Action Insight | Written by ActionForex.com | Mar 22 07 07:33 GMT |
Forex Daily Technical Report Focus on Fed Speakers after Dovish FOMC, UK Retail Sales Watched
Dollar remains weak today and edges further lower against euro, sterling and aussie. Though oversold condition may keep dollar in tight range for a while, but sentiments remains fragile after FOMC’s dovish statement yesterday and further downside is still expected to be seen in the near term. With a rather light economic calendar in the US today, markets’ focus will mainly be on speeches from Bernanke, Kroszner and Kohn from Fed on any further elaboration on Fed’s stance. Meanwhile, focus in the European session will mainly be on retail sales from UK.
To recap, Fed left rates unchanged at 5.25% yesterday as widely expected. The most important change in the accompanying statement is that the tightening bias is now abandoned. In the Jan 31 statement, Fed said that “the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.” This was changed to ” Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.” This is taken as a sign that a rate cut is now possible. Assessment of economy was changed from “somewhat firmer economic growth” to recent indicators have been “mixed”. “Some tentative signs of stabilization have appeared” was changed to “the adjustment in the housing sector is ongoing”. Regarding inflation, the “risk that inflation will fail to moderate as expected” is still fed’s predominant concern.
Recent rally in Sterling was based on solid PPI inflation and stronger than expected CPI inflation that prompted speculation that BoE will raise rate sooner in Q2 and could probably continue beyond. However, yesterday’s dovish MPC minutes that revealed an 8-1 vote instead of a 7-2 vote, with Blanchflower surprisingly voted for a cut, has triggered some traders to reposition themselves. Today’s retail sales data will be important and a strong number will shift expectation back to an Apr hike. Retails sales is expected to bounce back from Jan’s -1.8% fall to 0.7% rise in Feb, pushing yoy rate higher from 3.3% to 3.9%.
Released earlier today, Japan’s trade surplus for Feb came in slightly higher than expected at 980 billion. Exports surprised on the upside by rising 9.7% while imports remained solid by rising 10.1% yoy. EUR/USD
Daily Pivots: (S1) 1.3319; (P) 1.3354; (R1) 1.3418; http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/pivot_points_summary_200603205734/
EUR/JPY’s rally extends further to as high as 1.3410, breaking above last year’s high of 1.3364 and touches 61.8% projection of 1.2483 to 1.3364 from 1.2865 at 1.3409. At this point, intraday bias remains on the upside. Sustained break of 1.3409 fibo resistance will confirm that whole medium term up trend from 1.1639 has resumed for next upside target of 1.3668 (04 high).
On the downside, touching of 1.3354 minor support will turn intraday outlook consolidative first but downside should be contained above 1.3268 support and bring rally resumption. However, break of 1.3268 will argue that the rise from 1.3070 has completed, probably with bearish divergence condition in 4 hours MACD and RSI. In such case, deeper pull back could be seen towards 1.3185 resistance turned support.
In the bigger picture, correction from 1.3364 have already completed with three waves down to 1.2865 and the current rise from there is treated as resumption of the whole medium term up trend from 1.1639 as EUR/USD is still staying well within the rising channel. Sustained break of 1.3364/09 resistance zone will confirm this case and bring stronger rally towards 1.3668 resistance (04 high).
However, with bearish divergence condition in weekly MACD and RSI, a medium term top could be around the corner. Upside of this medium term up trend could be limited by resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. But clear reversal pattern or a break of the lower channel line (now at 1.2883) is needed to indicate a medium term top is formed, otherwise, further rise is still in favor.
On the downside, below 1.3185 support will be the first warning that whole rise from 1.2865 has completed and will put 1.3070 support back into focus again. Sustained break of 1.3070 will confirm this and bring deeper decline towards medium term rising channel (now at 1.2888).
GBP/USD
Daily Pivots: (S1) 1.9590; (P) 1.9640; (R1) 1.9725; http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/pivot_points_summary_200603205734/
Cable’s rally extends further to as high as 1.9695 today, break marginally above 1.9672 resistance. At this point, further rise is still expected to follow as long as cable stays above 1.9552 support. As discussed before, sustained break of 1.9672 resistance. will encourage a retest of 1.9913 high. Meanwhile, touching of 1.9552 will indicate that a short term top is likely formed and further consolidation will follow with risk of pull back to 4 hours 55 EMA (now at 1.9471). But still, a break below 1.9395 support is needed to indicate rise from 1.9213 has completed. Otherwise, further rally is still in favor.
In the bigger picture, strong rebound from mentioned 23.6% retracement of 1.7047 to 1.9913 at 1.9237 favors the case that cable corrective fall from 1.9913 is merely correction to the rise from 1.8517 only. Sustained break of 1.9672 resistance will add more weight to this view and should bring another high above 1.9913 and attempt to meet 2.0106 cluster resistance before having a medium term reversal.
However, note that bearish divergence conditions remains in weekly RSI and daily MACD, suggesting a medium term top is around the corner and the up trend from 1.7047 might complete at 2.0106 cluster resistance (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067). On the downside, break of 1.9395 will turn focus back to 1.9183/9237 support zone again.
USD/CHF
Daily Pivots: (S1) 1.2064; (P) 1.2114; (R1) 1.2145; http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/pivot_points_summary_200603205734/
USD/CHF’s recovery from 1.2029 was limited at 1.2166 after touching 4 hours 55 EMA (now at 1.2152). Subsequent fall has pushed USD/CHF to below 1.2100 support, suggesting that such recovery has completed. At this point, intraday bias will be on the downside for a retest of 1.2029 support (78.6% retracement of 1.1879 to 1.2571 at 1.2027). Firm break will confirm recent decline has resumed for next downside target of 1.1879 support (06 low).
Meanwhile, above 1.2166 will indicate correction from 1.2029 is still in progress and further recovery could still be seen. But still, fall from 1.2354 should still be in force as long as upside is limited by 1.2228/30 cluster resistance (61.8% retracement of 1.2354 to 1.2029 at 1.2230, 38.2% retracement of 1.2550 to 1.2029 at 1.2228) and another decline is still expected.
In the bigger picture, medium term outlook remains bearish with USD/CHF staying below both 55 days EMA and 55 weeks EMA. Daily and weekly MACD are staying negative, supporting this view too. The preferred interpretation at this point is that the whole down trend from 1.3283 is still in progress with the first move from 1.3283 finished with three waves down to 1.1919. Subsequent rebound to 1.2768 was the interim correction nand price actions from there represent resumption of such down trend. Sustained break of 1.1879 will add more credence to this view and bring further medium term weakness towards 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404.
However, note that USD/CHF is still bounded in wide range of 1.1878 to 1.2768. A rebound to above 1.2354 resistance will dampen this view and indicate that the fall from 1.2571 has completed and another rise could be seen to retest this high and then the upper end of the range at 1.2768.
USD/JPY
Daily Pivots: (S1) 117.13; (P) 117.53; (R1) 117.91; http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/pivot_points_summary_200603205734/
Not much to add as USD/JPY is still bounded in choppy consolidation between 115.13 and 118.49. As discussed before, the fall from 122.17 should have made a short term low at 115.13. And hence further consolidation is expected to follow. But upside should be limited by 100% projection of 115.13 to 118.49 from 115.75 at 119.10 and bring another fall.
On the downside, further consolidation cannot be ruled out as long as USD/JPY stays above 115.75 support. But a break there will encourage a retest of 115.13 low and break will confirm that fall from 121.61 has resumed for next downside target of 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02).
In the bigger picture, our view remains unchanged. Previous break of medium term rising channel support (108.99, 114.41, 117.87) indicates the whole up trend from 108.99 has completed at 122.17. Weekly MACD’s stay below signal line is still supporting this. The corrective nature of the rise from 108.99 swings favors back to the case that such medium term rally is merely part of a large scale consolidation that started at 121.38, with first leg completed at 108.99 and second leg completed at 122.17. The fall from 121.17 should then the third leg of such consolidation and deeper decline should at least be seen to below 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02) first with much possibility of further fall to retest 108.99 low.
However, decisive break of 119.48 fibo resistance will argue that the price actions from 122.17 is developing into large range consolidation instead. A retest of 122.17 high could be seen in such case. But still, firm break above this resistance is needed to confirm medium term rally from 108.99 has resumed. Otherwise, medium term outlook will be neutral at best.
EUR/JPY
Daily Pivots: (S1) 156.43; (P) 156.93; (R1) 157.84; http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/pivot_points_summary_200603205734/
EUR/JPY’s rally extends further as expected, reaching as high as 157.51 so far. At this point, further rally is still expected as long as EUR/JPY stays above 155.57 support. Sustained break of 157.61/73 cluster resistance (100% projection of 150.75 to 155.72 from 152.64 at 157.61, 78.6% retracement of 159.63 to 150.75 at 157.73) will encourage further rally to retest 159.63 high.
On the downside, below 155.57 again will suggest that a short term top is possibly formed and deeper retreat could be seen towards short term rising trend line (now at 154.61). Rally from 150.75 should still be in force as long as this trend line holds. But a break there will warn that such rebound has completed and will put 152.64 support into focus.
In the bigger picture, we’re treating the whole year long rise from 130.60 as resumption of the long term up trend with first wave ended at 143.60, subsequent correction ended at 137.167. The third wave up could have ended at 159.63 with a diagonal triangle already. Fall from 159.63 should represent the fourth wave correction and has already met it’s target of 38.2% retracement of 137.16 to 159.63 at 151.05) and lower channel line (143.60 to 159.63, 137.16, now at 151.53). Prior strong rebound from the channel line is so far consistent with this view. Hence, retest of 159.63 high should be seen and EUR/JPY should make a new high before finally forming a medium term top.
However, below 152.64 support again will dampen this view indicate that the rebound from 150.75 could probably be a correction to fall from 159.63 only. This will also put the channel support back into focus. Sustained break of the channel will indicate that a major medium term top already in place at 159.63 and that much deeper decline is indeed underway towards 147.71 support first.
Forex News Digest
http://c.moreover.com/click/here.pl?r855743609
Thu, 22 Mar 2007 04:58:00 GMT from Reuters
http://c.moreover.com/click/here.pl?r855710699
Thu, 22 Mar 2007 04:26:00 GMT from Bloomberg
http://c.moreover.com/click/here.pl?r855681936
Thu, 22 Mar 2007 03:58:00 GMT from Reuters
http://c.moreover.com/click/here.pl?r855665466
Thu, 22 Mar 2007 03:42:00 GMT from Bloomberg
http://c.moreover.com/click/here.pl?r855649284
Thu, 22 Mar 2007 03:28:00 GMT from Bloomberg
http://c.moreover.com/click/here.pl?r855648962
Thu, 22 Mar 2007 03:28:00 GMT from stuff.co.nz
http://c.moreover.com/click/here.pl?r855641536
Thu, 22 Mar 2007 03:22:00 GMT from The Australian
http://www.bloomberg.com/apps/news?pid=20601083&sid=akDkEcjLFWc0&refer=currency
http://www.bloomberg.com/apps/news?pid=20601083&sid=aqn0hVHDh_VQ&refer=currency
http://www.bloomberg.com/apps/news?pid=20601083&sid=a8q6deyGVW4E&refer=currency
http://www.bloomberg.com/apps/news?pid=20601083&sid=aHoSFEbzVvKA&refer=currency
http://www.actionforex.com/latest_news/latest_news/forex_news_20060323537/ Economic Indicators Update
GMT Ccy Events Actual Consensus Previous Revised
23:50 JPY Japan Trade balance (jpy) Feb 979.6B 711.1 B 4.4B -1.9B
23:50 JPY Japan Exports Y/Y Feb 9.70% 6.20% 18.90%
23:50 JPY Japan Imports Y/Y Feb 10.10% 12.40% 10.90%
9:30 GBP U.K. Retail sales M/M Feb 0.70% -1.80%
9:30 GBP U.K. Retail sales Y/Y Feb 3.90% 3.30%
10:00 EUR Eurozone Trade balance (euro) Jan 1.2 B 2.50%
10:00 EUR Eurozone Industrial new ords M/M Jan -1.00% 2.80%
10:00 EUR Eurozone Industrial new ords Y/Y Jan 10.10% 1.60%
11:00 GBP U.K. CBI industrial trends Mar 6 4
12:30 USD U.S. Jobless claims 323 K 318 K
13:30 USD Fed Bernanke Speaks
14:00 USD U.S. Leading indicators Feb -0.30% 0.10%
16:00 USD Fed Kroszner Speaks
17:30 USD Fed Kohn Speaks
http://www.actionforex.com/general_information/forex_newsletters/forex_newsletter_200507301487/
BRITONS in the 21st century will end up living in 16 different homes over their lifetime compared to their parents’ generation who will have stayed in just five, according to new figures.
Modern homeowners get itchy feet every five years on average as they try and move up the property ladder.
Their total property haul of 16 homes includes the houses of their childhood, university lodgings, rented flat shares, first time buys, family homes and finally downsizing for retirement.
This is almost twice as many homes as outlined in a similar social trends survey in 1990, showing just how often modern householders are willing to move if they can.
In contrast, today’s average 65-year-old has only lived in five homes during his or her lifetime said the study, based on a survey of 2,000 adults of all ages, released yesterday by the Ideal Home Show.
Experts said the trend was mostly down to changing social trends including moving away from home earlier, increased cohabiting before marriage, rising divorce rates and fragmentation of the family unit.
Neil Barber, of Edinburgh-based removal firm Intransit, said: “Social mores have changed. Our customers are moving because they are sharing with a boyfriend, moving up a year in university or are choosing different flatmates. They are moving because they have more options than in previous generations.”
Even owner-occupiers are more mobile today. Brett Jefferies, 31, has bought and sold homes in Edinburgh three times in as many years. “My long-term girlfriend and I just decided we needed more room so we’re looking to move even though we only just bought the flat we’re in now. We just bought it to redecorate and sell it on, really.
“I don’t feel particularly attached to places, even though you take pride in any improvements you have made.”
The study found older generations were more likely to move straight from their parents’ house into the marital home, moving once or twice to bigger properties as the family grew, then a retirement property.
But they also bought property at a time when it was harder to get a mortgage and more emphasis was placed on paying off a loan than constantly extending the amount borrowed.
There was also less profit to be made out of property.
Many of today’s 65-year-olds have lived through periods when house prices have actually fallen, unlike many homeowners in their thirties and younger who have never experienced a boom and bust economy.
The study found 12 million people a year move home in the UK - an average of over 33,000 a day. Every move involves ten days of packing and unpacking so 16 moves will add up to the equivalent of more than five months of tedious organising.
Bernard Clarke, of the Council of Mortgage Lenders (CML) said: “The number of mortgages is pretty steady - there is no long-term increasing trend. A lot of homeowners will choose to remortgage when they move.”
The Ideal Home Show’s director, Caroline Carr, said: “It’s amazing to think how many people are boxing up all their possessions every day of the year.”
In the future many will be moving into much greener properties built from more sustainable materials and geared towards the environment, the study predicted. FOREVER ON THE MOVE
Anna Close, 31, a lecturer in English at Glasgow Metropolitan College, has moved home in Glasgow 12 times in the past 13 years.
1. Autumn 1994 to summer 1995: Left home to move into student halls of residence.
2. Autumn 1995 to summer 1996: shared a flat in Derby Street.
3. Summer 1996: lived with a friend in Hillhead.
4. Autumn 1996 to summer 1997: shared Grant Street flat with five others.
5. Autumn 1997 to early 1998: shared a flat in Southpark Avenue.
6. Early 1998 to summer 1998: shared a flat in Woodlands Road.
7. Autumn 1998 to end of 1999: shared a flat in Queen’s Drive.
8. Autumn 2001 to spring 2002: shared flat in Nithsdale Road.
9.Spring 2002 to spring 2003: shared a flat with one friend in Albert Avenue.
10. Spring 2003 to spring 2005: shared a flat with one friend in Allison Street.
11. Spring 2005 to Nov 2006: shared a flat with partner.
12. Currently sharing a flat in Shawlands.
Related topic
- http://news.scotsman.com/topics.cfm?tid=483
http://news.scotsman.com/topics.cfm?tid=483
When publisher John Wiley & Sons approached me a year ago with a proposal to write the next title in their Little Book series, I must admit that my first reaction was to wonder if I had yet another book in me. I had only recently completed my fifth book, The Battle for the Soul of Capitalism, and feared that a little bit of “book fatigue” had set in.
But the more I thought about it, the more I realized how much I would enjoy writing a book that would explain, as simply and plainly as possible, the elegant arithmetic and irrefutable logic of index fund investing. And I was right! I enjoyed the process so much that just a few months after I first put pen to paper, I held The Little Book of Common Sense Investing in my hands, months ahead of schedule. And as pleased as I’ve been with each of my prior works, I’m particularly so with this one, aiming, as it does, for such a broad audience.
One reason that I found this book so easy and rewarding to write is because it called upon two traits that have served me well during my 55-year career — common sense, and, as one of my detractors put it, “an uncanny ability to recognize the obvious.” I’m convinced that successful investing is all about common sense. Common sense, after all, tells you to keep your costs low, minimize the impact of taxes and diversify as broadly as possible.
A low-cost index fund, holding all of our nation’s publicly held businesses, bought and held for the long term, is the purest manifestation of such common sense and is the only way to guarantee that you earn your fair share of the returns America’s corporations generate in the form of dividends and earnings growth.
Through the miracle of compounding, the accumulations of wealth over the years generated by those returns have been little short of staggering. Over the past half-century, American business has produced a return of 10% per year. Compounded at that rate over five decades, each $1 invested would grow to $117.40. Surely, a strategy of investing broadly and for the long term in American business is a positive-sum game — a winner’s game.
But as Warren Buffett has said, such a strategy is simple, but not easy. Why? Largely because Wall Street’s great marketing machine generates a tremendous amount of noise (and little light) in its efforts to convince investors that they can outperform the market. Internet stocks, small-cap stocks, emerging-market mutual funds, hedge funds, commodity ETFs — the styles and sectors come and go, but the message remains the same: Yes, you can beat the market, and we know how.
But of course, for every winner, there must be a loser. And, as a group, all investors are — I hope you’re sitting down — average, but only before the costs of all those investment strategies are deducted. But the deduction of all those costs (commissions, administrative and operating expenses, advisory fees, taxes and so on) turns efforts to outperform the market from a zero-sum game into a loser’s game, in which the return of all investors as a group lag the market by the amount of the costs they incur.
Of course, these costs can seem remarkably inconsequential in the abstract. Paying a mere 2.5% of your capital each year for expenses couldn’t have that much of an impact, right? Why not judge for yourself? If we deduct 2.5% in annual expenses (a conservative estimate of the total costs incurred by the average equity investor) from that 10% long-term return on stocks, the net return is just 7.5%.
As a result, a $1 investment grows to just $37.19, instead of $117.40, representing just over 30% of the return that was there for the taking. The other 70%? Paid year after year, in dribs and drabs, to Wall Street’s marketers. If such an arrangement strikes you as absurd, well, chalk one up for common sense.
When I created the world’s first index mutual fund more than 30 years ago, it was widely derided. “Bogle’s Folly” was one of the more memorable descriptions it earned. After all, it was asked, why would investors want to settle for average? Ironically, by “settling” for average performance, investors who choose what I call traditional index funds — low-cost funds owning virtually the entire U.S. stock market — will, over the long term, reap superior returns simply by paying a fraction of the costs that the typical investor pays.
By investing and then dropping out of the system, never paying a single unnecessary cost or tax, the odds in favor of the index strategy’s long-term success are staggering, simply because of what I call “the relentless rules of humble arithmetic.” Success breeds success, and today individual and institutional investors alike have embraced this wonderfully simple investment concept to the tune of more than $3 trillion.
Nonetheless, ever the idealist, I believe that indexing’s reach remains far short of its potential. I’m convinced that if I could spread the message of common-sense investing, as I quote Michael Kelly in the book, “carefully enough, thoroughly enough, thoughtfully enough — why, eventually everyone would see, and then everything would be fixed.” And indeed, the notion of “fixing” the long-term financial security of America’s 100 million investors is the ideal that drove me to write my Little Book of Common Sense Investing.
Editor’s Note: In this edition of “360 Degrees,” commentators Jim Cramer, Barry Ritholtz, Doug Kass, Helene Meisler and Dick Arms examine the latest market action.
TheStreet.com has always believed that offering a wide variety of opinions and viewpoints — rather than a monolithic “house view” — helps readers make better-informed investment decisions. In that spirit, we bring you “360 Degrees.”
“360 Degrees” is a feature that takes advantage of our varied stable of contributors to RealMoney, who offer analysis of stocks and the markets from all angles — fundamental vs. technical, short-term trader vs. long-term investor.
Click on the following link for information about a free trial to RealMoney.
We End With the Worst of Both Worlds
By James J. Cramer
This was originally published on RealMoney on March 2 at 3:41 p.m. ET.
Pathetic by both bulls and bears. We didn’t take out the lows of the week. But we couldn’t rally either. No man’s land means nothing ventured.
It is possible that you could argue that we had the V-bottom yesterday and a successful retest of the convoluted lows of Tuesday.
I wonder whether, though, the crescendo on Thursday was a false one, a machine-orchestrated crescendo, this time positively unlike Tuesday.
I am putting the odds of that being the case at 50-50. Believe me, it would be higher if we were more oversold.
I think that we will be oversold enough by the middle of next week to form a more important bottom than anything that the machines could pull off.
Until then, expect more of this whippy action. And batten down the hatches.
Top 10 Myths of Tuesday’s Correction
By Barry Ritholtz
This was originally published on RealMoney on March 2 at 3:38 p.m. ET.
On Tuesday, a long overdue market correction took place. At its worst, the Dow Jones Industrial Average was down well over 500 points. As has been recounted endlessly by the media, this was the worst single day since Sept. 17, 2001.
It didn’t take very long for the spinmeisters to get busy. Numerous reasons were spun out as to why stocks fell — ranging from merely uninformed to misleading to utterly false. I have seen, read or heard each of the following reasons offered either on the major networks, in the business press, or on the radio. While you have likely seen most of these, I doubt you have seen the facts figures and analyses that follow each.
My top 10 myths of the Great Correction of 2007:
1. Chinese regulators caused the meltdown.
The timing of the Chinese news release makes this statement suspect: On Sunday, China’s main stock exchanges (in Shanghai and Shenzhen) issued new guidelines regulating member securities companies.
An article on the subject “China tightens regulation of securities dealers with new rules” was posted at http://english.gov.cn/2007-02/26/content_533877.htm on Monday. Here is an excerpt: China’s Shanghai and Shenzhen stock exchanges issued on Sunday the new rules of regulating their member securities companies in a bid to ward off risks in stock trading. The rules, which will come into effect on May 1, set limits to the varieties, methods and scales of stock trading that dealers are allowed to conduct, preventing them from engaging in high-risk business beyond their capacity.
Note that these details were released on Sunday, and on Monday Chinese markets set new all-time record highs! Indeed, despite recent official discussions of new capital gains taxes, increased regulation and the government’s desire to reduce speculation in China, their indices had advanced 13% in the prior six sessions — all setting records.
2. It was Greenspan’s fault.
I’ve given Easy Al a lot of grief over the years. His answer to most any problem is “more liquidity.”
However, he doesn’t deserve the blame for this one. Given the specifics of what the former Fed Chair said, as well as the timing of his commentary, it is doubtful he had much impact.
First off, Greenspan didn’t say anything that was off consensus. His damaging quote? “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown.”
Those ain’t exactly fightin’ words.
Then there’s the timing issue. His comments were made early Monday morning over satellite to a group of Hong Kong investors. It was subsequently reported by Bloomberg and others. By 6:49 am on Monday morning, I had already http://bigpicture.typepad.com/comments/2007/02/greenspan_forec.html, noting tongue in cheek that “Greenspan Forecasts Recession (Market Expected to Rally).”
As noted above, Chinese markets rallied, and the US markets were flat on Monday. So to blame what happened Tuesday on Greenspan’s comments hardly makes sense.
3. Blame China’s market crash.
On Tuesday, China’s main indices were off 8.8%. However, it is doubtful this is what led to the cascading selloff in the US.
Why? Most local markets in Asia were off only modestly. The Hang Seng (-1.76%), the Kospi (-1.05%) and the Nikkei (0.52%) all had minor losses. (Note that some Asian markets close earlier than China’s.)
Second, consider this fact: The combined value of China’s Shanghai and Shenzhen stock markets — the total market capitalization — was $400 billion at the end of 2005. Over the next 14 months, it nearly tripled. Gains over the past six months were especially strong. After Tuesday’s 8.8% plunge, the combined market cap was a mere $1.4 trillion, vs. $400 billion at the end of 2005.
To put that into some context, the NYSE’s cap is $22.3 trillion, and the Nasdaq’s cap is $4.2 trillion. Add in the Amex and other markets and the total US market cap is north of $27 trillion dollars.
By my back-of-the-envelope calculations, our 3.5% correction wiped out nearly a trillion dollars in US market capitalization, or more than two-thirds of the entire capitalization of both of China’s exchanges combined.
I doubt Communist China’s relatively small public markets alone are responsible for what happened here.
4. A Dow Jones Glitch caused the plunge
An absurdly false statement. By 2:55 p.m. EST, the Dow was off 295 points, the Nasdaq was down 95 and the S&P 500 was off over 3%. Indeed, trades in the Dow Diamonds and all 30 individual Dow Components were being reported correctly. Only the index (”.INDU” on ILX or Bloomberg) was lagging.
Once the glitch kicked in around 3:00 p.m., most of the damage had already been done. Indeed, until that time, the glitch actually made trading look more orderly then it was. When Dow Jones switched to its back-up server, it rammed nearly an hour’s worth of lagging reports through in just a few moments, moving the selloff from mild to wild in 60 seconds.
5. We got fluctuated!
On “Kudlow & Company” Tuesday evening, and then again in a Wall Street Journal http://online.wsj.com/article/SB117271832057922965.html, my pal Larry Kudlow went to the infamous J.P. Morgan quote, saying “Prices fluctuate.”
Maybe, but prior to Tuesday, volatility had been nearly abolished and markets had only moved one direction — higher. I mentioned this market was challenging J.P. Morgan’s notions with its lack of volatility. When Kudlow corrected me — “Morgan said Fluctuate, not Volatility” — I replied “We got fluctuated pretty good on Tuesday.”
And as I am writing this on Friday, we seem to be getting fluctuated pretty good again today.
6. Stock prices will be higher six months from now.
This one is only half wrong: Based on prior one-day selloffs of 3% and 4%, what is most likely is that we will see higher and lower prices over the next six months to a year. So unless you plan on buying stock and then hiding on a desert island, prepare yourself for some big price moves.
Consider 1997: From Oct. 16 to Oct. 24, the market suffered three days where prices were down between 2.5% to 3%. The next trading day (Oct. 27), the Nasdaq dropped about 100 points (-6.2%). The day after saw a gap down of another 75 points, but then the market rallied, closing up over 9%! Some more upward progress was followed by an 11% setback. The washed-out markets set up a 30% rally by April 1998.
A similar pattern occurred in 1998. April 6 and 7 saw 1.7% and 2% drops, respectively, followed by oversold conditions, leading to a 10-day rally of about 7%. That set up some wild market swings over the next six months: a 10.7% selloff, an 18.2% rally, a 27.2% selloff. From there, we saw a near 20% snapback, leading to a 23.6% correction, and by Oct. 8, 1998, the markets had erased the gains for the entire year and then some. The deeply oversold conditions led to a rally that was up about 60% by the end of 1998, and tagged an 86.7% gain on by Feb. 1, 1999.
December 1999 and January 2000 saw several 3% down days. The market peaked on March 10, and two days later suffered a 6% (peak-to-trough intraday) whack. The next day was another hit of near 4%. These moves set 2000 up for what would turn out to be one of the wildest years in market history. From that March peak to the beginning of April, the Nasdaq dropped 29%. A 22% bounce by April 10 was followed by a 27% drop, a 23% gain and a 23% selloff. And that was all before May was over!
From the lows in May, the Nasdaq subsequently rallied 41% by mid-July. Between then and Sept. 1, the Nazz dropped 17.9% and rallied 21.0%. From September to December, the Nasdaq markets then dropped over 40%, to just about 2,300.
Here we are nearly seven years later, and we are less than 100 points above the levels of December 2000.
7. Selloffs such as this are healthy.
Moderate selloffs of 0.5% to 1% might be healthy, but the plunge this week was anything but.
What was unusual about the selloff this week were the volume and market internals. Volume on the NYSE and Nasdaq were record setting. The Nasdaq-100 Trust (QQQQ) traded well over 300 million shares alone. Advance/decline ratios and up/down volumes were off the chart.
This looked like the kind of panic selling we see at the end of a long decline. Indeed, if we had been selling off for the prior six months, I would have been advising everyone and their mother to be in there buying hand-over-fist.
What makes this situation potentially dangerous is that this was the first day of the selloff, not the last.
The enormous distributive volume and the horrific market internals were anything but healthy. It suggests a major change in underlying metrics and psychology.
8. The Fed stands by ready to cut if this gets much worse.
It’s become the rallying cry of the bulls: The Fed is cutting! The Fed is cutting!
The problem is that card has already been played and we know how that turned out. The Fed did this during the last recession/market crash (2001-03), and the resulting rampant inflation, unaffordable housing boom, $75 Oil and $750 Gold is what they have to show for it.
Inflation, though moderating, still remains elevated. I suspect the Fed will be somewhat reluctant to open the spigots again anytime soon. Ben Bernanke knows all too well that there is no free lunch. He is well aware that inflation is above all a monetary phenomena.
Hopes for rate cuts are misplaced. If we are to believe the Fed’s jawboning, it is inflation, and not stock prices, that has the Fed most worried. That concern is warranted, going by the recent Core CPI and PCE data. Oil, medical care and food prices all remain quite lofty.
9. The market is not forecasting a weakening economy.
For the past six months, I have heard repeatedly that the markets are forecasting economic growth, and that the rally was proof that the economy was not slowing.
Apparently this is part of the “ratchet wrench approach to analysis.” It only works in one direction — e.g., oil is disinflationary coming down, but somehow not inflationary going up, or lower gold prices are proof of low inflation, while higher prices are proof of speculation.
The lack of symmetry is revealing of bias. If you believe that markets discount the future, then it’s all but impossible to say that a 500-point intraday drop has no economic significance.
10. This had nothing to do with anything fundamental!
A long string of punk economic data was finally broken by a marginal ISM report Thursday. But that was cold comfort to those who track the economy and have noted the ongoing deceleration in growth.
Probably the most overlooked story from Tuesday was the live interview with Freddie Mac’s chief on CNBC early Tuesday morning. Freddie Mac essentially announced that they would “stop purchasing subprime loans or any securities with high risks of default.”
In 2006, about 15% of new mortgage originations (not refis) were sub prime. Add in the various “liar loans” where there is no income check and no documentation is required, and other flavors of exotic fare such as interest-only loans, and piggyback mortgages that allow 100% loan to value, and you have as many as 30% of new mortgages.
With one fell swoop, Freddie just eliminated between 15% and 25% of home purchasers from the credit pool, and that just set the housing bottom-callers back another year.
Drawing Fact From Fiction Since the summer, the rampaging bulls have had their way with just about every market on earth. Volatility had been subdued and risks ignored.
That era is likely over now. Indeed, the general commentary (”buy the dip, hold for the long term”) may be ignoring a developing shift in psychology. It reeks of complacency.
In a note to clients after the plunge, we said to expect three things:
1) Increased volatility;
2) attempt(s) to return to prior market highs;
3) deeply oversold conditions that will eventually create great entry points.
Traders are likely better off waiting for these conditions prior to jumping into long-side trades.
Finding the Next Shoe to Drop
By Doug Kass
This was originally published on RealMoney on March 2 at 12:32 p.m. ET.
Late yesterday, Countrywide Financial (CFC) , the largest originator of home loans in the U.S., http://biz.yahoo.com/ap/070301/countrywide.html?.v=1 in its prime mortgage loans.
At year-end 2006, Countrywide’s subprime delinquencies were approaching 20%. That’s nearly twice the rate reported by the subprime industry in November and it suggests that the upward spiral in subprime-industy late payments will rise dramatically in 2007. (New data from First American Loan Performance, a San Francisco-based research firm, confirmed this likely trend, reporting that nearly 14% of packaged subprime loans were delinquent.)
More importantly, these results confirm that credit problems will not be contained to the subprime mortgage market. At Countrywide, prime mortgage-lending delinquencies doubled to nearly 3% year over year, indicating that that sector is experiencing the same contagion that subprime experienced over the last 12 months.
On Tuesday, in response to the subprime carnage, Freddie Mac (FRE) http://www.freddiemac.com/news/archives/corporate/2007/20070227_subprimelending.html tougher subprime lending standards.
Today, the Federal Reserve and other regulators of banks are expected to release new subprime lending guidance, which will incorporate the impact of mortgage interest rate resets.
As a result of new lending standards and self-imposed reductions in mortgage lending, the availability of mortgages is going to be severely crimped — and with it, personal consumption expenditures will soon take a dive.
It is no wonder that bullish commentators are getting bored with subprime lending problems. Larry Kudlow’s , who, like Dante, Dostoevsky, Nietzsche and Proust, view the world through the lens of a single defining idea (”the greatest story never told”), are about to be outwitted by the foxes who, like Shakespeare, Aristotle, Balzac and Joyce, draw on a variety of experiences in creating their investment mosaic and refuse to believe that the world can be boiled down to a single idea.
The Next Shoe to Drop? With the contagion that started in subprime mortgage lending now spreading to other mortgage tranches, http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070228:MTFH21376_2007-02-28_18-19-03_N28452118&type=comktNews&rpc=44, the next shoe to drop might well be in the broader securitization market.
Not only will older, less-protected packaged securitizations and other derivatives decline in price in a readjustment, but the entire credit securitization chain will become less profitable to industrial companies, mortgage lenders, banks and brokerages.
Consider what has occurred and is now occurring in subprime. The prices of mortgages are rising as the originations become less profitable for the financial intermediaries that serve the market. In turn, housing affordability worsens, delinquencies and foreclosures rise, housing inventories build further, and home prices drop in the second leg down for residential real estate.
This is the vicious cycle and contagion in credit markets.
Now I am hearing stories of plunging demand for CDO tranches and sponsors taking large fee-haircuts before deals can be sold. It is in the mixed asset class of CDOs where the contagion of subprime might soon spread as buyers recoil from sharper-than-anticipated losses in the mortgage market.
Credit spreads are flying open and the vicious cycle of credit has begun as the evaluation of risk is reassessed.
Given the sheer size and significance of the unregulated credit derivative markets, this is the kind of stuff that capital market crashes are made of.
At time of publication, Kass and/or his funds were short CFC, although holdings can change at any time.
Upcoming Rally Won’t Last Long
By Helene Meisler
This was originally published on RealMoney on March 2 at 8:31 a.m. ET.
It must be killing the perma-bulls that we aren’t just turning around and zooming upward. After all, that has been the case for the past six or seven months. But I suppose that’s why they call it complacency.
We are heading toward an oversold reading, which will occur sometime next week between Monday and Wednesday. It will not be a great oversold reading because the negative numbers being dropped on the 10-day moving average are rather puny.
For example, we’ll drop -17 Monday. Tuesday is a positive reading. Wednesday is -320, and that is the biggest negative number to be dropped next week.
As a reminder, to be oversold, a long string of negative numbers must be dropped. For a good oversold reading, a long string of “big” negative numbers needs to be dropped. Next week’s numbers are not “big.”
The next thing to notice is that the oscillator has now made a lower low. Remember, an oversold reading usually leads to an oversold rally, but it takes positive divergences (i.e., a higher low in the oscillator) to get a rally with some staying power. Just notice the three lows of last spring and summer, with the latter two being higher lows. That is what a positive divergence looks like. What we have now is at best an upcoming oversold reading.
Then there’s the put/call ratio. For weeks on end, I put the put/call ratio on the bullish side of the ledger, but last Thursday, I warned that at some point, a constantly high put/call ratio becomes a negative, not a positive. On Monday, I showed the chart of the index put/call ratio’s 21-day moving average as it surged over 180%, which turned it from bullish to bearish.
However, for the past few days, I haven’t mentioned the put/call ratio, despite its higher readings. For each of the past seven trading days, the total put/call ratio has been over 100%. I use a 10-day moving average on the total put/call ratio for shorter-term moves. That means within three trading days, this indicator is likely to peak.
Heading into last Memorial Day, the put/call ratio had nine consecutive days of 100% or greater readings. The market rallied, but it lasted only a few days before heading back down again. To me, this confirms that the upcoming oversold reading isn’t a great one. These two indicators say that we should get some kind of rally next week, but it probably won’t last long.
Away from stocks, has anyone noticed that oil has rallied a lot lately? Oh, it’s been quiet in its rise, but yesterday’s high was $62.49. I had been looking for something around $62.50, I’d say it’s in the area now.
I wouldn’t look for much more upside on oil now and would consider it vulnerable to a move back down below $60.
Also on the commodity side, it’s time to revisit silver, which I last covered on Feb. 16. At the time, I said I’d like to see silver break out, get people excited and give the gain right back. That is exactly what it has done, yet I haven’t seen anyone discuss its collapse. I believe silver is due to test that $12.50-$13 level now.
Overbought/Oversold Oscillator
For more explanation, check out The Chartist’s primer.
Radical Change Cannot Be Ignored
By Dick Arms
This was originally published on RealMoney on March 2 at 8:15 a.m. ET.
The big decline at the market’s open yesterday took the Dow down to just about where some support would be expected. As you can see, the support of November seemed to come back into play yesterday. That also suggests the rally is likely to go further. In fact, there even may be room for nimble traders to make some money on the long side.
But more important is the larger picture. The upward move that began last July was a well-defined trend. That trend started to lose momentum in November, but the narrow channel continued. Now the uptrend has been decisively destroyed.
There has been a radical change that cannot be ignored, or passed off as just a correction, as seems to be the song being sung by both the government and the media. This was an important break, and one that was warned about repeatedly in this column. I am willing to try to play a rally here, because it is such an oversold short-term situation. But longer term, I do not believe the decline is over.
To view a larger version of these charts (in some browsers), after clicking on the “larger image” link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.
November Support’s in Play on Dow
But the longer-term decline isn’t over
http://images.thestreet.com/tsc/common/images/storyimages/030107_arms01.gif
Source: MetaStock
