.8% decline over a period of record ranges and little respite as credit markets refused to thaw on a global basis. (FT - Icelandic Banks; BW - Global Cuts)
click chart to enlarge
In fact, the VIX options volatility index nearly reached 77 on Friday, now some +53% above its 15-day moving average. That is a whopping stretch, my friends (please be careful with recently owned options). However, for the first time in a while, the NASDAQ 100 showed relative strength, down a mere -13.4% on positive IBM earnings. Sectorwise, Transports and Real Estate also managed to show relative outperformance (IYT -9.0%; IYR -11.4%), while the Energy group (XLE) dropped an incredible -25.2% on the slowdown trade.
Trading in Week 42 of 2008 will be influenced by Inflation, Retail Sales, Beige Book and Jobs readings on Wednesday and Thursday, and Housing data on Friday, not to mention Options Expiration that same day. Market watchers will also closely monitor developing rumors of the demise of Goldman Sachs and/or Morgan Stanley, progress in the credit arena, and any related global coordination efforts announced at this weekend's G7 meetings. These last two weeks have represented new statistical territory in many respects (take a gander at those RSI's below), and while it maybe asking alot, be prepared for anything.
Yahoo! - U.S. Earnings Calendar
Yahoo! - U.S. Economic Calendar
A glossary of Weekly Rewind terms and statistics has been posted here for your reference. Enjoy the weekend.
www.marketrewind.blogspot.com
Once again, the VIX is in the record books, with two new highs:
- new closing high: 69.95
- new intra-day high: 76.94
Of course, today is also the first time the VIX traded over 70.
In other volatility index news, the VXO (CBOE S&P 100 Volatility Index) closed at 86.14, almost exactly half of the all-time record high of 172.79 from October 20, 1987. The VXO had an intra-day high of 103.18, marking the first time the 'original VIX' has been over the 100 mark since 1987.
http://vixandmore.blogspot.com/
The challenge as an investor living through the last four weeks is to look forward. It is even harder if you have followed the tune of, don't worry you are in this for the long term. That has been my favorite saying from advisors and money managers like John Boggle. Yes, asset allocation models work over the long term. Yes, the S&P 500 ($SPX) did recover its losses from 2000-02, only to give them back over the last 12 months. In fact the 10 year average rate of return on the S&P 500 index now stands just under 2% per annum. Maybe long term is longer than 10 years. I will have to do some research on that and get back to you.
Sorry for the tangent. My point was to look forward not backwards. See how hard that is. The bounce today off the intraday lows of 840 on the S&P 500 shows some interest in buying stocks. I am not talking about a bottom just interest in picking up stocks at these levels. Will this lead to a rally next week? Good question. The answer lies in the G7 meeting this weekend. If the guarantee comes for banks and depositors. In addition the need to free up the commercial paper market. Plenty of talk around both of these issues. They will be key points heading into next week.
How do we build a portfolio looking forward. Well my assumption first of all is you are primarily in cash at this point giving you plenty of room to ladder into longer term positions. Energy is one of the first sector I would look into with the conditions here extremely oversold. The value will be realized as prices on crude return to normal. Normal being taking out the big swings up and down and some sanity to trading in the sector.
Financials are the second area to dig. The outcome of all this money flying around will lead to finding the winners. The trashing of the regional banks is the first place to dig. The insurance companies are another piece of the financials that have been trashed as well. Balance sheet looking here as well as the credit rating are important along with some patience. This will take some time, but I am looking through the remains.
Basic materials is a sector I have been short for a several weeks, but it is starting to look attractive at this point. There are some very attractive valuations on a forward looking basis. As the negative tone subsides there is value.
Last, but not least is the small cap stocks. The bounce off the lows today and closing higher by 4% gives plenty of reason to think this sector is oversold. I will be watching early next week for some follow through on this move.
VIX ($VIX) could have climaxed today at 75. That will give some indication next week how this plays out short term. From a longer term perspective there is value. Building positions versus trying to time the bottom is the best approach looking forward.
I am not sounding the all clear sign, just saying there are opportunity. Remain patient, focused and most of all disciplined. Relax and enjoy your weekend, you deserve it.
One year ago, in “From Overripe to Vulnerable?” I introduced something I called the OHFdex or listing of Overripe High Fliers, along with 14 CandleGlance charts from StockCharts.com for the highest fliers.
Needless to say, the picture one year later is an ugly one.
Not only were these stocks overripe and vulnerable a year ago, but they were ripe for decimation. CROCS (NSDQ: CROX) is down over 97% in a year, Las Vegas Sands (NYSE: LVS) is down 90%, and both DryShips (NSDQ: DRYS) and VMware (NYSE: VMW) are down more than 80%. All told, 11 of the 14 former high fliers are down 50% or more. The mean decline was 67.7% and the median decline was 69.3%. The best performer among the group was Baidu (NSDQ: BIDU), the Chinese search engine company, which has lost 36% while the Chinese markets have fallen 57%.
I have also included one year charts (once again courtesy of StockCharts.com) for all 14 members of the OHFdex below, with a 20 day SMA in blue and a 50 day SMA in red:
click chart to enlarge
Sifting among the rubble of today’s meltdown, it looks as if it is about time to create a new list of oversold stocks that can prosper over the course of the next year.
www.vixandmore.blogspot.com
For the first time since March 2003, the Dow Jones Industrial Average broke 8000 at the open of the US markets. However just as quickly as stocks dropped 600 points, it recovered more than half of its losses in the first 15 minutes of trading and actually moved into positive territory 35 minutes into the trading session. The capitulation followed by the major short squeeze suggests that we may have seen a near term bottom. This type of volatility drove the VIX index ($VIX) to a record high of 70.
Currency Traders Waiting for the Buying Opportunity
Interestingly enough, we have not seen much of a reaction in the currency market. This suggests that the capitulation is only in stocks and traders are waiting for the bounce to get in. The day is early so many things can change and equities could sell off again, but for the time being, it appears that the buyers of EUR/USD, GBP/USD and USD/JPY are sitting on the sidelines waiting to get in. If stocks start bottoming out, carry trades could actually bounce today. No one will want to be short carry ahead of the G7 and G20 meeting this weekend – we expect a bounce.
Pessimism in Uncharted Territories
Pessimism in the market has hit uncharted territories with the TED spread reaching another record high. This indicates that liquidity remains a problem and unfortunately confidence in the markets is tied to liquidity. Lehman has a CDS auction today and the rumor in the markets is that governments could resort to temporarily shutting down equity trading. This seems nearly impossible by theory, but it is certainly becoming a growing possibility. There is nothing more coveted than cash right now and the continued hemorrhaging will force the G7 and G20 into action. It will be another long weekend for US Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke. There is even talk that the US is considering a guarantee of bank debt.
G7 Meeting – Most Significant Since 1985 Plaza Accord
Finance Ministers have arrived in Washington for the G7 meeting while the G20 meeting is scheduled for the weekend. This will be the most significant G7 / G20 meeting since the 1985 Plaza Accord which marked a major turning point for the US dollar. The consequences of inaction are severe, so we expect a big announcement this weekend if not sooner.
In 1985, the 5 nations attending the event agreed to intervene in the currency markets and to sell US dollars to reduce the US current account deficit and to pull the US economy out of a serious recession. FX intervention is still on the table, but it remains to be seen whether even that step will enough to surprise the markets.
How Low Can Stocks Go?
The Dow Jones Industrial Average has fallen to the lowest level in 5 years. Since its peak in October 2007, the Dow has fallen close to 40 percent. The worst financial crisis prior to the current one was the Wall Street Crash of 1929, which led to the Great Depression. Stocks started selling off in October 1929 with the big crash happening on October 29th of that year. Equities did not bottom out until July 1932, after the Dow lost 89 percent of its value. These are scary figures but it provides a perspective on how bad things have gotten in the past. We sincerely hope that this doesn’t happen, but the lower equities fall, the greater the decline in USD/JPY and carry trades.
www.kathylien.com
I want to believe in a bounce as much as anyone, but right now the adjusted tick and advance-decline lines remain negatively sloped and price is below the declining daily VWAP just above S1 (SPY (NYSE: SPY) $87.20). These have been terrific daily predictors throughout this period, though it is still early in the day. VIX ($VIX) broke 70 and remains high. Volume at the open was huge. Commercial paper markets are supposedly improving and now we have some CDS pricing. I can't emphasize how important this is.
click chart to enlarge
On the other hand, volume at the open was huge, commercial paper markets are supposedly improving, and now we have some CDS pricing (albeit awful). I can't emphasize enough how important these elements are.
9:00AM PST: VIX 73+ and climbing -- but oil and gold are both down -5.9% and -2.2% respectively. Here is an interesting article from Macroblog. Restesting opening lows.
How Low Can We Go?
This is for my father in-law, who emailed me this photo with the suggested caption "How Low Can We Go?" Maybe it should rather be captioned "Insitutions Afraid to Get Burned on a Bounce?" VIX ticking down a tad after exceeding 74+. Quantifiable Edges looks at past intraday plunge reversals here: Two Outcomes...
Seven Sources of Selling
It's incredibly unusual to see selling due to all of these source at once. This is what has made this "event" different and cascading in nature.
1. Global Deleveraging
2. Mutual & Hedge Fund Redemptions
3. Margin Call Cash Raises
4. Operating Liquidity/ Cash Raises
5. Valuation Reset on Earnings Reductions
6. Valuation Rest on Higher Risk Hurdles
7. Individual Fears
10:10AM PST: Again, I want to be proven wrong, but this isn't holding and momentum remains downward. We really will need a massive buying effort to overwhelm the supply we will see on any drive higher. Looking at tick, it is once again hugely negative even more than price belies.
Note that next week is holiday shortened on top of the G7 meeting outcome and options expiration.
10:45AM PST: Third go at the lows after multiple attempts to bust the VWAP. One of them will break before the day is over. Oil and Gold are now both down nearly -8%. Demand destruction for Oil plus rotation/ cash raising for Gold, which you'd otherwise expect to have gone up. SPY re-approaching S2 ($83.50) and VIX is back on the rise at 75+.
11:30AM PST: SPY volume is on pace to exceed records set on September 18th when we saw the TARP reversal (that lasted a day). Volume has certainly been a missing component of the recent pull-back. The temptation has been to view that as a cumulative exhaustion proxy for the desired "capitulation" event. VIX is on the rise again. Quite a battle playing out -- Art Cashion has been asked to predict the close. I won't do it!
12:40PM PST: Technicians will like this on so many levels. Still, there will be a lot of supply above. Thousand point range and we end down, what 110 Dow points? Enjoy your long weekend.
www.marketrewind.blogspot.com
...people sell stocks.
I've always had the impression that he hurt stocks each time he opened his mouth during this crisis, but this time I ran back the Tivo and the proof was there: the Dow was down 83 points when he took the mic, down 185 when he was done speaking.
Actually, that's probably an improvement over his recent performances.
Seriously, when are they going to stop trotting this guy out as though he inspires confidence? And if he says one more time how our economy is "innovative, industrious and resilient," I think I'm going to throw up. Can George W. Hoover please just go in the basement for the next 90 days? Pretty Please?
It seems the market is getting ready to either:
a) Complete this capitulation and reverse upwards very hard, or
b) Drop to zero and close its doors for good.
At this point I wouldn't rule out either one. If you're of the belief that it is more likely to reverse hard than go to zero then you're probably in the minority. You may also find the following charts interesting. They're 5-minute charts of the legendary reversal bottoms. Whether you're long, short, or sidelined you may want to study them for a few minutes - in case it doesn't drop to 0.
September 1, 1998
click chart to enlarge
July 24, 2002
click chart to enlarge
October 10, 2002
click chart to enlarge
They didn't all happen in 1 day. Here's 3/12 and 3/13/2003.
click chart to enlarge
One common theme I see is that once the bottom was established the uptrend stayed in tact. October 10th 2002 saw a brief and relatively minor break of price support just before noon. Other than that all the rallies held their ground throughout the day. In other words, if you're trading intraday, a loose trailing stop may not be a bad idea. A sharp break of support seems unlikely if the market is going to put in it's next legendary reversal.
www.quantifiableedges.blogspot.com
