Articles from Aug 2007

Down Up Down

The market is forming a small range here. Technology is the new leadership theme for market and when the market correction is over the sector would be ideally placed for rally. The biggest area of concern is small caps. The speculative favorites are the ones which are showing weakness. That is on of the reason the 65 days ratio is stuck in negative territory.

In the short term the low volume holiday environment is bullish and with one of the indicator (stocks up 50% plus in month at 2) showing possible strength around, we will likely see strength. The market is ideal environment for day traders and short term traders. Nimbleness is the key.

With Nasdaq showing strength the post holiday action might offer some opportunities for light commitments in technology sector. Number of stocks in the sector are showing relative strength, but again most of them are in the large cap technology area. However if the overall market gets in to downswing, much of this pocket of momentum in technology sector will not be able to sustain its up move.

Swinging Market

The difficulty of trading a highly volatile and low volume move is demonstrated by last two days action. Market is swinging from one extreme to another extreme. 2% days or days with 300 plus 4% bullish or bearish breakouts are now a days a weekly phenomenon.

After day before yesterdays weakness a retest of high was what I was expecting , but not so fast. The market opened in green and stayed that way and accelerated post 2 p.m. on news of Fed Chairman's letter. Technology was leading the way. INTC the tech bellwether had 4% plus breakout yesterday. Expecting this strength to not carry through much and we are likely to have a pullback from this level.

Market is in confirmed correction phase as per Market Monitor. The entire idea behind Market Monitor is to avoid risky , volatile period and trade during safe, less volatile periods. All such periods are ultimately followed by less volatile more predictable periods. More than that the profit one can make during the safe period can compensate for staying out during such period.

Buyer Strike

There is absolutely no reason to buy at yesterdays level. The buyers who bought the bounce weeks ago in fact had incentive to sell in to Friday strength. So we had a day where market dived on low volume and pretty much kept going down. There were no dip buyers.

The last Friday action was spooky and unexpected. A rally when 65 days bull/bear ratio is negative is always a tactical play. Probability of it failing or retracing is always higher. The market has behaved as per that script so far.

Many headlines were attributing the sell off to Fed meting minutes. But I don't see that as consequential. The market was technically due for pullback and that is what happened. Low volume on this move makes it tricky and by end of week, we might rally back in to recent high.

Excitable gloom-mongers and Apocalypse

Was that it? Can it really be that the violent storm that broke over financial markets this month has turned out to have been no more than a bit of noisy huffing and puffing, an empty squall that blew over at the first sign of a response from central banks? Have the excitable gloom-mongers in the media and parts of the financial markets once again been denied their Apocalypse?

There have certainly been encouraging signs in the past few trading days that, over here in the United States, markets are reverting to a sort of normality. Equities have shaken off the doldrums.

After a strong week, the Dow Jones is 6 per cent above where it started the year and only 5 per cent off its July peak.

Having spent much of the past two weeks bouncing around like a bungee jumper on a thin rubber band, US Treasury markets look comparatively becalmed – the yield on three-month Treasury bills has bounced back up from its low of below 3 per cent last week to a more normal looking 4.5 per cent.

In the interbank credit market, anecdotal evidence suggests that the August panic is giving way to a late-summer calm. Those nasty rumours about imminent bank failures – featuring, in the UK, names such as Northern Rock and, in the US, Countrywide – have dried up. The weird things that were going on in the interbank market two weeks ago – with overnight lending rates shooting up and down in an unprecedented way – have disappeared.

It is tempting for those of us who never signed on to the “sky is falling” hysteria to crow at the sheer dullness of it all.

But in truth even I did not think that it could really blow over this quickly. What kind of a crisis was that?

Central banks step up their overnight repos, the Fed cuts a largely symbolic, as opposed to a real, interest rate and a few big-swinging, money-centre banks make a very public appearance at the discount window, and that is it?

Low volume pullback

  • Market continues to be in confirmed correction phase as per 65 days ratio.
  • Market had a pullback on extremely light volume. With most market participants on holiday, it will be tricky market. Most of the action will be choppy and on low volume.
  • China stocks were the star, they have been on tear since the end of down move.
  • Patience is the key at this stage. Markets will set themselves for sustainable move only post holiday.

Market Monitor

  • Market had a surprisingly strong action on Friday. This week is holiday shortened week plus last week of summer, so thin volume will likely move the market higher in near term time frame.
  • 65 days bullish/bearish ration continues to show market in confirmed downtrend. Rallies during such period have high probability of failure.
  • In seven days market has rebounded vigorously and now is back within a few percent of recent high. Panics are always good buy opportunities as long as you do not get sucked in by all the doom and gloom talk during such panics.
  • Stocks which were not dented by the panic are now starting to breakout, the early part of the bounce was driven by heavily shorted stocks. This bounce is also setting up some potential shorts, as number of stocks are consolidating near their low or rallying on low volume.

Pullback time

Last week panic buy set up is now witnessing profit taking. As we continue to be in confirmed downtrend as per 65 day bull-bear ratio, rallies like we witnessed in past couple of days will be more tactical plays. From this level we might test and retest the panic low.

Quantitative funds rebound

When the market hit turbulence, the quant funds lost money. Immediate reaction from clueless perma bears and everyone else was to pile on and claim doom and gloom for quant funds. Now news is percolating down that most of them have rebounded. Obviously you would not see any comment or mention about it from the usual suspects. Go back and see the news and blog coverage from just 10 days ago, there was no shortage of commentators writing obituaries of quants.

Goldman Sachs Group Inc.'s Global Equity Opportunities hedge fund rose 12 percent last week after the securities firm shored up the money-losing pool with $3 billion of cash, investors said.

Assets more than doubled to $7.5 billion as New York-based Goldman put $2 billion into the fund and raised $1 billion from investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad. The fund lost about 30 percent in early August as rising mortgage defaults caused stocks to tumble, upending the computer models its managers use to select trades.

Global Equity and other so-called quantitative funds rebounded as market turmoil eased, said the investors, who asked not to be identified because the Goldman fund's performance is private. James Simons's $29 billion Renaissance Institutional Equities Fund made up almost the entire 8.7 percent decline it suffered in the first eight trading days of August, investors said.

Keeping calm during market correction is very important. Most immediate analysis about market corrections is often faulty and no more than just fear mongering by perma bears. See my previous post about this here.

Rebound continues

The market is witnessing a textbook rebound after the last weeks panic and weakness. Yesterday was second 300 plus breakout day post the rebound. Now this sets us up for a possible partial retest or sideways move in next smaller time frame.

Stability zone

After reaching extreme levels of panic few days ago, in last two trading session there is a bit of stabilization. The move post Fed action was subdued, which is not a very encouraging sign. So most likely scenario would be attempted retesting of the recent lows.

As the market attempts to stabilize here, my vacation is getting over and after sitting in cash through the entire turmoil, I will be back in USA by midweek. Updates will be infrequent as I am currently in transit.