http://nbcharts.blogspot.com/2009/02/rumors-from-con-men.html
When will these guys just shut up and start taking action, executing the laws on the books. The markets are pricing in nationalization. The talk of politicians is proving to be folly and is eroding public confidence in our nation’s institutions and leadership – sort of a financial Hurricane Katrina…
Nationalizing the largest, insolvent banks is the first step in restructuring the World’s Financial Markets. That is the job of the FDIC! Their role is to protect depositors from the irresponsible actions of bank management. But they are nowhere to be found.
Counterparty Risk
Banks are afraid to lend to one another, because they know that the guy on the other side of the trade is insolvent. If the government nationalizes your counterparty or they go bankrupt, then you lose all of your money. So banks aren’t lending to one another. This has the economy paralyzed. All the talk is to try and keep confidence game going just another day longer.
The only way to get lending going again is to get the risk out of the system by removing the insolvent banks. My story has not changed since October. Unfortunantely, the economy has crated since then, as the politicians and regulators have been paralyzed from doing what is needed and right.
This week, the big boys sold banks with abandon. Take a look at the Index for the Preferred Stocks of Banks (PFF). It took out major support on massive volume. That isn’t grandma and Aunt Betsie selling, that is Fidelity and CALPERS running for the hills!
I feel bad for those little old ladies who have been chasing yield and buying Preferreds. Just wait until Corporate Bonds roll over yet again…
Very Short-Term Oversold
That said, the markets have been pounded since February 9th and they are now very stretched and can rally sharply at any time.
No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.
We may be entering another crash leg, so I want to revisit the indicators I use to determining how oversold the markets are and from where they may bounce.
Daily Moving Average Envelopes
This chart plots lines for each 5% +/- the 150-day moving average. It worked very well in the 2000-2003 Bear Market and has done a decent job defining activity of the last few months.
I use the S&P 500 Index (Cash Price, Not Futures or SPY) as my proxy for stock market activity. You can see how the S&P 500 have been bound between the -15% Line (Green) and the -25% Line (Thick Blue). See how rallies have failed at the Green Line and the 50-day (Black Line). See how selloffs have stopped at the Blue Line (Black Arrows).
30-Minute Standard Deviation Chart
I use this chart to define oversold and overbought conditions in the shorter-term. When price stretches to + or – 3 Standard Deviations from the 50-day moving average (Black Arrow), then I expect at least a short-term reversal. We are now there, so I am looking for a bounce.
A bounce from here would be normal. I think this bounce will be aggressively shorted. I think the markets are broken and the governments around the world are in panic mode. I expect MASSIVE government intervention in the next few days of trading.
I would not be surprised to see the announcement of either explicit government support of stock prices or some new multi-trillion dollar transfer of money from taxpayer to shareholder. Nothing else will stop this market from crashing.
The potential for intervention is why I am not interested in shorting. Even on a bounce.
Scorecard
The S&P 500 was down -38.5% in 2008. I was +2.8%. In 2009, the S&P 500 is -13.76% and I am down about -0.50% (1st Quarter Fee Included). So I am 54.6% ahead of the market the last 14 months. So I have plenty of time to wait before I deploy money into stocks again.
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