Saturday, March 14, 2009

Technical Update 9.09

Well that was fun. 13.5% in just 4 days. I had been waiting for some sort of a rally, but had no idea when it would come. I managed to get in on some JP Morgan calls near the bottom and more than doubled it - before watching it scoot even higher, of course. But a double in less than 3 days is okay in my books. No complaining here. What now?

I'm leaning toward another new low before we see a multi-month rally take hold. But I thought this rally would die out sooner than it has, so I could be wrong. The one thing I do feel strongly about is that 666 was not "the" low. Whether it was a low for this specific downleg is likely something that will be resolved next week. Any further follow-through would probably be a sign that I am wrong, and that multi-month rally is now taking root. I'm not going to chase it. I want two things to occur before I would think about buying anything: 1) enough time to elapse to consider the rally "accepted" and 2) a decent pullback that would give me a low-risk entry. Buying now would be suicidal because there is no legitimate way to control your risk. I'd rather watch the markets skyrocket higher for weeks on end and wait for a short opportunity than try to chase 'em higher. Shorting now is equally as dangerous. I would only do it if I had a multitude of reasons and an extremely tight stop.

On the S&P 500, I was looking at the 20day EMA to hold the rally on a closing basis. But Thursday's and Friday's close surpassed it. Does it have the juice to make it to the 50 (800)?

My two favourite indicators are not quite as ambiguous. The put/call ratio moving average is back to where it was prior to both the January and February highs (which is a sign of excessive optimism). The market breadth moving average is nearing the area that has previously marked intermediate term tops.

The US Dollar looks like it wants to retrace a little bit before making any further gains. My eye is on the 85 level for the Dollar index, 0.80 or 0.82 for the Canadian Dollar and 1.325 for the Euro.

Just a reminder to readers that these technical updates are for people with time horizons of under 3 months. DO NOT use this information as any part of a long-term investment decision making process.

Are there any indicators my readers would like me to include in these updates? What are your eyes on? Feel free to leave a comment below or send me an email with your thoughts.

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mannfm11 said...

Your technical analysis always is interesting matt. I tend to agree with you that there should be another wave down. Only question is if it truncates or not. Looks like the whole world has called a permanent bottom again and that isn't the case ever when the world can call it. I just answered an email from a guy who insists the SPX is on a huge triangle starting in 2000 and I can't figure out how he can make one out of a formation where A is shorter than B which is shorter than C? In any case, he says 666 will be the low for my lifetime. I think once we take the dive, it might be the high for the rest of my life. I happen to believe all wavers are wrong and that we are in A wave of a huge zigzag or expanded flat. In any case, a supercycle wave is going to be a 5 and there will be another downleg and for the short term of the next several years, the count will be the same in either case. We have much more downside over some uncertain period of time. This bear has been worldwide, the recession worldwide and the debt bubble worldwide. I am expecting a decline at least to the 1987 lows before we are done. This debt game has a million miles to go and it appears the leadership in the US is as incompetent as ever.

Anonymous said...

Hi Matt

what is your expectation of the USD/CAD and USD/EURO for the next 2-3 months?



Matt Stiles said...


After a bit of zigzagging, I expect them to be right around where they are now.

Namke von Federlein said...

Well, I've been pondering a few things that I encountered along the way.

1. The pricing and currency crisis

The Economist Magazine produced the 'Big Mac' index as a way to compare
purchasing power and currency trends. I would suggest that this is no
longer a useful metric because Big Macs represent pure consumption and
waste. The world economy has changed to a productivity driven economy?
In this sense, it might be useful to have the Futuronomics Engineer
Index. It takes time and money to produce an engineer and engineers
are highly mobile. In other words, you cannot rapidly increase the supply
of engineers (who produce productivity) and they are only a little bit
less mobile than capital (especially their productivity improving
innovations). It might be useful to compare the after-tax pay of engineers
in the world as a baseline metric for pricing and currencies?

2. The Masters of Fear

The insurance companies (including AIG, etc) are in big trouble. However,
there is also a business called the reinsurance business. It may sound
like a contradiction, but these guys are a very high-risk part of the
financial system. It might be possible that they operate on what I call
the go-go and go broke model. Collect money and skim it out for years.
In the case of a major disaster (where they are not covered) they can
simply declare bankruptcy. The problem? Many of these companies are
located in off-shore juristictions? Who are they? Where are they? Are
they solvent?

3. Off-shore pension management of major corporations

How many large corporations have their pension funds located offshore?
How much money does that represent? What would happen if they were
forced to re-patriate the funds?

4. Off-shore banks and fractional reserve lending

I saw a chart recently of the fractional reserve lending rules for
banks. I apologize if my current statement is completely inaccurate.
If I read it right, banks can lend up to 6 million USD without having
any reserves at all. I think you can imagine what a regulation like
this could mean for an off-shore bank. Ten guys could each borrow
5 million USD to get a pool of 50 million. They could then use that
money to buy a small corporation. Effectively : legal counterfeiting.
So, the question is : are there offshore banks that are allowed to
create loans under a certain limit with having any collateralization
at all? If so, how much money has been 'created/ printed' this way outside
of the Fed system?

5. Top soil

This is a shocking metric to look at. As the world population grows, top
soil is being destroyed at a tremendous pace. Global warming is causing
'desertification' (just look at the drought problems in every area of the
world today!). Petroleum based fertilizers literally burn the soil -
which means that the top soil cannot regenerate. Not to mention erosion
due to poor land management practices. In fact, for years I have speculated
that every empire collapses when they run out of topsoil. Finally, there
seems to be a consensus that food will be the big issue of the next decade?
So, perhaps the Futuronomics Global Topsoil Metric would also be helpful?

6. Productivity

I personally think that the 'credit crisis' (casino crisis?) will provoke
a stochastically important jump in world productivity in the next few
years. I would suggest a productivity jump of about 30% to 40% in the
next few years alone (for a variety of reasons). This will have a very
big impact on things like credit requirements, inflation, liquidity
requirements, trade balances, international competitiveness, central
bank forex requirements and more?

7. Conclusion

I would suggest that these are the final metrics needed to calculate the
the risk left in the current 'credit crisis'. Together, they might provide
a good map to help investors assess the risk involved with investments -
both on an industry basis and a national basis? Put this together with
the rest of the data that the Fed has in it's desk drawers and we might
have finally got the metrics together needed to engineer the re-pricing
of asset classes in any currency?

And as always - the above just some ideas and opinions about the situation
(and what might be needed to put it all behind us).

Thanks again for a great blog!

Matt Stiles said...

nice post, Namke! Always appreciate your comments.

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