Tuesday, February 27, 2007

What Will The Bears Do For an Encore?

We'll find out tomorrow morning at 9:30, is probably the best answer.

Though, we will have early indication of how things will shape up for tomorrow once trading in Shanghai begins in about 2 hours.

Here's a useful link for keeping an eye on the activities in Shanghai: http://www.sse.com.cn/sseportal/en_us/ps/md/sh_b_qci.jsp.

With regulators in China worried about excessive speculation, I just can't help but to wonder if the government will allow things to slide a bit further to wring out some speculative excesses in that market. With a TRILLION in foreign reserves, the Chicoms could easily stop any sort of blood letting in their stock market, but excess has been a concern. Helping to grease the skids - new rule changes. And next week, the big meeting of the National People's Congress where more legal reforms may be coming which could impact the Shanghai market. Somewhere in this blog is a link to a WSJ article about folks in China buying stock by using credit card debt and even mortgaging their homes - all a not too much for regulators. Of course, knowing what we know on how the Hong Kong market has been operated, especially pre-2000 it's also doubtful that we'll see complete meltdown in Shanghai.

Getting back to the U.S market outlook. While I had been writing about various warning signs that there were trouble signs (and being abused for it and called bad names), I wasn't thinking we'd be seeing a 500 point down day this quickly. I was thinking next fall. And who would have dreamed a shoot up in the VIX to 18+? LOL, I did own VIX calls (between 30 and 80) at each strike all the way to 18 and have sold most them. These VIX calls I had mostly quintupled or more in value today so this was one of my best days ever in the markets. But even here, I was not expecting late February fireworks.

With this surge in VIX and TRIN, it would not surprise me if we get some sort of relief rally perhaps as early as hour 2 of tomorrow's session IF things don't blow up too badly in China overnight, or some other dislocation doesn't appear by tomorrow morning.

But there's a BIG BUT here. Technical damage has been severe. I think the relief rally will be brief (watch out for those briefs). Now that the 20 week moving average has been soundly trounced in the Dow, once we get some relief, the 50 week or thereabouts sure looks prime for the pickin'

The shabby thing about the above Dow chart is that weekly MACD (top chart) has negatively diverged for the first time since last May. That's were I'm thinking that we're in for further eventual downside.

Same for other major indices. 50 day, 20 week, etc taken out today. Yes, likely rebounds, or snap backs, but further downside testing looks likely given the technical damage. More later. Time to take number-1 son to cub scouts.


Kevin said...

Excellent call on the market Jim..I don't know if you anticipated China being the catalyst for this sell off, but you were clearly bearish on the market. Nice going!

Lauriston said...

Jim K

I agree with you about VIX and potential relief rally. I am gonna try and game the rally but very very carefully :), small position! I am more interested in shorting when that relief rally ends. Great job your blog esp. on TRIN, and I think we are in for exciting times when fear and greed come out into the open better than in a trending market! Good luck.

Jim K said...

Congrats to you as well Kevin. Your blog has done a great job being on top of many things to be wary of. It's nice to know that on the web, there are sources of alternative and informed analysis. The same goes for Lauriston. He says he hasn't been investing for long, but he's a sharp guy and his skepticism and mockery recently of "bad news" being porttrayed as "good" was on the mark and amusing as well. You just can't ignore bad things, it eventually catches up.

As for China. It was clear to see trouble was brewing, and I have a large put position in BIDU (which still may be problematic), but I honestly did not anticipate a 9% correction in Shanghai would spark such a rout on Wall Street. EEM has been flashing a red flag and 1998 seems like yesterday WRT how emerging markets can upset the apple cart, but I had been focused on domestic dislocation potential not on China. Interesting how a "confluence" of negatives (all out there for everyone to see) hit the market hard.

While I'm concerned that a China correction and bad durables may not really be enough justification for a 500 point intraday Dow drop, another poster brings up the issue of hedge funds and leverage and that has me wondering what damage has been wrought there and whether that will curtail a relief rally. It will be interesting to see what happens tomorrow.

Thanks for posting guys.