Tuesday, September 30, 2008

09.30.08 - Volatility Contraction

The markets are getting their expected bounce. Most measures are maintaining a stable posture, though the slope of the AD line is flatter than I'd like. Also, like yesterday (amazingly), volume appears quite low. The VIX has come in some -12% to 41.

10:05AM PST: Ted Spread jumped to 3.53% at one point today, but has also since come in a good deal to 3.14%.

12:15PM PST: Ted spread now down to 3.05, Vix still falling. Not alot of opportunity to play noise today, it has been a fairly consistent uptrend. And yet we are still below yesterday's range before the big fall! Should we see a surge at the close up to the five-day MA/ R1 on the SPY, consider trimming exposure. Doubt we'll get there, but you never know. I suspect a better bet may be a run back down to the rising VWAP -- anyway, just idle speculation, I'm not playing that trade -- maybe if we start to turn. Meanwhile, you can literally "see" money coming out of bonds. Good for the day.

CLOSE: And what do you know, we did hit the five day, after which price finally pared gains a touch. Interesting on the MTM draft changes. If they look familiar, you may have read something similar here! This bounce could still have days to go, but I'd pick spots carefully based on pull backs to the VWAP or better, and don't forget this is truly a news-driven, highly volatile environment (in case you didn't notice).

Never Investment Advice

Monday, September 29, 2008

Measuring the Bear


Current Market Statistics:

o S&P 500 High October 11, 2007 was 1,579
o Today's Close was 1,106 and change
o Point Difference -473 points
o Percentage Loss -29.96%
o Percent Increase Required to Reach prior Highs +42.77%
o Twelve Months Duration

o Dow High October 9, 2007 was 14,164
o Today's Close was 10,365 and change
o Point Difference -3,799 points
o Percentage Loss -26.82%
o Percent Increase Required to Reach prior Highs +36.65%

Past Bear Markets Peak to Trough (Dow):

1900 32% 12 months
1903 38% 10 months
1907 45% 10 months
1909 26% 8 months
1912 24% 26 months
1917 40% 13 months
1919 47% 21 months
1923 19% 7 months
1926 17% 2 months
1929 90% 34 months
1934 24% 9 months
1937 52% 56 months
1946 25% 37 months
1953 14% 9 months
1957 20% 6 months
1960 18% 10 months
1962 29% 6 months
1966 26% 8 months
1969 36% 17 months
1973 46% 22 months
1976 27% 17 months
1980 24% 20 months
1987 36% 2 months
1990 21% 3 months
1998 16% 2 months
2000 34% 30 months

Source: Trulaske, Missouri

Quick Conclusion: We could have further to go in the months ahead, particularly if earnings and/or guidance disappoint next month. I increasingly suspect they will as 2009 estimates remain relatively optimistic.

[ADD: Reading this the next morning... I feel a bit like the ratings agencies... changing their forecast after things look to be their worst! Still, I am concerned about those earnings. Oh, and I don't mean to imply we aren't due a bounce this week. I am actively playing one myself (and trailing stops along the way).]

Never Investment Advice

09.29.08 - Heading for a Retest

Weakness, portended by the Sunday futures, has quickly evolved into a free fall at the open:


7:00AM PST: QQQQ -4.26%; DIA -2.42%; EFA -5.97%; SPY -3.16%; TEDSPD 3.48%; VIX 39.8
Breaking News: Massive Coordinated Central Bank Injection
Announced Among Nine Global Banks

Do you think some of today's news might have been timed to coincide with agreement on the TARP? Too much news for one weekend, must have been quite a bit of action on hold last week. And so it goes...

7:45AM PST: CNBC is reporting that as Alt-A loans begin to hit the banks, the "rescue" plan will have to grow 10x. Meanwhile, oil is down over 6%.

10:45AM PST: Who would have thought a "1987" would come of a congressional vote? Alright... but Nas 100 is down a flippin 8%. Hold on tight.

11:20AM PST: I'd guess we've seen the lows for the day (geez, let's hope so). We came back up, saw a huge volume spike, back down, tested and up again (little w). VIX hit 45-plus levels and is pulling back a tad. This is an exceptionally high level even an absolute basis (forget it's stretch). Ted Spread is also coming down a touch from earlier highs. What a joke.

Intermediate term, I'll easily concede this could get worse. The economy is only going to deteriorate ahead irrespective of what the market or congress does. This perspective blows away any "fair value" analyses I've done earlier in the year. No bottom picking in this crazy environment. So, does this open the door to the Fed to lower rates on top of their money injections...?

Meanwhile we are getting zero leadership from our president or presidential candidates. What a missed opportunity on both sides.

12:20PM PST: Q's are still breaking down.

12:30PM PST: Ouch... welcome back to 2004. VIX @ 48+. Incrementally adding exposure into the close for a trade in this camp.

12:50PM PST: Monthly view --


CLOSE: Time to hit the water. I would have liked to have seen much stronger volume today. Hate to be a terrible cynic, but I've got to wonder if the Dems didn't know that vote was going to fail... brilliant strategically if they did. Idiotic, but brilliant in a Machiavellian sense. In any case, I think my new party affiliation will be 'A' for Anti-Incumbent. SPY RSI[2] = 5.53.

COMMENT: It's difficult (for the non-cynic in me) to understand how the politicians can fail to see the linkage between "main street" and "wall street". Even if they don't comprehend the nightmare economic multiplier scenarios outlined in past posts, clearly they know that main street owns wall street through 401-Ks and direct personal savings, and that measure of wealth has now declined in one day more than the sum total of the requested funding due largely to their inaction. Only difference being that loss is now a historical fact, whereas with the plan there was upside opportunity for all.

Reading:

o Vix & More - Top Ten Vix Events
o Macroblog - The False Choice

Measuring the Bear:

o S&P 500 High October 11, 2007 was 1,579
o Today's Close was 1,106 and change
o Point Difference -473 points
o Percentage Loss -29.96%
o Percent Increase Required to Reach prior Highs +42.77%

Never Investment Advice

Sunday, September 28, 2008

No Magic Tonic

It looks like a case of sell the news with the "subdued reaction to the plan" description being quite the understatement (see article below). As of now, just about everything is trading down a touch (50 to 75 BPs) this Sunday evening in the U.S. futures markets.

Asia's initial pop has also reversed course, in some cases rather dramatically. For now it looks like it's going to be a game of sit and wait for through the actual bill passage and elections. Oh, and did I mention earnings are once again right around the corner -- just in time for Halloween.

o Yahoo! - Investors Give Plan Ho Hum Reception
o Calc. Risk - German, Belgian & UK Banks Too!/ Wachovia on Deck
o Quant. Edges - 1% Gaps Down Study

Scary about the bank contagion spreading globally... But on a lighter note, gotta love Calculated Risk's line: "Sunday is the new Monday." They are very quick on the news there, often with a well placed comment (though occasionally they'll pick up a rumour as news -- usually identified as such). Highly recommended for at-a-glance updates.

Bad News Bears

Hardly the news flow one would have hoped would have come out along with the plan announcement! There were a number of technical indicators suggesting this week may get off to a poor start here as well. Meanwhile the VIX looks like it is heading back up to 40 territory afterall.

Saturday, September 27, 2008

Weekly Rewind - Week 39 (09/26/08)

(Click to Enlarge)

In this week's theatrical version of political "Deal or No Deal?" -- equity indices retraced over half of their prior gains as Treasury Secretary Paulson's TARP plan was thoroughly dissected up on the Hill (Bloomberg - Agreement Near).

In spite of the large give-back, the markets were generally able to hold their ground considering the downward revision to GDP, and FDIC seizure of Washington Mutual and subsequent asset resale to JPMorgan Chase (Business Week - Revision Raises Recession Risk; WSJ - WaMu is Seized). In the end, the S&P500 (SPY) closed down another -2.6%, while last week's winners, the Russell 2000 and Emerging Markets, fell the hardest (IWM -5.6%/EEM -7.0%).

Sectorwise, only the Consumer Staples arena was able to hold its ground (XLP +0.0%), while Materials and others reversed dramatically (XLB -7.9%). While there was little place to hide from a Style perspective, for spread traders the Value quadrants managed to outperform Growth by a wide margin (PWP -3.3 vs. PWJ -6.3%). Meanwhile, Commodities saw a small comeback on US Dollar weakness (DBC +2.2%/ UUP -0.8%).

Week 40 of 2008 brings a new month, a new quarter, and a busy economic calendar, as follows:

  • Monday - Personal Income & Spending
  • Tuesday - Chicago PMI & Consumer Confidence
  • Wednesday - Automotive Sales; ADP; Construction Spending; ISM Manufacturing & Crude Inventories
  • Thursday - Initial Claims & Factory Orders
  • Friday - Payroll Reports & ISM Services

Although most asset classes look technically neutral within the wide range of recent moves, with the VIX options volatility measure so extended above its recent average (+13.7%), there remains the possibility of strong moves higher (again) on the right news flow -- read DEAL! On the other hand... in this market there are the quick and the disillusioned.

Traders will undoubtedly be closely monitoring the progress and final form of the "rescue" plan (Add: Calculated Risk - Pelosi Summary of Final Draft; NY Times - Agreement Reached), how the market behaves after its passage (if I may be so presumptive), and the outcome of Wachovia's reported talks with Citigroup (Bloomberg - Early Takeover Talks).

A glossary of Weekly Rewind terms and statistics has been posted here for your reference. Enjoy the weekend.

Never Investment Advice

Weekly Rewind Retool

You may have noticed a few new columns in the Weekly Rewind. This post explains each one for future reference.

I like the format that I've settled on because it provides a quick view of recent price action both in terms of broad market movement (through the graphs), and relative class behaviour (through the table).

It is important to stress the words "recent" and "relative," because for many of the measures in the table, insufficient data points are provided for statistically confident results. However, by comparing the measures across securities and how they have change through time, you may come to find them quite helpful.

Regarding the headers, in most cases I have substituted more reader friendly names over true technical titles, as presented below. For time frames, 1-Week = Five Trading Days (Friday over Friday, unless it's a holiday shortened week) and 4-Weeks = Twenty Trading Days. Where no mention is made, the default is Twenty Days.

Performance Measure Descriptions

  1. Price Change - The easy one, Friday's closing price divided by the respective prior period close.

  2. Ten-Month Moving Average - Research shows that semi-active portfolio management using secular trends is helpful in reducing draw-downs and volatility while prospectively enhancing returns and assisting in the identification of the strongest performing indices. These columns compare current price to the simple ten-month moving average, and then rank that difference across the tracked ETFs.

  3. Travel Range - This is the "Standard-Score" or "Z-Score", which measures how far the last price is from the average over the period, as measured in terms of units of volatility (number of standard deviations). For traders, this is another way of seeing how close price is to standard Bollinger Bands (typically set at 2.0 SDs). Just remember that equity prices often exhibit "fat tails", and rarely move according to standard statistical distributions.

  4. Price Index (RSI) - This is the same "Relative Strength Index", or RSI, indicator shown in the charts for the SPY and QQQQ. (I didn't want to confuse this unfortunately named measure with the others to its right.) This price oscillator moves between Zero and One-Hundred. The higher the measure, especially over time, the more overbought that security may be considered. Likewise, when the measure is particularly low over time, the more oversold.

    In Rewind tables, securities will be formatted green (near oversold) when the RSIs are under 10 and 25 for the 2- and 5-day calculations, respectively. They will likewise be market red (near overbought) when they exceed 90 and 75, respectively.

  5. Relative to S&P 500 (RS) - This column compares the percentage price change of the SPY to the other ETF proxies over the respective periods. Traders often call this "True Relative Strength" or "Price Relative" to avoid confusion with RSI.

  6. Correlation to S&P 500 - Correlation measures how closely the subject ETF moves either positively or inversely with the SPY on a scale of -100% to +100%. When the measure reaches 80%+, we can say that the two ETFs have a strong linear statistical relationship.

  7. Relative Volatility - This statistic, better known as the Beta Coefficient, measures the volatility of daily returns versus those of the S&P 500. It is calculated as the slope of the two return series plotted against each other. To the extent it remains stable over time, it can be thought of as a leverage ratio against the S&P.

  8. Historic Volatility (HV) - In this case the volatility measure scaled from 0% to 100% is what it says! The higher the number, the more volatile the ETF has been, both reflecting risk as well as often indicating a turning point in trend.

  9. Trend Stability - Moving further into the more esoteric measures, we have the "Hurst Exponent" estimation or inverse "Fractal Dimension." At a high level, this statistic measures the level of "smoothness" or "persistence" of the recent directional trend (>50) versus a tendency to mean-revert (<50).

  10. Risk Reward - The relatively new "Omega" statistic goes beyond end-of-period risk/reward measures, such as the traditional "Sharpe" and related ratios, and effectively (albeit perhaps less intuitively )weights the distribution of returns over the subject period, giving preference to positive skew. If the result seem non-intuitive or wacky, consider (dis)confirming the measure by doing some mental math on the ratio of either "Trend Stability" or "Price Change" over "Historic Volatility."

  11. VIX % Stretch - I occasionally refer to this statistic in my blogs, comparing the last VIX options volatility index to its fifteen-day moving average. Discussion of the usefulness of this typically mean-reverting indicator can be found throughout the Web. It is found in the lower right hand corner of the Rewind table.
As a reminder all the measures here are backward looking and therefore not necessarily predictive of future behaviour, particularly during inflexion points.

Friday, September 26, 2008

09.26.08 - Nasdaq Lags Badly

Fears on RIMM customer acquisition costs rising has the Quad-Qs badly lagging the recovery off of the morning lows (QQQQ -2.2% vs. SPY -1.3%). Price has been relatively stable (though it's starting to roll), all things considered, but the VIX is rising, and the AD line and adjusted tick are negative, so be careful playing the fade trade.

Political hay sure is flying. Economic slow-down aside, for now it seems no one wants to be too short ahead of the weekend and a potential plan agreement.

Intrade Bailout Contract Odds

10:30AM PST: Finding resistance at the pivot (SPY) and five day ma's (QQQQ), respectively. QQQQ's in particular are having trouble getting motivated, maybe more of an underlying economy message to traders?

Ted Spread

Reading: I had thought of posting this very same concept and got too busy. It's too expensive to make it worthwhile, but here it is anyway by Bill Luby -- good work Bill. And here is a link to the SPY composition. Interestingly, the IWM has greater raw financial services exposure. Anyhow, there are many ways to skin that cat "short" of an outright ban on all shorting.

Thursday, September 25, 2008

Stick That in Your Eye...

...Congress.


Reportedly, the unexpected federal FDIC take over of WM will leave no value to either shareholders or bondholders. Will taxpayers notice that another $2.5 Billion in market cap has evaporated from their S&P 500 401-K holdings in the morning? The largest bank failure in our history, and the country's sixth largest lender, I believe.

Hey, it's all Wall Street guys after all... (wait a minute, isn't WaMu out here in the Pacific Northwest?) And your constituents are overwhelmingly furious with this bailout, aren't they... (WSJ: 33% Against/ 30% For?) Take your time guys, we all want to be assured that you "get it right."

That sure worked well when you set these wheels in motion with the passage of the 1999 credit easing. Talk about unintended consequences. And special good work to the credit agencies that downgraded the firm yesterday and today. My personal kudos to you.


o US Seizes Washington Mutual
o JPMorgan to buy WaMu Assets
o WM After Hours
o Obama Says More Work Needed
o McCain Gambles
o Additional Details

09.25.08 - Adjusted Tick Looking Up


Tick is looking really good, but I'd like to see the Advance - Decline line show better strength. Amazing day given the economic numbers. CNBC is calling this "The Deal Gets Done Bounce." The bears are already looking ahead and so am I -- so consider trailing stops just in case. On the other hand, note that traditional MACD lines are set to go positive any day now (momentum).

11:35AM PST: Brief internet outage here. Price bounced off of the rising VWAP about twenty minutes ago. Blogger also has a planned outage later today.

Never Investement Advice

Wednesday, September 24, 2008

09.24.08 - Will S1 Hold?

Our legislators undoubtedly have a very serious fiduciary duty to fulfill, but boy is this thing dragging. They need to learn how to power negotiate. Meet in a moderated forum, ask questions and articulate positions through a selected member, go back to committee with a set time schedule and a battery of experts available in real-time, repeat no more than a handful of times with a deadline for the overall solution.

Most indicators are flat to slightly negative. So far S1 is holding. We are due a bounce up to SPY $122+, but we are really stuck in a quagmire here on a downward wedge and it nonetheless seems price action could break either way. No buyers. Maybe I'm being overly pessimistic. We'll see.

9:45AM PST: Notice that VIX is falling along with price, could indeed be a bullish falling wedge... meanwhile Adjusted Tick keeps moving down and look at the treasury spreads. Mixed signals for sure.

Commentary: Executive Compensation Limits -- now MBAs can know what it has felt like to be an MD during the last decade-and-a-half. What a joke. I like how the obviously war-focused republican presidential administration is taking the heat for this while the democrat-dominated congress conveniently ignores its oversight role. What have they been focused on for the last four years? Does anyone care?

Dear "Loyal Mentor" -- Don't confuse my commentary about the political process, such that it is, with party commentary! Don't get me started down that road!

Reading:

o Quant Edges - "Pullback has given back gains faster than any other..."

Never Investment Advice

Uncertainty Undiminished


Many of the "capitulation" indicators remain at extreme levels, indicating an extended period of uncertainty over the traditional interpretation of a singular fear event per se. While a sense that price action could break any moment in either direction remains, to the positive, a momentum divergence continues to establish itself.

Tuesday, September 23, 2008

09.23.08 - Walking Down to -61.8%


The market has felt heavy since the morning pop, as we slowly grind towards the -61.8% Fibonnaci retracement from the Friday highs to Thursday lows. Amazing. It seems that it is indeed going to take some resolution on the Hill to turn this tide in the short-term, and the market has the sense that this is now going to be an extended political process, economic recovery aside. Still, I'd be careful of holding too short here.

Here is an interesting article from Quantitative Edges. Dollar is up on the day. Lastly, note how low volume was yesterday and today. With the shorts out of the way, it's readily apparent that this is an [institutional] buyer's strike.


10:55AM PST: We slipped under that retrace line and are headed back to the "zone". Should find support there for now if we get that far.

11:10AM PST: Feels like we are carving a bottom [with the higher highs and lows]. Maybe place stops at the daily lows if you are compelled to chase it on a trade. If you are in for the longer-term... this area continues to look compelling to me.

11:40AM PST: Right back up to that declining trend-line... trend traders will short here... breakout traders will look for a piercing...

11:55AM PST: And, breakout! Let's see if it can hold [add: at that SPY $120 level]. Traders should consider raising stops to preserve gains.

12:55PM PST: Sell programs hit hard in this light volume environment. Hang in there.

CLOSING UPDATE: Nice move up again on the GS/BKR news. Here is a link for the person asking "what the hell" a Fibonacci is. Bottom line, it's one of those technical analysis quirks where elements of nature occasionally get reflected in the aggregate/herd behaviour of the markets.

Never Investment Advice

Monday, September 22, 2008

When M-T-M = M-A-D

Of course Mark-to-Market Accounting = Mutually-Assured-Destruction for the banks in a non-functioning market environment like this. By definition there is no "market" to mark to; and so their capital base is non-existent? This issue has come up in waves throughout this entire crisis, and here it is again today with everyone nervous about what clearing price the TARPs will actually set! Clearly this needs to be addressed in concert with the liquidity provisions.

Why not approach the problem from an adaptive mechanical trading systems approach? For example, relative volume (a proxy for liquidity) based rules could be applied whereby M-T-M must only be applied when transaction volume for a given asset class during the last quarter has been say 70% (pick your threshold) or greater as compared to the adjusted average of the prior four quarters.

There could even be a gray-zone where it would be discretionary to the individual entity, allowing investors to weigh the well disclosed elections of one company over another. Then below another critical limit in classes with systemic implications, a mandatory book method could be required to avoid system-wide disruptions and failure.

The purpose would be to avoid "the madness" of balance sheet "death spirals" while limiting the need for discretionary regulatory intervention and market uncertainty. Something to think about vis-a-vis FAS 157 -- effectively a self-adjusting hybrid between past and present rules.

09.22.08 - Adjusted Tick Wavering

As our politicians act like, well, politicians -- the slope of the Adjusted Tick has been wavering between positive and negative even while it remains clearly negative on an absolute basis, as is the daily VWAP. Meanwhile, the SPY has fallen back to its declining ten-day moving average.

Honestly, I would have been more concerned if we had moved up another 1%-plus. For now this action is healthy and desirable. However, oil is up nearly +6.3% (USO) and Gold is up some +3.6% (GLD) on dollar weakness, no doubt, and the XLE is the big session winner (+0.90%).

10:40AM PST: Crude trading halted!

12:35PM PST: Well, that "healthy" sheen to the pull-back has become quite an oil-slick. SPY is at S1 ($121.15) -- may be worth a try on a long scalp trade, but probably less risk to wait until the end of the day at this point. XLF is down -7.8% even under the short ban; go figure Chris Cox...? Still figuring?

12:55PM PST: I thought there would be a little more noise to play with today (especially in the NDX); it was pretty much a one-way trade. SPY is resting on the 5-day moving average. That MA line has flattened, maybe even turning up a bit, which is somewhat bullish inspite of today's action. It remains a question, of course, whether we will bounce here (inverted H&S) or form a W-type bottom where we retest or even break the Thursday low. News flow will be tremendously key here... we'll see if our "lawmakers" get the hint.

o ETF Guide - Survivorship Bias (...and you thought you weren't a momentum trader...)
o Reuters - Buybacks (+ Our Stock is Cheap; - No Investment Opportunities Here)

Never Investment Advice

Saturday, September 20, 2008

Weekly Rewind - Week 38 (09/19/08)

(Click to Enlarge)

Did I suggest that it might be "yet another volatile week," in last week's summary? After five days of exceptional range on fears of systemic financial collapse and new government capital market initiatives (Bloomberg - Stock Rise; AP - $700B Bailout Negotiated), the "big three" U.S. equity indices managed to close just slightly off of last week's closes.

Indeed, the S&P500 (SPY) closed down on Friday a mere -1.0%, as compared to its deepest draw-down of -9.7% just a day before. Meanwhile, both the Russell 2000 and Emerging Markets indices rocketed higher on an explosive bounce and relative dollar weakness (IWM +3.8%/EEM +5.3%/UUP -2.0%).

Sectorwise, the Financial and Energy complexes seriously outperformed (XLF +6.8%/XLE +3.7%), while the Consumer Staples and Technology areas saw continued negative rotation (XLP -4.3%/XLK -3.8%). Remarkably, in spite of significant volatility, the Financial sector ETF's overall performance during the past four weeks affords it one of the highest "Safety" Measures among the tracked group (XLF Omega[20] = 127%), although Real Estate (IYR) and Consumer Staples have both shown significantly less volatility and greater trendiness. (More on these new measures in an upcoming post.)

In the commodities realm, Precious Metals posted a record rebound (DBP +14.6%) on a rush to safety as global fears pushed the VIX implied volatility measure up to a multi-year high of 42+ (Reuters - Volatility Stays High).

We have a relatively light, but important economic schedule next week, as follows:

  • Wednesday - Existing Home Sales & Crude Inventory
  • Thursday - Initial Claims; New Home Sales & Durable Orders
  • Friday - Final GDP & Chain Deflator; Revised Michigan Sentiment
As oversold as equities remain in the longer time frames, the late week upsurge leaves many sectors nearing short-term overbought. Going into Week 39, the markets may likely see a pause or pullback as participants take time to consider the deeper meaning and longer-term implications of this week's sweeping government interventions.
Never Investment Advice

Friday, September 19, 2008

Why "We've Got to Stick Together"

After today's close, I lamented on the telephone with a relative whose puts had been blown out by the tremendous morning gap higher.

We discussed at length why liquidity is so important to our system that the government felt it had to take these drastic historic measures to shore it up.

To summarize, while the markets will likely fret for some time about what the Feds imagine is so bad that this was necessary, the implications of inaction would possibly have gone far beyond allowing another few mega-banks and insure-cos to fail, threatening the very roots of our capital market structure. I don't wish to be a doomsayer here, but obviously only time will tell whether the measures will prove effective.

Flawed Case-by-Case Approach

Looking back, as grating as today's actions were to our free-market foundations, they probably should have been taken earlier in the summer. I don't think the Feds necessarily had to blow out the shorts on an expiration Friday to make their point once again, but maybe the Brits spilled the beans early and yesterday was, after all, a pretty scary day.

The government simply could no longer keep addressing one institution at a time, leaving us all to wonder who would be next while playing "wait-n-see" and jawboning about how "no institution is too big to fail." That next institution may well have otherwise been the very system itself.

First, the government needed to put in place blanket structural measures covering the entire system to avoid going further down that slippery rabbit hole of articulating what criteria it would apply in selecting its next salvation candidate. It was the only way to avoid ever shifting statements and precedents, thus preserving its own (remaining) credibility.

We Are a Levered Economy

More importantly, it was not just that our banks were (and possibly remain) scandalously over-leveraged at 30:1, turning 3% excess loan losses into 99% black holes. It is that: a) the largest of our institutions are inextricably interlinked; and, b) our entire economy is fundamentally based on leverage of varying degrees.

When people can't get loans to buy homes, companies can't affordably draw on their revolvers, and banks stop lending to each other altogether - without hyperbole - the whole house of cards is likely on the verge of collapse.

Let's think about it. Even at traditional loan-to-value ratios, 80% has been typical in the home loan market for decades on end. In the sixties and seventies, tremendous additional float became available to the consumer with the advent of credit cards, not to mention home equity loans in more recent times. And the same can be said of businesses and commercial loans. Leverage is a significant part of how new opportunities are explored and expansion is financed. In the long run, we know that GDP and aggreggate growth are one in the same.

I could go on further tangents here on the role that the ratings agencies, derivative and reinsurance markets played in all this (a true laissez-faire corporate "race to the bottom" and "tragedy of the commons" all at once led by a complex interaction of individual, corporate, industry and government motivations), but this is all surface noise. Let's instead go a bit deeper to the root of the Fed's true fears.

The Multiplier Effect & Tipping Points

Fundamentally, every dollar that is spent and job that exists in our economy is subject to an economic multiplier. It's Econ-101. Think about it this way, for every one job lost at Lehman Brothers, how many building maintenance and security worker, limousine driver, maid, nanny, dry cleaner and barrista-down-the-street jobs are also lost? Two, three, more?

At some point along the path of economic and market declines, it is easy to imagine how we as a nation become increasingly sensitive to these losses on the margin. The multiplier works exponentially against us at some critical tipping point. We have been going down that road for nearly a year now, recently with increasing acceleration. I have to think that some fairly grim scenarios based on this logic were at the root of Paulson's nightmarish cautionary tales reportedly told up on the Hill last night.

Boom to Bust & Capital Market Cracks

Sure, it feels bizarre that we went from such a flush period to the polar opposite in such a short period of time, but, as is often the case, it was truly the unregulated excesses of the last expansion that set us up for a bubble correction leading to this traumatic and unprecedented decline in housing.

Yes, it was also predicatable, but if you'd bet on that since '06, you'd only now be breaking even on the trade. Back to my earlier point, this effect could only travel so far before that fundamental multiplier effect would waterfall over the entire global economy. Delinking debunked -- have you looked at emerging market performance lately!

Lastly, with the debt markets done in, by definition equity has to be shot as the unprotected asset class. No IPOs or stock financings here, thank you very much. (Not to mention foreign capital injections!) It seems that realization may have finally begun to sink into the equity markets just this week. Heck, even the repo/ money markets became unstable. When the lower traunches of the system are in shock, the entire capital markets structure trembles.

Folksy Blog Insert [Here]

A straighter title to this post would have been, "Why Liquidity Matters." I'm no economist, and though I suppose I could go into greater detail on why this is all so, there is really no need because the George Baily (James Stewart) character of the 1946 classic, "It's a Wonderful Life" said it all as plainly and passionately as could be during the "Run-on-the-Bank" scene:


"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?...Now wait...now listen...now listen to me. I beg of you not to do this thing.

If Potter gets hold of this Building and Loan there'll never be another decent house built in this town. He's already got charge of the bank. He's got the bus line. He's got the department stores. And now he's after us. Why? Well, it's very simple. Because we're cutting in on his business, that's why. And because he wants to keep you living in his slums and paying the kind of rent he decides.

Joe, you lived in one of those Potter houses, didn't you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren't going so well, and you couldn't make your payments? You didn't lose your house, did you? Do you think Potter would have let you keep it? Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicky and he's not. That's why. He's picking up some bargains.

Now, we can get through this thing all right. We've got to stick together, though. We've got to have faith in each other."



Diversionary, yes, but Frank Capra wrote that script in the period perhaps most analogous to what we are facing today. It's like I wrote last Sunday (was that less than a week ago?), our economy is 100% based on the principals of Hope and Trust.

I'll let you decide who "Potter" is in today's story, but two things are certain: we've got to stick together on this one... [and] we've got to have faith in each other. (It may even be time to reread the motto on our own dollar bill -- I know, I said no doomsaying!)

However imperfect they may be, let's hope that this week's dramatic Federal actions are correct, effective, and temporary steps in reestablishing these necessary preconditions to functioning capital markets.

What Now?

After the initial euphoria fades next week, the markets will undoubtedly begin fretting over what "truth" Paulson and friends feared with sufficient probability that they felt the need to switch from the "bazooka to the nuclear device," to quote one of today's CNBC commentators.

I would suggest that it is best to nip such speculation in the bud with a full and candid characterization of exactly what was said last night up on the Hill. After all, wasn't a lack of transparency part of what got us here? It's fear of the unknown that tanks markets. If this week's measures address the grim scenarios properly, then there should be no fear of discussing them openly, and soon.

As for what this all means for the future of our country and its standing in the world, that will just have to take time to sort out. It certainly feels grim right now, and you can be sure I'll be keeping an eagle eye out on the dollar, but we have been through this before, and here we all are.

Warning: Political Theater Ahead!

Then there is that other famous George Baily quotation:


[To Uncle Billy] "Where's that money, you silly stupid old fool? Where's that money? Do you realize what this means? It means bankruptcy and scandal and prison. That's what it means. One of us is going to jail - well, it's not gonna be me."

How we got here is more complex than a sound-bite fault that can easily be attributed to any one or several actors, but no doubt there will be plenty of time for the political blame game ahead after we've addressed the crisis at hand, TARPs and all.

Thank goodness there seems to be political consensus on this. The last thing we need right now are half-a-dozen hearings about how the evil shorts and bankers took us here, please Mr. Bank Regulator.

* * * *

Party On!

Sorry gang, this is for my Brother and Father-in-Law;
promise it will be my last Hammer & Sickle graphic for a while.
Hey, that one guy in the middle looks a little like Cramer!
Funny thing is, that after being limit-down for several days this week,
the Russian markets were limit-up today. Crazy times.

09.19.08 - Market Loves Red

Socialist Red equals Capitalist Green today as we witness heavy buying across all sectors. Cumulative Adjusted Tick is as strong as I have seen it in a long, long time as we run back up to R1 (SPY $126.15). Markets are now up on the week.

I hope you won't consider me unpatriotic for having flattened my long positions on the open.

I'll get back into the game soon enough, but first I want to assess the impact of this "game changer" on market behavior beyond the initial reaction. My advice if you don't like what you see - throw a TARP over it comrade.

Ex-Post Capitulation Capitalism Indicator Update: (Ref.)

Reading:

o Politico - TARP Summary
o Politico - Paulson Plan to Cost $1T
o Quant Edges - "Big Ass Reversals"
o Reuters - Treasury Backs Money Markets

11:40AM PST: Has anyone noticed that the US Dollar is down -1.12% (UUP), Gold up +3.10% (GLD)? I tried shorting GLD yesterday, no dice -- hard to borrow.

Broker Short Sale Restriction Letter

"September 19, 2008

Dear XXXXXXXXX clients,

IMPORTANT MESSAGE:

Due to the industry impact of today’s Securities and Exchange Commission emergency order on short selling (the SEC Order), EFFECTIVE IMMEDIATELY, we will not be able to facilitate short sales for any of our clients in any of the Financial Firms included on the list attached to the SEC order. The SEC order is in force until October 2, 2008 unless further extended.

IN THE EVENT ANY CLIENT ATTEMPTS TO ENTER A SHORT SALE IN VIOLATION OF THIS ORDER WE WILL IMMEDIATELY CLOSE OUT THE POSITION AND THE CLIENT WILL BEAR TOTAL RESPONSIBILITY FOR ANY LOSSES SUFFERED OR LOST OPPORTUNITIES REALIZED AS A RESULT OF THE BUY-IN.

For additional information, please visit the SEC website at http://www.sec.gov./ or contact the Trade Desk at (800) XXX-XXXX."

List of Firms: 799 Financial Firms. Breaking news GE/CIT to be added..?

If you thought last session's...

..moves were big, look at the overnight:

SPY +2.36%
DIA +1.56%
IWM +0.95%
QQQQ +2.53%

Looking at the futures, it looks like it's holding. And yet we are still down on the week... Asian markets are up 4-6% as of the time of this post. Here are some plan summaries and comments; still seems sketchy to me, so I'll reserve comment:

o Bloomberg: One
o Bloomberg: Two
o Washington Post

Well, [all this nationalization] is a bit embarrassing... but it's not like we haven't been here before. Have I mentioned that I was assigned by KPMG Peat Marwick as a young consultant to do SoCal real estate valuation and asset packaging for the RTC during the S&L crisis? When will we ever learn? (I think I know the answer to that.)

Volatility isn't over yet -- though some upside vol is undoubtedly welcome. Get up early for the open; awfully big moves. If you have a sense you may want to trim positions, you can be sure you won't be the only one considering it. In addition to tomorrow's normal post, I will put up a short article explaining some of the new statistical features found on the Weekly Rewind.

Thursday, September 18, 2008

09.18.08 - Tick Reversal

We are seeing some support just above S1 for the SPY (the [edit: second objective] $115 level). However, adjusted tick and the AD line rolled over fairly early in the morning in spite of the "coordinated central bank action." Downward price momentum is slowing, but we are at new lows and the VWAP trend is still south as the VIX breaks +38.

If the indicators turn or we hit the $115 level, I'll look at long exposure again (made a stupid trade and held too long), but so far today's trade has been on the short side. Breaking News: Putnam closing institutional money fund on redemption pressures (dollar level not broken). Tomorrow is options expiration, otherwise little official news on the calendar.

Reading:

o TraderFeed - Notes on a Weak Market
o Kathy Lein - Market Still Believes in Perfect Storm
o Calculated Risk - 25% Off Sale
o BeSpoke - Multiple 4% Moves
o SeekingAlpha - Nasdaq Worst Since 9/11
o Trading Markets - How to Recognize Capitulation
o SEC - New Rules Against Naked Shorts


9:50AM PST: VIX Breaks 40 (now 41+). This is the washout underway. My personal belief is that good intermediate- to long-term buying opportunities will be found between here and SPX 1,100 (yes we could go lower even if we bounce here). Again, patience will pay for cash reserves -- these are volatile times. When I referenced S1 earlier, I was looking at a 15 minute screen. Usually I refer to my three-minute chart, as posted on this site. We are now resting on S1 by that measure ($114.20). I'm very interested in reader thoughts.


Republish from Sunday Post:

"...But the global financial system's value is entirely hinged on trust and hope, and the former is very much a prerequisite for the later. Here, I can even put that into mathematical terms for you:

Value = Hope/(1+Distrust)^Time

I hope you recognize that formula. It's about as basic as it gets and lies at the heart of modern finance, such that it is. I know, I know -- save it for the drama queens on the financial news networks..."


10:20AM PST: Not to get too high here -- bugle and all ;) -- but watch to see if we can break the declining VWAP here. Momentum has shifted a bit, but the $116.50 level may prove resistance... and blew right through it back to pivot (add: now resistance).

Breaking News: "A Short Holiday"/ Calpers to Stop Lending Financial Shares/ "RTC-Like" Fund to be Announced/ TSP Waives Restrictions on WAMU Sale...

SHAZAM! - Hey, I get to have a little fun with this, don't I? Let's see if we can get follow through tomorrow. I'd trail loose stops for the time being (I prefer ATR-type stops).

Comment: Najarian makes a really good point... the cost of hedging through options will get more expensive by an order of magnitude with added short sale restrictions. Maybe one more reason the VIX has been relatively low this year until today. Think about it.

Never Investment Advice

Wednesday, September 17, 2008

09.17.08 - Battle to Hold S1

The SPY is holding at Floor Pivot S1 ($118.40), but adjusted tick is very negative and the AD line is headed south. I don't think it will continue to hold and I'm trying to leg out of my long trades entered at this level. Take a look at the headlines today at financial news aggregator and commentary blog Calculated Risk:

  • TED Spread Blowout

  • Russian Stock Market Crash Continues, Trading Halted Again

  • Single Family Starts: Lowest Since 1991

  • Report: Regulators Looking for a Buyer for WaMu

  • Large Money Market Fund Freezes Redemptions
Talk about global macro. This thing just keeps on getting bigger, and what we've seen so far are not "special cases." Do your best to manage risk today and the weeks ahead (I'll grant it isn't easy), and take a close read of this article at Traderfeed. Breaking News: SEC Short Rule Changes.


Name that Pair

Okay, not a lot of bandwidth for "fun" today, but if you need a break, see if you can "name that pair" below. Leave your answer in comments, and check back at the end of the day for the actual ticker names.

Answer: Black = Dreamworks (DWA)/ Red= US Oil ETF (USO)


8:40AM PST: Testing yesterday's opening lows. May provide brief respite. Look at gold (GLD +7.5%) and the VIX (34+)(See: VIX & More).

9:45AM PST: Tick is seemingly repairing itself/ slowing its downward momentum (edit: scratch that -- just as ugly as ever), and the VIX is looking toppy on the day. However, the VWAP is still downward sloping and we are now retesting the aforementioned S1 level from below, which may now prove technical resistance. Another wide-range day; will the lows hold? [Add: Doesn't look like it.]

10:50AM PST: Did I say VIX looked toppy? Liquidation continues at VIX 35+. Alpha Trends has posted the limit down table. Yikes!

12:05PM PST: "Big W" rally underway. I did not buy it, but did start selling/writing some out of the money [add: vertical spread] puts. As a side note, every commentator on CNBC keeps talking about diversification as the way to go. I agree, but can they tell us where that has helped lately (other than Consumer Staples maybe).

12:40PM PST: Wow, I take back every snide remark I've ever made about CNBC. Maria and Dylan are ripping this rating agency guy (Drew?) a new one and openly laughing in his face. I kid you not.

POST CLOSE: "Big W" got sloppy and fell apart -- New lows again. The "Name that Pair" answer is below the chart above.


The VIX closed 20% higher at 36+ today. Meanwhile, a long standing short signal I've had was finally negated by today's close on an exhaustion breadth indicator that measures capitulation across a broad spectrum of industries. There again, many capitulation indicators are at record levels tonight. So much so that I wonder if we don't have more to go, but it may be time to start looking for places to begin legging in for longer holds. This is not a penultimate capitulation call and an '87-like event may even be plausible ahead, but we are also increasingly due a bounce here. Bottom-line, be on high volatility alert.

P.S. - I felt the Russia Limit Down and Money Market Freeze got short shrift in the news cycle today. Scary, and I'm not being melodramatic.

Never Investment Advice

Tuesday, September 16, 2008

09.16.08 - AIG/Fed Foreshadow?

I'd propose that the pop on the AIG speculation foreshadows the moves we will see around the Fed announcement. That said, Adjusted Tick is fairly negative even as the Advance-Decline line shows slight signs of life. Price is just now testing the rising VWAP.

From a daily standpoint, note on the following chart how the first downside objective of this "prescient" article from last week was met this morning, including significant deterioration among the various capitulation indicators. Short-term RSI levels are also now near buyable lows. Even so, this is one capitulation event I'm not willing to call until after the fact, say after one or two days of significant 52 Week Highs - Lows improvement. There will undoubtedly be plenty of opportunity ahead for those holding cash.

More Reading:

o VIX and More: VIX:VXV Ratio at 1.16
o VIX and More: CDR Counterparty Risk Index Swamps March High
o Trader Feed - Thoughts about the Weakness
o Quant Edges - Older Studies to Review
o MarketSci - Fed Days


Fed Statement

Release Date: September 16, 2008

For immediate release
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.


11:20AM PST: Dollar basket ETF (UUP) is up +1.40% and rising. Fed keeps its powder dry -- [add:] but bear in mind several large monetary injections have been placed over the last several days! SPY is just under S1 and Tick is deteriorating. Don't let yourself get whipped, it will likely take through the close for this to sort out.

Bill Gross - "[Inflation statement is other worldly... clearly some Fed Governors on on another planet.]"

11:35AM PST: Supportive volume spike, restesting VWAP from below... not so sure. And it took...

12:10PM PST: Some tail winds now, but having a hard time breaking the pivot. I'd guess we do.

1:15PM PST: Morgan beats and an AIG bridge in the works, this may have been "it" [add: intraday -- but still see comments above]. Still some event news to get out of the way, but we are getting there. The next few days will tip that hat. Note that we went from oversold to mildly overbought in just a day again. As yet I'm still unsure what will pull us out of this on the consumer/economic side, but market watchers will invent something if they have to and call it anticipation of a recovery ex post.

Larry Fink just pointed out one positive element, mortgage rates have come WAY back down (30-year at 5.75% again). Add lower oil to that, substantial cash on the sidelines and on Tech Sector balance sheets, reduced inflation, soon to pass political uncertainty/ risk, fuller financial sector balance sheet disclosures, as yet unannounced added systemic/structural supports put in place, a few ologopilistic mergers in the financials, autmakers and transports, possible end to Iraq, easy to beat earnings comps ahead, global relative strength investment coming back into the US on the stronger dollar, improving consumer sentiment... Not too hard a picture to paint after all. Hey, hope springs eternal.

Never Investment Advice

Monday, September 15, 2008

09.15.08 - VWAP Holding under Tick Pressure

VIX beat 30 at the open. Nothing magic about that number gang, but still a big stretch from Friday. However, that level has been so popularized, maybe it's helping, who knows.

So far that Thursday opening low is proving strong support, as is the VWAP on an intraday basis. But be careful, adjusted tick is very, very weak, meaning traders are taking the bid more than typical. Rumor city out there.

Here is a link to today's earlier comments, and Sunday's as well for posterity's sake. Amazing about oil... has to be more unwinding happening as Ike gets little news play.

Paulson coming out with a statement soon. Hard to know how Fed speculation will play versus the risk of the GS report tomorrow. I'd guess it plays positively -- with commodities down so much and unemployment barreling higher, if not now (more cuts), then when?

10:50AM PST: Mr. Paulson, come on, the problem is not the "housing correction." It was 30 to 40 times leverage on top of bad lending practices that artificially stimulated home prices and subsequently magnified 3% portfolio losses into 99% equity declines. LEH is now trading at $0.19/share. [add:] Now the credit rating agencies show up late to the game only to further jeopardize the banks (by raising their borrowing costs) when they can (literally) afford to deal with it the least.

11:45AM PST: Ah, obviously the title of this post became defunct about an hour ago. I'd like to see us close at least a touch lower than the open. It's just that moves like off of the Thursday opening lows [seem to] not hold past the first hour on the subsequent day. I'd like to see a study on that -- don't have one -- strictly observation.

12:10PM PST: VIX:VXN in capitulation territory (1.1+). However, other indicators have yet to catch up to my satisfaction. We'll just have to be on watch throughout the week.

12:15PM PST: Meredith Whitney calls out Citi, Wachovia and Washington Mutual. Who are they going to sell their assets to [add:] and over what period of time? (IYR -6.24%) "I don't understand why the equity markets are doing so well today." And what about job loss impact on regional economies? Nice secondary effect thinking.

12:25PM PST: With enough foresight I could have named today's post, "VIX Smiling, Price Frowning."

1:00PM PST: Pierced SPX 1,200 into the closing bell. New closing lows on the year.

7:15PM PST: SPX is entering "the zone" (1,150 to 1,175), Dec. ES down after hours another 60 basis points to 1,176. The spring will be coiling at this point -- wait for it.

Oil down -4.68%; TNX down -5.34%


Note: The VIX:VXN ratio peaked near capitulation levels earlier today.

7:15AM PST: Adjusted tick is still negative, though the intermediate bars have been headed north. AD line looks like it could be turning. Mixed signals I'd say as SPY hits [potential] resistance coming from under S2, but feels like this gap wants to fill.

o FinViz ETF Heatmap

8:55AM PST: Nice run up this morning, but the indices were rebuffed at their five day moving averages, Adj. Tick remains very negative... will switch to normal format at the mid-day.

Sunday, September 14, 2008

Buckle Up!

Haven't looked at Globex yet... but hard to miss these headlines:

o Lehman to File Bankruptcy
o BofA & Merrill in Merger Talks
o Banker "Confidence" Plan
o Gasoline Topping $5.00 per Gallon

...Okay, looked it up and wish I hadn't... SPX down like 3% (3.4% low, some recovery occurring)... may want to take a look at these indicators again. There is blood in the streets my friends -- hang tight.


o AIG Restructure

At least we are seeing a flurry of action to shore things up. Enough hand wringing and waiting on Uncle Sam. Of course, it all changes nothing economically speaking for now. But the global financial system's value is entirely hinged on trust and hope, and the former is very much a prerequisite for the later. Here, I can even put that into mathematical terms for you:

Value = Hope/(1+Distrust)^Time

I hope you recognize that formula. It's about as basic as it gets and lies at the heart of modern finance, such that it is. I know, I know; save it for the drama queens on the financial news networks. [edit: Makes more sense with distrust in the denominator, but you get the idea.]


Wow, the boys ain't going to let Monday roll around with giving it a go:

o Bank of America Buys Merrill
o Fed Announcement
o $70B in Support

And I thought Paulson was "taking the weekend off." Guess CNBC got that wrong. I have been wondering who was going to be next. So is this "all better now," or is it "must be worse than we thought."

How many of you are insured through AIG? How much exactly is the LEH counter party risk? And what about WM? Who is next (this is the key back-of-mind question that could really tank us as Federal options fade)? What about the regionals? The list goes on....

So, probably just the start if you ask me, but we'll see what Mr. Market has to say tomorrow morning as we slog through this one day at a time. December e-minis are breaking new lows (1210.75). For me, early to bed, early to rise here on the westest coast.


o Paradise Lost

Note to self: Asia is just waking up; be sure to check the futures and overseas trade first thing. Let the action tell the story and be careful with your stops, this is just the kind of setup that can play hit and run on a nearly 4% down morning. I know it goes without saying, but you just have to trust your own instincts on that one.


o AIG Reaches Out

Yikes. When I wrote "buckle up", I didn't know it was going to be for the whole of an otherwise perfectly nice Sunday. Goodnight.


9/15 - Opening in the overnight lows range -- really not too bad... King Bill Gross - "AIG is in a perverse situation." Cramer - "This feels a little bit like '87 (I know)... This has been a disclosure issue..."

Saturday, September 13, 2008

Weekly Rewind - Week 37 (09/12/08)

(Click to Enlarge)

If you are tired of reading about how the markets "put in another volatile week," you'd better believe this blogger is tired of writing it. (Maybe that's as sure a sign as any that a bottom is in the works.)

Well, it was a nail biter as virtually all sectors were hit hard after Monday's opening GSE euphoria faded (Forbes - Investors Cheer Bailout), only to stage a minor come back after a gap down Thursday on a Lehman downgrade (AP - Lehman Plunges) and a weak jobless claims number. In fact, the S&P500 (SPY) and Dow Jones Industrials (DIA) both managed to finish the week up +1.3% and +2.2%, respectively. Among the major U.S. indices, only the NASDAQ 100 (QQQQ) came in just below flat.

Sectorwise, the Transports and Consumer Discretionaries did quite well (IYT +3.6%/XLY +3.0%) on the continued Commodities plunge (DBC -3.9%), while the beat down Utilities and Materials stocks were finally able to get a bounce in spite of it (XLU +3.1%/XLB +2.3%).

Remarkably, most commodities are now positively correlated to equities as all asset classes have been relentlessly subjected to the deleveraging effect. However, Liquid Energy again looks quite stretched to the downside (DBE RSI[2] = 5.1), as Consumer Staples does to the upside (XLP RSI[2] = 90.1). From a Style perspective, the Value quadrants once again tended to outperform (Mid-Cap Value, PWP +0.9 versus Growth, PWJ +0.4%).

Week 38 of 2008 holds a busy economic schedule, including the Federal Open Market Committee Policy Statement on Tuesday, as follows:
  • Monday - NY Empire State Index; Capacity Utilization & Industrial Production
  • Tuesday - Consumer Price Index & FOMC Statement
  • Wednesday - Building Permits; Housing Starts & Crude Inventory
  • Thursday - Initial Claims; Leading Indicators & Philadelphia Fed
Off the calendar, all eyes will be on the progress of Lehman (WSJ - LEH Deal Could Come Tonight) and Washington Mutual (Telegraph - JPM Chases WAMU), and the ultimate affect of Hurricane Ike, which now reportedly has nearly 20% of U.S. refining capacity off line (Bloomberg - Ike Forces Shutdown). Also, be aware that earnings season is far from over with Morgan Stanley (Wednesday), Fedex (Thursday), and Goldman Sachs (Tuesday) all reporting, among others. Add expirations on top, and it promises to be "yet another volatile week."
Never Investment Advice