Weekly Results:
S&P 500 899.22 -18.20%
NASDAQ 1,649.51 -15.30%
Russell 2000 522.48 -15.65%
MSCI Emerging Markets 24.66 -21.2%
Powerful weekly moves as investors digest the high magnitude of intra-day swings. Participants await impact of global interventions and pending confidence restoration.
Sentiment/ Reactions:
Its commonly known that trading on emotions leads to overreaction and enhances overall investment risk. At this point, sentiment gauges boldly illustrate extreme panic. The VIX (Volatility Index) spiked 54% on the week and reflects less rational reactions. Through this inevitable consolidation phase, the results of "negative headlines" have worsened. Not to mention, weak economic data and Financial systems have yet to stabilize. Thus, a reminder that calling "bottoms" is a dangerous process. In the past year, several indicators have numerously signaled overextension and contraction. Following the multi-year bullish run, we've approached an era of de-leveraging. This process is visible in the chart of NYSE Margin Debt which has been contracting since July 2007.
"Unwinding of margin has accelerated this week, and when that happens, prices fall as fast as positions are being unwound to meet margin calls. Those who invest using extremely high leverage are speculators, and these kind of market conditions end up squeezing speculators out of the market." –(Marty Chenard -StockTiming.com)
Cycles & Perspective:
In this current period, risk is unclear and requires reassessment. Meanwhile, participants wrestle to identifying entry and exit points. Nonetheless, general principals of human trading patterns repeat themselves in various cycles. This wave of panic selling is a powerful force to outsmart. The lows of 2002 might serve as gauge or support level. Then, the S&P 500 hit a low point of 768 , which sparked a new cycle upside move. Perhaps, declining below those lows is necessary to flush out multi-year gains from 2002-2007. Important to note, that markets have tendency to exaggerate. That said, even for the most optimistic, its difficult to overlook downside surprises. On the other hand, few await for natural exhaustion of sellers and increasing confidence among major participants. At this point, the disruption of natural market flows increases the number of unknown variables. Nonetheless, investors can cut their losses and exploit extremes for next cycle recovery. In other words, these are two behaviors investors can control.
Market Mechanics:
The mechanics of asset management suggest that selling pressure is not fully complete. For one thing, fund redemption lead to further downside pressure. In addition, liquidation by hedge funds is an ongoing trend. For example, "About 350 funds were liquidated in the first half of the year and if the trend continues, the number of closures would be up 24 percent this year from 2007" (Perpetual Interests, LLCTM). The current environment of "forced selling" and limited leverage continues to contribute to a readjustment process. That said, one can expect frantic market behavior. Thus, it becomes important to stay in liquid assets and manage portfolio's on a near-term basis.
Money Management:
Few points to consider:
· Additional patience is required for those seeking to buy as stocks decline/stabilize.
· The natural flow of markets is still disrupted.
· Many Technical indicators signal oversold readings, but sustainability is unclear.
· Volatility can breed opportunity, but requires intensive short-term risk management.
· Sole reliance on traditional valuations might not provide an accurate measure in cycle downturns.
· Investor psychology cannot be underestimated in which fear plays a major role.
Macro Levels:
Crude [$77.70]: Broke below a major support level of $80. Crude is down, over 47% since mid summer peak. In the near-term oversold and poised for a minor rally. Nonetheless, heavy resistance around $90.
Gold [$900.50]: Since September lows of $740, the commodity has jumped nearly 22%. Long-term trend is positive despite March 2008 peak at $1011. At this point, a break above $950 can confirm the strength of multi-week move.
US Dollar – DXY [82.99]: Yet another explosive move last week. Again, since March 17th lows, the index witnessed technical improvement following several years of downtrend. In the near-term, the Dollar Index is extended as global investors piled on for risk-aversion. Despite sharp run up this year, the Dollar is few points removed from its 17 year moving average of 93.45.
US 10 Year Yield [ 3.87%] Trading in a narrow range between 3.60%-3.80% range. Attempting to stabilize, while hovering at the lower end of a 6 year range (3.50%-5.00%).
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.
