Sunday March 18, 2007
Consolidation
Consolidation is my new market buzz word, with the S&P's being down about 1 point over the past two weeks. What does it mean? It means the Fed stepped in and supported the market with some of their friends, the collective "them" that you will hear those of us at Shadowtraders speak about from time to time. Why do I think this? I think this because the news last week was god awful. There were too many headlines about subprime lending woes to count. Last week there was a warning from one of the nation's largest lenders, Countrywide, that their earnings would be hurt by the subprime disaster. There was this headline on Tues. :
CHICAGO (MarketWatch) -- Many more U.S. homeowners were unable to keep up with their mortgage payments in the fourth quarter, the Mortgage Bankers Association said Tuesday, with the rate of homes entering the foreclosure process hitting a record 0.54% and the delinquency rate on U.S. home loans leaping to 4.95% from 4.67% three months earlier.
As I am writing this there is a headline streaming on Bloomberg that says the Fed may have to Cut rates aggresively by year end. In the options market there was a 0% probability for a rate cut this year, 2 weeks ago, last week the options priced in a 24% chance the Fed will cut rates 3 times, that is a big leap and there is no better a predictor of "them " activity than the options market. The options are where the big boys go for protection first.
It is quite interesting that after the sharp selloff 3 weeks ago the best we could do to recover is a 1 point loss over the past 2 weeks. This means to me that we are in a consolidation phase and we will most likely move lower because we have had a fundamental shift in the marketplace. Americans are having difficulty paying for their homes. I saw one quip that read, a senator was considering a bill to make it impossible to foreclose on an American citizen. How will that affect business?
Watch the 1400 level this week, I think it is very significant. Anytime we are below it and having trouble bouncing up through it, it is probably a good short. If we are above it we can rally 10 points, so be careful.
Highlight of the week is the FOMC meeting Mar. 20-21, they will probably do nothing but imply in some way rate cuts may happen at some point, if this occurs you could se a rally. Don't be afraid to take profits from being long after the meeting, quickly. Why? Because initially on the rate cut comments the market will rally, but then you could get a snap back down if the market thinks the Fed is getting desperate and their desperation is evidence this economy is in trouble.
We are currently seeing strength from overseas markets and from a proposed deal for Barclay's to buy ABN Amro for 10 billion, this should boost the markets temporairily.
Shadowtrader's Fear Factors:
1. VIX-16.79%, a couple points higher this week
2.Treasury options volatility up to 7.4%, .4% higher than last week
3. Housing- this remains the same, terrible, see above
4. Things cooling off here, with the Asian markets pretty strong right now, Nikkei up 130 points
5. Inflation- many commodities at multi-year highs including energies, metals and grains to name a few.
Shadowtrader's Fear Factor = 6
Only because of the current strength of the overseas markets and proposed deal between Barclay's and ABN.
Sunday, March 18, 2007
Wednesday, March 14, 2007
Wed. March 14, 2007
Volatility is the name of this new economy, it is no longer the Goldilocks economy. We were down triple digits today only to end the day up over 50 pts., in the Dow. This is the second time down with a subsequent recovery, usually there is only one move down then spring back up to new highs. This is not the case now. What is the case is that we will break down, only to have the Fed come in support the market and then break down again. This down move is not through yet, but the volatility will only increase. So, you want to be short, but you need to be willing to be patient and hold your shorts when the market is running in your face. Look to get short on rallies and then be patient. This 1400 level in the E-minis is very important and when we break through it, on a down move, you are pretty safe being short. Above 1400 it is not clear to be short, so you really need the Shadowtrader's Indicators in your favor.
Volatility is the name of this new economy, it is no longer the Goldilocks economy. We were down triple digits today only to end the day up over 50 pts., in the Dow. This is the second time down with a subsequent recovery, usually there is only one move down then spring back up to new highs. This is not the case now. What is the case is that we will break down, only to have the Fed come in support the market and then break down again. This down move is not through yet, but the volatility will only increase. So, you want to be short, but you need to be willing to be patient and hold your shorts when the market is running in your face. Look to get short on rallies and then be patient. This 1400 level in the E-minis is very important and when we break through it, on a down move, you are pretty safe being short. Above 1400 it is not clear to be short, so you really need the Shadowtrader's Indicators in your favor.
Tuesday, March 13, 2007
Tues. Mar. 13, 2007
Terrible Tuesday, what more can I say. You guys could have made great profits if you had heeded my warnings from Saturdays blog. Enough of patting myself on the back. The reason I feel the need to update is we have really entered new territory here. Our markets are now Down about 5% and headed towards that benchmark figure of a 10% correction. The fundamentals are beginning to get scary, hence the Shadowtrader's Fear Factor is being Raised to an 8, based upon confirmation in today's news of some of the highest ever foreclosures, the sharp rally in Treasurys, UP almost a half point and the rally in the VIX, UP 30% to 18. Happy Trading Ride the shorts for big winners.
More Confirmation comes from Marketwatch.com:
The recent market sell-off is not over, but about halfway done, Zandi said. There's a 50% probability that it'll be a modest correction, which will not dissolve into a major economic crisis.
Moody's estimates there's a 20% probability of a more severe correction, with U.S. stocks declining 15% and credit spreads expanding by 150 basis points. That scenario would trigger some easing by the Federal Reserve, but it wouldn't lead to a recession.
There's a 20% probability of yet another, much darker scenario, which will see U.S. stocks declining more than 20% and credit spreads widening more than 200 basis points. In that scenario, a recession in the U.S. is likely.
Moody's least probable scenario -- with 10% probability -- is that the correction is already over, but there are higher odds of a more substantial correction later on.
A global markets sell-off -- ranging from U.S. and European stocks and fixed-income to commodities and emerging markets -- was triggered by an 8.8% drop of the Shanghai Composite Index in China last Tuesday.
"It's clear that this is a global event, across all markets, across all asset classes, but so far it hasn't been very deep," Zandi said.
Last week's biggest loser in dollar terms was the Russian stock market, which fell 9.8%, followed by Brazil (down 9%), China (down 6.2%), Germany (6.2%), India (5.8%), as well as Canada, the United Kingdom, the United States, and Japan.
Terrible Tuesday, what more can I say. You guys could have made great profits if you had heeded my warnings from Saturdays blog. Enough of patting myself on the back. The reason I feel the need to update is we have really entered new territory here. Our markets are now Down about 5% and headed towards that benchmark figure of a 10% correction. The fundamentals are beginning to get scary, hence the Shadowtrader's Fear Factor is being Raised to an 8, based upon confirmation in today's news of some of the highest ever foreclosures, the sharp rally in Treasurys, UP almost a half point and the rally in the VIX, UP 30% to 18. Happy Trading Ride the shorts for big winners.
More Confirmation comes from Marketwatch.com:
The recent market sell-off is not over, but about halfway done, Zandi said. There's a 50% probability that it'll be a modest correction, which will not dissolve into a major economic crisis.
Moody's estimates there's a 20% probability of a more severe correction, with U.S. stocks declining 15% and credit spreads expanding by 150 basis points. That scenario would trigger some easing by the Federal Reserve, but it wouldn't lead to a recession.
There's a 20% probability of yet another, much darker scenario, which will see U.S. stocks declining more than 20% and credit spreads widening more than 200 basis points. In that scenario, a recession in the U.S. is likely.
Moody's least probable scenario -- with 10% probability -- is that the correction is already over, but there are higher odds of a more substantial correction later on.
A global markets sell-off -- ranging from U.S. and European stocks and fixed-income to commodities and emerging markets -- was triggered by an 8.8% drop of the Shanghai Composite Index in China last Tuesday.
"It's clear that this is a global event, across all markets, across all asset classes, but so far it hasn't been very deep," Zandi said.
Last week's biggest loser in dollar terms was the Russian stock market, which fell 9.8%, followed by Brazil (down 9%), China (down 6.2%), Germany (6.2%), India (5.8%), as well as Canada, the United Kingdom, the United States, and Japan.
Saturday, March 10, 2007
Shadowtrader's Market Recap Week of March5-9, 2007
Stocks rebounded by a little over 1% this week, leaving the 2 week total down a little over 3%.
Not much good news this week but probably just a bounce from the lows of the previous week. I saw a lot of opinion based news out there trying to push the market higher, that is why I believe the correction may not yet be over. Whenever there is alot of opinion it means "they" are trying to push prices higher to draw more blood from the little guys before taking it down again. The recent rally to the highs that began last fall was based on the idea the FED would have to cut rates this year and some actually decent earnings, but alot based on rates. The correction 2 weeks ago began with the Asian markets and talk of loan defaults(subrime loans) causing recession. During the pullback bonds rallied because the money came out of the stock market and flooded into safer bonds. Last week was the first time treasuries fell in 6 weeks, again showing, "they were about 1 month ahead of the little guys. This is significant however, because it shows the FED may not cut this year. So, you see, there is a problem with subprime loans and no rate cut and the issue with asian markets. This sounds to me like the market requires more than a 3.3% downswing, so I don't think the correction is over. This, on Bloomberg, gives you an idea of how the Fed feels about the economy:
Subprime Defaults Are `Beginning of Wave,' Bies Says
By Alison Vekshin and Anthony Massucci
March 9 (Bloomberg) -- The nation's banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.
Bies, who has been the Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
Diane Swonk of Mesirow, says the Fed may have to tighten, that is real bad for stocks. Gas prices are high , so is gold and so are grains, all inflationary which is what the Fed looks at to tighten.
There will be increased market volatility because of the following Shadowtrader's, "Fear Factors":
1. VIX, Stock market volatility index- 14.09, 52 week range 9.39-23.81
2. Treasury options volatiliity down to 7% off it's highs but still 40% above the lows
3. Fed-loan default, less of a chance of rate cut and whisperings of a tightening
4. Global Risk- Talk of China selling US treasuries and diversifying could cause significantly higher rates and weakness of Asian mkts.
5. Housing Market- Very weak, recent new home sales were dowm 16.6%- the worst in 13 years, and that figure does not include condos.
6. Inflation Outlook- Grains, Metals, Energies- all at multi year highs, if rates start going higher as well-LOOK out!
FEAR FACTOR- 6
scale of 1-10
Stocks rebounded by a little over 1% this week, leaving the 2 week total down a little over 3%.
Not much good news this week but probably just a bounce from the lows of the previous week. I saw a lot of opinion based news out there trying to push the market higher, that is why I believe the correction may not yet be over. Whenever there is alot of opinion it means "they" are trying to push prices higher to draw more blood from the little guys before taking it down again. The recent rally to the highs that began last fall was based on the idea the FED would have to cut rates this year and some actually decent earnings, but alot based on rates. The correction 2 weeks ago began with the Asian markets and talk of loan defaults(subrime loans) causing recession. During the pullback bonds rallied because the money came out of the stock market and flooded into safer bonds. Last week was the first time treasuries fell in 6 weeks, again showing, "they were about 1 month ahead of the little guys. This is significant however, because it shows the FED may not cut this year. So, you see, there is a problem with subprime loans and no rate cut and the issue with asian markets. This sounds to me like the market requires more than a 3.3% downswing, so I don't think the correction is over. This, on Bloomberg, gives you an idea of how the Fed feels about the economy:
Subprime Defaults Are `Beginning of Wave,' Bies Says
By Alison Vekshin and Anthony Massucci
March 9 (Bloomberg) -- The nation's banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.
Bies, who has been the Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
Diane Swonk of Mesirow, says the Fed may have to tighten, that is real bad for stocks. Gas prices are high , so is gold and so are grains, all inflationary which is what the Fed looks at to tighten.
There will be increased market volatility because of the following Shadowtrader's, "Fear Factors":
1. VIX, Stock market volatility index- 14.09, 52 week range 9.39-23.81
2. Treasury options volatiliity down to 7% off it's highs but still 40% above the lows
3. Fed-loan default, less of a chance of rate cut and whisperings of a tightening
4. Global Risk- Talk of China selling US treasuries and diversifying could cause significantly higher rates and weakness of Asian mkts.
5. Housing Market- Very weak, recent new home sales were dowm 16.6%- the worst in 13 years, and that figure does not include condos.
6. Inflation Outlook- Grains, Metals, Energies- all at multi year highs, if rates start going higher as well-LOOK out!
FEAR FACTOR- 6
scale of 1-10
So, don't trade against a downtrend and look for down trend trades.
George Fushi
Shadowtraders.com
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