Sunday, January 24, 2010

Market Update 04.10

Whack! Just like that, nearly 3 months of slow, grinding gains were eliminated in three days of trading. The selling intensified into the close on Friday. It seem that every time three days of selling close out a week, analogies to 1987 get thrown around. While I don't expect anything like that to occur anytime soon, this is indeed the type of action one would expect to see if "the big one" still lied ahead. Long periods of perceived stability breed complacency.

And the last few months of trading have certainly given the impression of complacency as most stocks have returned to their cyclical high valuations, despite earnings that remain in the dumps compared to their cyclical high earnings of '07. Many have also taken it for granted that banks are earning their way out of trouble, completely ignoring the multi-trillion dollar portfolios of toxic assets that are temporarily held off-balance sheet. While most have just assumed that FASB will never grow a pair big enough to enforce GAAP, they seem to forget that eventually these distressed debt instruments mature. So unless home prices start rising again soon, these losses will be realized eventually. Unfortunately for them, home prices have begun falling again (as of the most recent Core Logic numbers from November). The overhang of inventory (ie. shadow inventory) has clearly started to matter again.

Isn't it funny how things that seemingly "don't matter" all of a sudden become important? Like sovereign debt problems. Or funding crises at state and municipal pension funds. Or sour commercial real estate loans causing small regional banks to fail at an increasingly rapid rate. Or skyrocketing delinquency rates on credit cards, HELOCs, and FHA/Fannie/Freddie loans. It costs money to maintain these operations. One way or another, resources are being redirected from what they would otherwise be doing toward trying to plug these black holes. And this misallocation of resources is precisely what will keep the economy from recovering - just like Japan but without exports to fall back on.

This week's selloff may not be in reaction to these cumulative imbalances finally exacting influence on the stock market. After all, as I'll show below, internals are in better shape while oscillators are more oversold than during their late October corrections. This could be just another correction. Until markets display a change in character, it would be wrong to assume another leg lower has begun. Then again, after 10 months of gains, markets may have sufficiently done their job to turn even bears cautious.

Now, some charts:

S&P Daily. Selloff only takes this average back to the bottom of its trend channel. Notice how the RSI is lower than at any point since the rally began. Does this signify a buying opportunity? Or is it a signal of the higher intensity of the selloff and thus a change in market character? I suppose it depends on how one looks at it.

Similarly, Crude Oil has been trending in its own channel, but while stocks are a good 15% higher than their June highs, oil has not yet signaled any increasing industrial demand since the summer (when many contend the recession ended). There is a confluence of support between $70-72.50.

And internals. Most remain in stronger positions than at their July and early November cyclical lows. Again, this could be indicative of strength, or could simply mean they have further to fall before finding support.

Advance/Decline Volume Ratio

Advance/Decline Issues Ratio

% of stocks above their 50 day moving average

Put/Call Ratio

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Roger J said...


The one w/ German title, is this the English equivalent?

Don't know German, not one bit.

Matt Stiles said...

Yep, that's it.

ZH is off my subscription list for now (partly due to some sensationalism, partly because I get enough angry blogging from Denninger). None of my other feeds had mentioned it as of this morning. I read German and Spanish language blogs mostly to keep up on my skills. But every once in a while I understand enough to learn something! :)

Japan is going to blow sometime in the next few years. Their social security fund will now be net sellers of Samurais henceforth. Thus, Japan will increasingly need to finance their debts externally - which means higher rates. And with their debt burden, higher rates (of only 2.5%) would fully consume their entire revenues.

That's an endgame recipe.

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