Tuesday, February 27, 2007

The TRIN Goes Nuts

We haven't seen the TRIN behave like this since 2002 and that was during the the time the market was putting in a major bottom. Interesting to see a TRIN reading this extreme with the market still relatively close to the highs. The concern here is that the swings are too extreme and that we could see a quick snap back later in the week. We'll see. These are days when I sure miss Bill Lefevre and Lou Ehrenkrantz.


Pete said...

Hi Jim: This feels like 1998 and Long-Term Capital Management. For those that remember, it was caused by two of the founders of modern day option pricing models (Robert Merton and Myron Scholes). They started a hedge fund called Long-Term Capital Management. They used arbitrage models and the fund collapsed in 1998 when Russia defaulted on their debt. Here is a link for more info. http://www.sjsu.edu/faculty/watkins/ltcm.htm The sell off in 1998 was huge and it came out of nowhere. The SPY fell 25% in a month. It was nasty and the market was up big going into the collapse. The Yen-Carry Trade has the same implications. Borrow cheap, leverage big. Now that Japan raised its rates, that window is closing. We'll see what happens. The SPY broke 141 in a single day and that will cause pain. That level was the 100-day MA, a six month trendline and horizontal support. There are more hedge funds than ever and some are going to fold.

Jim K said...

I sure remember it well. And today there are many smaller LTCMs out there leveraged 10x mroe than LTCM.