The market cycle - where we are at......Catching falling knives (with directions to the nearest emergency room)
A wise old market sage from years ago once said "this isn't the end of the bear market, it isn't even the end of the beginning; it may be the beginning of the end but it certainly isn't the end".
I remain convinced, base upon the best evidence I can find, that the US markets have not reached a bottom though there is evidence to suggest a rip snorting rally is imminent. The market is looking more and more like the 2000/2002 or 1973-1974 scenarios in which there were numerous violent rallies, all of which later lead to lower lows. That's the optimistic scenario as I see it with the more pessimistic scenario dating back to tge 30's. It remains to be seen which scenario will ultimately play out but the battle is not for liquidity but solvency in the US and by extension, the rest of the world will also pay a heavy price.
The theory that problems in the US will not extend to the rest of the world because of Asian growth will prove as accurate as the suggestion that world stock markets would decouple from the US. In point of fact, most world markets have done worse than the US including the emerging markets which smart alecs in the media are now referring to the submerging markets.
A leading analsyst yesterday reminded everyone that it is "time in the markets, not timing the markets" that counts in the long run and he is likey one of the money managers feeding stock to the audience that he cousels to hold on. Someone has to be left holding the bag and better John Q than a wall street banker who is already up to his ears in rotting bags.
It has always struck me as unusual that they eliminated the short uptick rule last summer, just before the proverbial crap was about to hit the fan.
Big money had to get out and again, better John Q and a few foreign banks than anyone on Wall Street.
It's poetic justice that the big banks and brokers on Wall Street are getting roughed up with the whacking stick though I don't expect to see any of the personalities lining up at the local food banks.
Yesterday, there were 1304 52 week lows on the NYSE. A new record.
For awhile it looked like the financials and brokers were going to end the day positive and bottom the market short term as they did last spring but in the end, they turned down and finished down on the day.
Crude oil got whacked and gold was up but gold stocks were down in a flight to liquidity.
Though laughable, there continues a debate about recession or no recession. They may be right that there won't be a recession but only if they replace the rec with a depr. Lets hope that doesn't happen.
Canadian markets are now likely more at risk than US markets simply because they have held up far better and longer as a result of commodity strength. That commodity strength cannot possibly continue and we saw yesterday how oil reacted in what was suggested was a reaction to Bernanke's comments about economic weakness. Pure b.s. - oil is going down because it is too high. Just like overpriced houses. One can rightly say that world economies are having a hard time because of sub prime and mortgage related issues but none of this would be an issue if house prices around the world were not so overpriced.
I can see oil falling to $60-70 when it overshoots fair value on the downside, just like it overshot fair value on the upside. The impact upon oil company stock is likely to be less since oil stocks have been lagging the rise in oil, a divergence that always leads to a downward correction.
Gold stocks got sold off yesterday even though bullion was up - a classic flight to liquidity. We haven't yet begun to see fund redemptions or widespread margin calls.
Nor have we begun to see problems (they are there - we just haven't seen them yet) in non housing related loans including car loans and leases, home equity lines, commercial loans, credit cards etc.
There is the piling on rule in football but no such rule exists in the markets.
Volatility and fear indexes continue to push higher but I have noticed one heck of a lot of people talking about VXO or VIX being at a certain level and indicating a bottom. It won't be that easy and if enough people are onto an indicator or importance, then you can bet the indicator will no longer work. Besides, while the VXO bottom figure I have heard is 30, the fact is it has been as high as 60 at past panics.
Every market cycle is different and new standards and levels are created both in up and down markets. Yesterday's new record of daily lows is an example.
We have to keep in mind that the people telling us the bottom is in are the ones who have been telling us that sub prime issues were dealt with last year.
I find it ironic that the second biggest US bank failure in history hardly merited any attention because two larger fish were being fried. This is not good news but this simple irony seems to have escaped attention.
Catching falling knives is dangerous and at the very least, it is prudent to wait for some sort of a turn up (10 day or 20 day moving average etc) before sticking one's unprotected hand out.
I would suggest that optimistically, we are half way through the decline and rallies not withstanding, one can assume that we have yet to experience essentially the same as what we have already experienced.
The market will bottom when the big money decides to go back in and start buying. They haven't done that yet.
Short covering will kick start a rally that will be explosive but keep an eye on the charts from 2000-2002 and be aware that these clearing rallies tend to be short and violent and prone to failure.
In a time period during which virtually all the major US banks and financial institutions are seeing their equity ripped to shreds and respected analysts are describing the current situation as the worst since the depression, it is lunacy to think that a 20% loss is the worst that need be feared. 20% simply represents the starting point of a bear market. We'll be lucky if the markets only lose twice that amount but I am not counting on it.
As for the inflation recession debate - I don't think it matters unless one prefers being shot or hung. A destablized system will be hurt by both. At a time of overpriced markets and deteriorating fundamentals, it is a matter of picking one's poison. Personally, I am keeping an eye on the 10 year US treasury yield and hoping it moves up. This would signal inflation or perhaps even stagflation but I do believe that is prefereable to the Japan experience or the 30's.
I think it's too late to short right now, at least until we get a bounce but I also feel that other than short term traders, it's far too early to be investing in the market. This is a terrific trading market but not an investing market. The best investment remains cash.