The "imminent move lower" I have been expecting for a few weeks has begun, although unevenly. I favour an extension of this selloff, but a bounce may be required to work off some measures that are displaying excessive pessimism.
Increasing talk of "nationalization" has been hammering the financials, as common and preferred share holders fear getting a goose-egg on their speculations. Readers of this blog know that a goose-egg on many of these stocks is inevitable. The only questions are when and how.
In the middle of the carnage on Friday we were told that more details were forthcoming on Timmy Geithner's "plan." I'm not so sure that's a good thing, but we'll find out Monday.
As you can see, the SPX has managed to stay above it's November lows. The same can be said about the Nasdaq and the Russell. The Dow Industrials and all of the indices I mentioned last week (Transports, Canadian Financials, and Staples) have not been so lucky. All made new lows this week. The Industrials are looking the ugliest. You have to go back to early 1997 when the index closed the week at such a level. So much for buy and hold. What else happened in early 1997? OJ Simpson was aquitted, Dolly the sheep was cloned, Packers beat the Patriots in the Superbowl. I got my braces removed and was battling acne.
Another problem area on my radar is the utilities sector. Think this is a relatively stable sector with secure dividend payments? Think again. Many of them are saddled with enormous debt/equity ratios and much of that debt is coming due over the next two years. Their situation is similar to that of the REIT complex (with different problems obviously). Fear of not being able to refinance is hammering their share prices. Lower share prices increase the debt/equity ratio and increase fears of not being able to refi. Previously, when a utility would get over its head, another one would simply take it over. They'd do a public offering or go to the debt markets at more favourable terms and consolidate the debt. That is not economic now. Even the strongest are trying to reduce debt levels. Yet one more manifestation of peak-credit. I don't think the socialists in government around the world would think twice about nationalizing this sector, as they are about the banks. I can just see President Obama giving a heartwarming speech about having to keep the lights on so a student can study at night and become a doctor. "It is government's res-pon-si-bility to maintain essential services for everyday Americans."
Preferred shares. Getting hammered as a function of nationalization talks. (note: Financial preferreds make up 81% of this index)
But as I mentioned earlier. A continued swift move lower is guaranteed to no one. I covered some of my GE and Canadian Financial short exposure into the morning abyss on Friday. Some of my indicators, and a few being followed via others are already at extremes. Take for example the 10 day MA of the Advance/Decline ratio. I'm not sure if the increased volatility is responsible for the recent swings out of the 2 year range, but I suspect so. In that case, there's still plenty of room on the downside.
A weekly look at the same indicator supports that view, as the extremes on both sides have been expanding for at least 20 years. Try to ignore the red lines on this chart. Does it mean anything? Maybe not. To me, it is supportive of the gambler's mentality that was prevalent over this period.
My put/call indicator is suggestive of further downside.
Although a look at the same indicator on the weekly chart is unconvincing.
For practical purposes, these are both likely better used on shorter timeframes. But I was fooling around with the inputs and thought I'd share them.
That's all for now.
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