2008-10-10 Market Watch: weekend analysis

This is the update to the last weekly analysis.

Market overview:

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Firstly take a look at the weekly chart $VIX (CBOE Volatility Index) from 1998 to present.

Different from any other data, VIX does involve any demand/supply but only the sentiment of market players.  So I do not intend to over-analyze the chart.

VXO is the CBOE OEX volatility index.  It may not be as accurate as VIX but the data can be traced back to 1986 on Yahoo Finance.

It is no doubt that the current stock market crash can be comparable with 1987 black Monday and much severe than dot com crisis.

TED spread is increasing which reflects the continuous uncertainties on the credit market.  Before the trend reversal is confirmed, the stock market is still like a casino.

The following chart shows the MSCI World index, MSCI EAFE index, MSCI Emerging Market, Shanghai Stock Exchange Composite Index, Hang Seng Index, and Nikkei 225 index.  The whole world is tanking while the emerging market recovered a bit, and mainland China market is probably the most resilient one.

Major indices, commodities, and US dollar are shown in the following chart.  I have only one word: terrible.

Sector overview shows that all sectors have been going down parabolically.  However, the financial sector might be the first one which shows a dead cat bounce.  Not because the financial sector is the most healthy one, but most of rescue fund will be spent on this sector and it will get the most attention.  However, this is not a reason to open long positions on XLF/UYG.

On the glance of major indices and bullish percent, there is absolutely no sign of recovery over the intermediate term.  It is no doubt that the market is extremely oversold, and a strong short-term rally is possible, however the mid-term trend is still bearish.

From the Credit Risk and SPX we can see that the discrepancy between LIBOR and 1-month treasury bill is at a historical level again.  Although many people are looking forward a reversal, I would say it is too early.

Descending channel of Major indices:

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Last week the descending channel of SPX was broken at the lower edge, which meant the selling off could be accelerated.  Why was I so stupid and didn't sell everything and started to short?  Now it is too late.

Here is XLF, note that both the ascending and descending channels were broken on Oct 6th/7th, which should a strong signal to start short, however I overlooked it.

I didn't touched QQQQ because the expensive price of QID looked scary.

Wave counting:

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SPX daily:

SPX is in major wave 3, and the question is if this wave is completed and then if we are going to have a mid-term rally which is major wave 4.  In my opinion, the internal structure is incomplete so there should be a new low or comparable low (suppose minor wave v is an exhausted wave) in the future.  Then it is logical to touch the low of the last bear market at 768.

XLF daily:

It looks like a short-term top is in place, then the next question is if it will reach the July level (red/blue horizontal line).  Because of the incomplete internal structure, I think there will be a new low in the future.

Here is a daily chart of SKF:

Will it go further up? It seems unlikely in the near term, but who knows the long term?  I still cannot get it right, SKF is too violent and unpredictable.  Compare with SKF, UYG looks much "normal" and just move in a descending channel:

QQQQ daily:

Again, the internal structure is incomplete.

Currency:

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I do not touch any forex trading.  After a stock market crash, I feel interesting to see how the exchange rates changed in the past week.

USD/JPY:

The exchange rate between US dollar and Japanese Yen dived down just like how the stock market crashed in the last week.  No wonder Nikkei 225 index went down even faster than S&P 500.  Here is the daily chart:

USD/CAD: 

USD/EUR:

USD/SGD:

Commodities:

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Gold (continuous adjusted):

Here is the monthly chart of gold price since 1974.  It seems the gold is in a multiple-year bull market, isn't it?

Look at the daily chart:

Note that today the gold price dropped significantly (you can also see this on the GLD chart).  Someone said this is because some big funds got margin calls and then sold off their gold holding to cover the stock losses.  I don't know, but does this big candle imply anything?  I doubt, check the comments on the chart for more information.

Crude oil (continuous adjusted)

The following chart shows the adjusted crude oil price since 1983.

Note that the current price level is at an interesting point:

• Fibonacci 50% measured from 1999 low to the history high;
• Lower edge of the ascending channel.

The drop of the oil is by no means the sign of economy recovery, in my opinion.  Anyway, keep an eye on it and see how the trend develops.  Look at the daily chart:

I suspect the down trend will continue.  On the chart of USO, the last candle is a white candle.  I think it's inaccurate compare with the futures' data.  Big players will always use CL or QM to trade or hedge their holdings.  ETF must have a tracking error.

Last comments:

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Today's rally is not because the selling strength is over or everyone want to catch the bottom.  In my opinion, it is probably because of the G7 meeting in the weekend and bears don't want to have any surprise so they had to lock a part of the profit.  Another reason might be that the P/E ratio of the broad market might reach a certain value and the computer programs of big funds started to buy some discounted stocks automatically.  Nobody knows, but certainly it is not a guaranteed bottom.  If the G7 meeting does not come up some really great news, the down trend may be resumed very soon.  Keep an eye on index futures, currencies, and Asian markets from the Sunday afternoon.

Last thing, before the smoke is cleared the capital preservation is the number one priority.

2008-10-09 Market Watch: special report

Many people, including myself, thought today could be a short-term bottom.  At least the market could take a rest at this point.  Unfortunately we got the 7th red candle.

I have been kept calling 92x in the past based on the wave counting.  It was my mid-term target and I expected seeing it in 2009 or at least several months later.

This is a big surprise to me that the third wave could be such violent.  The Fib 100% (bottom of the last bear market after the dot com bubble) is not far away, and the market could reach there in a matter of hours.  Now the important question is when we can safely long or short, not catching the falling knife.  At this moment, the market can go either directions, and short is as risky as long.

Take a look at a few charts first.

XLF daily:

QQQQ daily:

Russell 2000 index:

Markets around the world are all diving dramatically:

Needless to say, the market is extremely oversold and major distribution day shows up one by one.  Will here be the bottom over the intermediate term?  Is this time different?  Let's see more charts and understand how bad the economy is.

BOGNONBR: Non-borrowed reserves of depository institutions

Here is an excellent explanation to the chart (thanks to Bob Hernon):

The central bank requires member banks to keep a small % of deposits on hand, that is not loaned out to anyone.

Anything above the required minimum is called "excess reserves".

If a bank reserves drop below the minimum, they are required to borrow reserves from other banks that have excess to meet their minimums. The interest rate on those inter-bank borrowings is the Fed Funds rate.

Negative numbers here then are the sum of reserves that had to be borrowed to meet minimum requirements.

I suspect this chart demonstrates the net effect of the recent bank runs we've seen across the country. I don't think the credit market will be out of the woods until we have positive non-borrowed reserves.

The statistics started from 1959.  Now it is the worst and the first time the excess reserves go below zero:

The banking system is nearly frozen.  However the banks are still borrowing money, here is the explanation:

Right now the banking system as a whole has nothing it can lend to consumers since as a whole the minimum reserves in the system are borrowed. My guess is the borrowing comes from the TAF, which is around $150 billion of Fed assets loaned to banks.

(chart source and description)

The money multiplier has taken a dive recently.  This indicator tracks the velocity of money used in commerce that is not used to extinguish debt.  Historically a value of 2.0 is growth, 1.8 is considered as stagnation, and 1.6 is considered as recession (thanks to Bad McClure).

What is FED doing?  Apparently they are "producing" money which is shown on the following chart of the Monetary Base:

Also skim through today's Fed H3 statistical release, besides the stunning number of non-borrowed reserves and increasing monetary base, one can see that total reserves reach a new high, which means the banks would rather hoard their money (including the money borrowed from the Fed) than lending out.  As I talked before, Fed actually pays interests to those reserved money from the banking system from 2008 (previously planned 2011), then the facts are:

• Fed is borrowing money to banking system in order to prevent more failures and injecting fund to the market;
• Banking system is reluctant to lend money out because of extremely uncertainty, and they are happy to put money in Fed Reserve and get paid by doing this;
• At the moment Fed cannot really control the target rate (refer to the published Fed funds data).  As the market is free falling, Fed is losing control.

Lastly let's look at the ever increasing TED spread:

If it does not go back to the level in the middle 2007, the market won't calm down and the economy won't grow.

We are experiencing a life-time event, and this time is extraordinary.  The financial crisis, the meltdown of the banking system, makes this time dramatically different than dot com bubble burst or the 1987 black Monday.  Therefore we should be very careful and never have a wishful thinking that we are approaching a long-term bottom.  There will be several tradable rallies, but the primary trend is down, and the bear market will disappoint most individual or institutional investors.

With respect to tomorrow, take notice that:

• Morgan Stanley Credit Rating May Be Cut by Moody's (Update1).  Yes, they want one more bank run.
• Bush will give a talk before the bell rings;
• GE's report pre-market;
• Lehman's CDS selling in Europe.

Any one of them could be a potential bomb to the market.  If you still wait to catch the falling knife, think twice.

2008-10-08 Market Watch

It looks like the true direction of the market is undetermined.  Financial sector has a new low.

SPX daily:

Look at the details (15-min chart):

Hopefully the low won't break tomorrow.  The selling-off in the end of trading day is real with massive volume:

It might be a bottom, but the smoke is not cleared yet!

XLF daily:

15-min chart:

QQQQ is the same, just like SPX.

IRX - 3-month treasury bill discount rate:

No good news yet.

2008-10-07 Market Watch

In term of the broad market, the big picture is not changed.  However what happened in the financial sector is subtle.

SPX daily:

Basically everything is the same as yesterday.

The intraday chart (15-min) looks more bearish than the daily chart:

XLF daily:

Wave counting must be wrong.  I will look into it later.

The intraday chart (60-min) looks fishy:

QQQQ is the same, just like SPX.

IRX - 3-month treasury bill discount rate:

Now the situation is getting a little bit better.

2008-10-06 Market Watch

SPX daily:

Here we got a short term bottom.  A minor wave 4 will start very soon, but don't expect it too much.  The next target is 92x, which is really nothing if we think about today's plunge.

XLF daily:

Short term bottom again.

QQQQ daily:

Short term bottom, but more downside movement is ahead.  Just be patient.

IRX - 3-month treasury bill discount rate: 

You can see that the selling off is not caused by the credit crunch, but probably the deleveraging or massively mutual fund withdraw.