Market Touch

by Dan August 19, 2011 8:39 am • Commentary

Yesterday’s action was nothing short of disgusting, equities the world over got destroyed, crude oil was taken apart, yield on the 10 yr touched 2% (!) and of course Gold through the roof making new highs……I guess I am a litte too bearish for some and the reasons tend to be more psychological than anything else, but market action like this, with this sort of sustained volatility does not just end without a thud… each instance when we have seen this sort of sell-off in the last few weeks, none felt panicky, and until we get a mini-flash crash, where we go down 2-3% in a straight line intra-day, then maybe, just maybe we are close to intermediate-term bottom.  Like I said yesterday, I want to see stocks spread multiple dollars wide and see eye-pooping declines in single names, that has not happened, and since i have been in this business in 1996, this is always how it happened, 1998, 1999, 2000-2002, 2008-2009 and, well, not yet 2011.

Terms like recession and bear market are thrown around on TV like they actually mean something to the people at home… most people in the U.S. it feels like the “great recession” from 2008 never ended and the fact that the Fed “QE’d” the stock market higher for 9 months so we  all thought we could afford to go out and buy a new flat panel tv or an iPhone didn’t really fix any of the structural problems that our economy faces.  Unfortunately it feels like we need a good old fashioned thumping and for better or worse (probably worse) that starts with your 401k.  Bulls will tell you that the S&P hasn’t been this cheap since who knows when, but what if that earnings number they are using to calculate the PE with is just way too high?…. In the last week alone the lowered earnings guidance by companies like DELL, HPQ, NTAP far outweigh the moderate raises we have seen from TGT, HD and WMT.  The outlook is getting cloudier and cloudier for U.S. corporations and anyone that tells you different is just lying.   See some comments below from Merrill Lynch this morning regarding the prospects for a recession,

As I write at 8:40am the DAX is in a free-fall (-3%, after being down almost 6% yesterday), gapping below the previous intra-day low from last week, and our futures are down about 1.35%.   Our equity markets are clearly trading off of the unknown, to state the obvious. The further selling this week, and the re-test of last weeks lows, is a the result of fear of the next panic without any evidence of the panic……As most of you know by now, I want to avoid this market from the long side, and the only thing I own are puts or inverse etfs!   But that isn’t exactly a sound long term investment strategy……I have conceded that I will likely miss the first 10% off of the bottom because I don’t have a clue where the bottom is…….A lot of what is going on has caught many off guard, the magnitude of the decline doesn’t seem to add up with our perceptible problems over on this side of the pond, but as many thought the fixes for our last recession merely kicked the can down the road, and maybe we will now finally bite the bullet.

So in the meantime, I am looking for short term trading opportunities to take advantage of the volatility, but always defining my risk, risking what I am willing to lose……

Keep moving your feet, if you haven’t reduced long exposure in this cycle yet, I can’t tell you that now would be a great time to fully liquidate, we are getting very oversold, and any news (or even rumors) of QE3 could cause a violent short squeeze…….but I believe, unlike last September this time around may be a great opportunity to get out!



5 important indicators point in the same direction
The Philadelphia Fed Business Outlook Survey is a powerful indicator. A reading below -21 on the Philly Fed has predicted every recession on record since 1968 when the data series began (Chart of the Day). Thursday’s reading was -30. 
Another indicator has been the stock market. Every recession since 1960 has been preceded by a one-month decline of 6% or more within the four monthsprior to the recession. The S&P index is down 13% since the end of July and would need to recover back to 1250 for this indicator to leave the red zone. 
Another well-known indicator is the slope of the yield curve. In every recession since the existence of 10yr Treasury notes, the slope between 3-month bills and 10yr notes has flattened dramatically, and often inverted, before a recession. In the past two months, this slope has declined by more than 100bp.
Another survey-based indicator is the University of Michigan Consumer Confidence Survey. This series has shown a large decline before, or at the start of, each recession since the survey started back in 1978. Not only has the survey dropped 20 points in the past three months, but it is now within 3 points of its all-time lows (54.9 versus its all-time low of 51.7 in 1980). Only twice since 1978 have there been larger declines over a 3-month period in this survey.
Finally the Federal Reserve’s bias – or language change – in its FOMC statement can be an indicator. Each of the three recessions since 1990 have either coincided with or been immediately preceded by a switch to an easing bias (or a downside risk to growth). The August statement should be seen as signaling a renewed easing bias as well. It strongly increased the emphasis on disappointing growth, it indicated a bias to stay on hold for at least twoyears, and it ended by noting a discussion on the range of tools to promote stronger growth. 
Although none of these indicators are a definitive signal, the fact that all of them are pointing in the same direction, and that some of them are at extreme historical levels over periods of several decades, must be considered a very significant combined signal.