Fari Hamzei
Our early morning call today for DJIA touching its -1 sigma price (~12250) was covered by Robert Gray on FOX Business Channel at the bottom of the last hour of the market. Our next target is -2 sigma on SPX which today stands at 1316.
Our Equity Markets are in the process of building a bottom but the WEAK LONGs have to take in more pain in the short term. Look for a big volume day with a huge (4 to 5 sigma) spike on VIX, VXO and VXN. We are not there yet !!
Editors' note: This commentary was sent to Timer Digest about 14:50 CST today.
Fari Hamzei
We again reiterate our position: SELL SHORT & HOLD...
Here is why:
Sub-prime writedowns continue to resurface by the "usual suspects" announcing on both sides of the Pond (CONUS and Western Europe). The Three Amigos' hands (Uncle Ben, Comrade Paulson & Chris Cox) are all but tied behind their backs. They can no longer drop FF rate unilaterally as depicted by recent rise in Gold and Crude Oil spot/forward prices. With UofMich Senti at 16-yr lows due to high energy prices, falling home prices and credit concerns, consumers continue to worsen their sentiment and economic outlook. And now the inflation expectations component is edging back up.
Editors' note: This was sent to Timer Digest about 01:32 CST today.
Frank Barbera
Primary Wave (A) to the downside of a developing cyclical bear market that is likely bottomed over the last two days. From here, we expect a sizable counter-trend rally in stocks moving the S&P back up into the 1400 zone, with the daily news flow improving over the next few weeks taking away some of the negative gloom overhanging the credit crisis. For a time in the weeks ahead, it may well appear as though the skies have cleared and the sun is out shining once again in the land of financial markets.
This is the job of Wave B, to move the herd back to the center of the boat. That said, stocks have been, and are very likely to remain in bear market mode for some time, even if one or two market averages were to record a matching or token new all time high, unlikely, but not impossible. Commodities look toppy and are expected to weaken as the US and the world deals with the deflationary trend now emerging in the global economy...
Ashraf Laidi
One essential indicator for the future performance of US equity indices is the aggregate margin debt used by member firms of the NYSE. After attaining a record high of $381 billion in July, member firms’ margin use continued to tumble for the following 4 months, reaching a low of $322 billion. Such declines in debt result from the execution of margin calls as client losses escalate to unsustainable levels, which is the case during mounting market volatility.
The chart below clearly shows that the rapid declines in margin debt from their record highs correctly predicted the prolonged bear market in equities in fall 1987, fall 1998 and spring 2000. The continued declines in margin debt in December to $322 billion from the July high of $381 billion suggests that continued losses are due in the market, which is consistent with our expectations for a prolonged bear market in equities. The 12-15% declines in stocks we predicted back in December are already underway. We expect another 15-25% of declines to come by end of H1 as the macroeconomic deterioration coupled with prolonged losses in US banks and profit warnings (no currency translation effect this time as the dollar stabilized in Q4-Q1) will overwhelm the easing measures of the Fed.
The importance of determining where the general equity indices are heading is highlighted by the 70-20-10 rule, which states that 70% of a stock’s movements are influenced by the broad indices, 20% are driven by stock’s sector and 10% by the fundamentals of the individual stock. As history has shown without fail, individual stocks have consistently followed the broad averages during prolonged bear markets regardless of their individual fundamentals.
Incorporating this outlook to currencies, continued risk reduction should maintain the yen as the key beneficiary of falling risk appetite and unwinding of carry trades. Further declines in USDJPY, GBPJPY and CADJPY are in store as we anticipate 103, 202 and 100 respectively before the end of the quarter.
Editor's Note: Do not miss Mr. Laidi's Q&A session with the Financial Times last week regarding currencies located athttp://www.ft.com/cms/s/2/34139f9c-c50b-11dc-811a-0000779fd2ac.html
