Wednesday, August 15, 2007

Another Oversold Bounce?

The market is getting a boost in early trading, which is pretty good considering the early news. Asian markets plunged overnight as the subprime news made its way across the pond. One Australian hedge fund has gotten hit, and one of Japan's biggest banks is reporting losses as well.

The economic news was good, with the core CPI coming in at just +0.1%. The 10-year yield is down slightly to 4.73%.

Tech stocks are mostly weaker after disappointing guidance from Applied Materials (AMAT). But financials are higher, even in the face of a big Countrywide (CFC) downgrade.

The markets have gotten oversold again, and are due for a bounce. The last time we were deeply oversold, we saw a pretty strong 3-day, +5% rally. But then when the markets came back down for the retest, they undercut the previous lows.

Sometimes this is how the pattern plays out. So no we have to again wait for a bounce, and then see if these new lows hold on the next retest. Obviously, this process takes time so investors need to be patient and not try to force things.

With each level the indexex move lower, they leave behind more overhead resistance. But eventually the news gets priced in, everyone who wanted to sell has done so, and a new uptrend can begin.

If the Fed ever comes in and cuts rates, that would ignite the market. But for now, this is still wishful thinking.

9 Comments:

At 8:16 AM, Blogger Eric said...

Why do you think a Fed rate cut would ignite a rally? Don't you think everyone thinks that already? Sept Fed Fund futures are already pricing in a cut--shouldn't the cut therefore be in the price of the market? As Nouriel Roubini said in his blog, this is different from 1998 in that we have an insolvency crisis on top of a liquidity crisis whereas 1998 was really just a liquidity crisis. I actually think there's some chance that all "longs" in the market are waiting for a fed cut in order to square up positions. what happens when everyone who is praying for the "Fed cut rally" sees that the spx is only up 10 or 15 on that move. They'll all turn to sell and then people will realize that this problem is actually out of the Fed's hands (for the time-being). Cutting the Fed fund rate by 25 or 50 bp won't affect mortgage rates. It won't affect the values of asset backed securities. It will lower funding costs (although Fed Funds has been trading below 5.25 all week), but it won't change the fact that LTV of all this debt is too low to refi.

 
At 10:01 AM, Blogger Suge Knight said...

I agree with Eric. J, something I notice about you, if the market doesn't sink, then we have reached the bottom (according to you). If it does sink then stocks are oversold and we're ready for a bounce back up anytime (according to you). The market is not oversold or overbought J, if it is oversold now then what are you going to say if the Dow drops another 500 points next week? Also, why do we need the Fed to cut by 25 basis points if this so far is not even a 10% correction?

Big Suge

 
At 1:46 PM, Blogger Suge Knight said...

J, stocks are not oversold according to the market, I thought I'd let you know ;-)

 
At 2:31 PM, Blogger J. Kahn said...

Is this Eric from Philly?

I think a Fed rate cut would ignite a rally just as it always has. The market is already pricing in the certaint of a rate cut, now the Fed just needs to acquiesce.

I don't think all of these mortgage lenders need to be saved, but I think a big injection of liquidity would allow many homeowners stuck in adjustable mortgages to lock in something they can live with.

 
At 2:33 PM, Blogger J. Kahn said...

Big Suge,

When I talk about "oversold", I am referring to the oscillators that I follow. Oversold is a term that measures declining stocks versus advancing stocks on a 10-day moving average.

Just because the market is oversold does not mean it can't get more oversold. And that is what is happening.

But in my trading career, I have done better by buying oversold markets and selling when they get overbought than vice versa.

Peace--

 
At 3:23 PM, Blogger Suge Knight said...

J,

Good point. I'll drink to that!

Big Suge

 
At 3:44 PM, Blogger Suge Knight said...

Did I post this article already?

Nouriel Roubini: "Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets."

Big Suge

 
At 5:05 PM, Blogger Eric said...

It's hard to argue that a Fed rate cut would ignite a rally when more than one cut is already priced into the Fed Fund futures market. Not every rate cut has ignited a rally in the past and I would think that a cut that meets market expectations would fail to deliver this time as well. You see William Poole temper any inter-meeting cut hopes tonight after the close? I think people should be more concerned with what happens to the market if the Fed doesn't cut and the Fed Fund futures get repriced. That's where the real surprise would come. This is Eric from Philly. You should know that I only surface when there is blood in the water.

 
At 5:16 PM, Blogger Suge Knight said...

Eric,

You call this "blood" on the streets? We're barely at a 10% correction. I see no blood on the streets yet but that's me.

Big Suge

 

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