Next Leg Down
Bloomberg:
U.S. stocks tumbled the most in 11 months after service industries contracted at the fastest pace since 2001, reinforcing concern the economy is in a recession.
Exxon Mobil Corp. and General Electric Co. led declines in New York trading and all 10 industry groups in the S&P 500 retreated after the Institute for Supply Management’s index, which reflects almost 90 percent of the economy, fell more than forecast. Citigroup Inc. led 91 of 92 financial shares in the S&P 500 lower after Fitch Ratings said it may downgrade the AAA insurance rating on MBIA Inc., the largest bond guarantor.
The S&P 500 lost 44.18, or 3.2 percent, to 1,336.64. The Dow Jones Industrial Average decreased 370.03, or 2.9 percent, to 12,265.13. The Nasdaq Composite Index slipped 73.28, or 3.1 percent, to 2,309.57. Shares also retreated in Asia and Europe. Almost 11 stocks fell for every one that rose on the New York Stock Exchange.
“As the recession unfolds, then profits will disappoint,” Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. “It’s already under way.”
Like other big bear markets, this is merely a headfake for us novice investors. Bear Markets don’t last for 1-2 months. On average, they would last for 20 months. At least we are still pretty far off from the bottom. If you have sell into strength as a trader, your decision will be much vindicated.
The current market is very sentiment driven at the moment. Any bad news creates alot of downside and any good news does not come up to much. This is a mirror image of what i observed in a senseless Bull run.
Technical Analysis
Click to view Pic
This 2 year S&P 500 daily chart shows a bullish channel dating back July 2003. We can clearly see the SP500 attempted to rally against the falling tide but it failed to break that resistance near 1400. We should see the next leg of the down trend here.
Click to view pic
The 10 year S&P 500 MACD looks like it has alot more to go. So if the last bear in 2001 is a good gauge, and that this bear is more severe, we really need ti wait for a while to see the RSI and MACD go down to low levels before we see a turn around.
Systematic Breakdowns
What are systematic breakdowns and why should we be worried about them? Jim Surowiecki writes:
The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies–not even very big companies, at that–can make the entire edifice totter…
When you have systems with lots of moving parts, some of them are bound to fail. And if they are tightly linked to one another–as in our current financial system–then the failure of just a few parts cascades through the system. In essence, the more complicated and intertwined the system is, the smaller the margin of safety.
Today, as financial markets become ever more complex, these kinds of unanticipated ripple effects are more common–think of the havoc wrought a couple of weeks ago when the activities of one rogue French trader came to light. In the past thirty years, thanks to the combination of globalization, deregulation, and the increase in computing power, we have seen an explosion in financial innovation. This innovation has had all kinds of benefits–making cheap capital available to companies and individuals who previously couldn’t get it, allowing risk to be more efficiently allocated, and widening the range of potential investments. On a day-to-day level, it may even have lowered volatility in the markets and helped make the real economy more stable. The problem is that these improvements have been accompanied by more frequent systemic breakdowns. It may be that investors accept periodic disasters as a price worth paying for the innovations of modern finance, but now is probably not the best time to ask them about it.
The effect of such intricate moving parts is gonna cause huge up down moves in the market. Based on current market sentiments, it seems that huge downside might be more prevalent then upside.
How might this happen? Roubini writes here:
A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbate the liquidity and credit crunch.
In this meltdown scenario financial US and global financial markets will experience their most severe crisis in the last quarter of a century.
Now that sounds scary. Are they not scarying you enough? I think that is the worst case scenario. Should you be worried about it? I am. Why? Because of the probability of this scenario happening. The gears and the intricate moving parts are in place. What matters is whether we have sufficient confidence in the policy making aka the risk management that politicians, FED has to react to a big blow out.
In the end, what matters is not what small companies do, but what these big-ego politicians attempts to do. I have a feeling they would bring more chaos then good.
Chinese New Year
Its another long break.. I am starting to enjoy these. but it looks like for those born in the year of the monkey, you should lie low at your job this year. This is the year of the rat and according to many its a bad year with lots of famine and financial loss. If what they said is true, Chinese new year should start on the 4th of Feb instead of the 7th.
Just in time to start the new leg of downward move. I’m getting bloody superstitious here.
So what can an investor do now?
- If you are a stock picker or trader, being in cash might be the best proposition.
- look for bargain companies that you felt you couldn’t buy cause they got too expensive. Now is the time to re-evaluate them
- Always ask whether they have become cheaper because of sentiments or because of deterioration in fundamentals
- Short or put warrants if you are nimble and well tuned enough?
For me, I’m trying not to be too caught up in this. I’m always telling myself not to put in substantial amounts since there are so many good companies out there.
- I’m looking for companies that pays a reasonable dividend and have an upside when liquidity returns to the market.
- At the same time I’m building up my alternative allocation as well.
- If UOB United International Growth and Fidelity Emerging Markets fall in the red by 15% and 25% respectively, I will add a portion to them. Right now, I’m relying on my RSP to do the work.
- so far, I am still 50% in cash.
No related posts.
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment