Volatility Anyone?
Since the last post the stock markets have been mostly lower, very volatile and recently strengthening. For all the excitement we are still locked in the S&P range of 1270-1400, oil and gold are setting new highs, and the $US is setting new lows, amongst other action.
The Fed is scrambling to stabilize our financial system through some clever, sophisiticated techniques beyond simple rate cuts and all of those acts will help to turn the tide eventually. However the current evidence says those acts are not yet causing a difference. Today's rally was spurred by the fine people at S&P who claim that subprime related write-offs are past the midway point. They completely missed this debacle - some 85% of all mortgage bonds issued in the last 3 years were rated S&P AAA. Many of them were clearly not up to that standard and at the same time a good number of such AAA bonds have become worthless. Yet investors respect their current analysis. Its clear they didn't understand this before so why should they be trusted to understand it today? One answer is that the market is "oversold" and normal daily buying is enough to push prices towards the top of the range. If such a bounce occurs I would expect it to peter out between here and the 50 day moving average or about 3% higher, give or take. It is noteworthy that the S&P has bounced off of 1270 5 times in the last 6 weeks and this zone was a congestion area from Q4 2005 - Q4 2006. So those points could indicate that the bulls will hold here, for now. If the rally exceeds 1400 then I would be inclined to back off on some of the downside exposure we have but more on that if and when we cross that bridge.
The central point to my thesis is that the confluence of the fallout from the housing bust, the weak consumer, the banking crisis, and the weak dollar (to name a few) will continue to act as a headwind/overhead supply to the economy and the market. Until that changes we will be very careful (perhaps "avoid" is better) in adding more than miminally to long positions. Simply watching the action of the key financial stocks will tell us most of what we need to know. And from that indicator I can say that its not time yet.
Stay tuned.
The Fed is scrambling to stabilize our financial system through some clever, sophisiticated techniques beyond simple rate cuts and all of those acts will help to turn the tide eventually. However the current evidence says those acts are not yet causing a difference. Today's rally was spurred by the fine people at S&P who claim that subprime related write-offs are past the midway point. They completely missed this debacle - some 85% of all mortgage bonds issued in the last 3 years were rated S&P AAA. Many of them were clearly not up to that standard and at the same time a good number of such AAA bonds have become worthless. Yet investors respect their current analysis. Its clear they didn't understand this before so why should they be trusted to understand it today? One answer is that the market is "oversold" and normal daily buying is enough to push prices towards the top of the range. If such a bounce occurs I would expect it to peter out between here and the 50 day moving average or about 3% higher, give or take. It is noteworthy that the S&P has bounced off of 1270 5 times in the last 6 weeks and this zone was a congestion area from Q4 2005 - Q4 2006. So those points could indicate that the bulls will hold here, for now. If the rally exceeds 1400 then I would be inclined to back off on some of the downside exposure we have but more on that if and when we cross that bridge.
The central point to my thesis is that the confluence of the fallout from the housing bust, the weak consumer, the banking crisis, and the weak dollar (to name a few) will continue to act as a headwind/overhead supply to the economy and the market. Until that changes we will be very careful (perhaps "avoid" is better) in adding more than miminally to long positions. Simply watching the action of the key financial stocks will tell us most of what we need to know. And from that indicator I can say that its not time yet.
Stay tuned.
posted by David Geller at 7:04 PM
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