Multiple Capitulations...
The end of every recessions or bear markets are marked by multiple capitulations in both the economy and the stock market and I think we might be witnessing some of that right now.
Capitulations in the economy:
1. Bankruptcy of major institutions. Every recession or bear market must end with the close down of a few major players and I think we might have witnessed it in Lehman Brothers.
2. Surge in unemployment. Every recession or bear market must end with a huge surge in unemployment. The last recession ended with unemployment rate at 6.3%. We are certainly near that level once again with 6.1%.
3. Sudden and powerful collaspe in oil price.
Capitulation in the stock market:
1. Multiple blow off days near critical support levels. Both the Dow and the Nasdaq composite formed 2 blow off days right at the July low levels, once again forming a strong support and a possible rebound. We need to see a J hook over the next few days to confirm this.
2. Rush to Bonds. Every recessions and bear markets also ends when investors are most negative and rushing into bonds. We saw bond yields ditch across the board this couple of days as bond traders rush in.
3. Surge in volatility. A surge in the VIX almost always lead to a significant market rally. The last time the VIX was this high led to the 2 months rally from March to May.
So, why no rate cut today? Because there is no need to. As long as oil price stays below $100/barrel, the lower production price would increase short run aggregate supply to the point where the okun gap could get closed up without an increase in aggregate demand, returning the economy back to near full employment equilibrium. Near? Yes, I am one of those who do not believe that the economy functions at full employment equilibrium for any sustainable period of time. The economy is always either slightly at above full employment equilibrium or below full employment equilibrium. The Fed is definitely more comfortable keeping the economy at slightly below full employment equilibrium in order to keep inflation at bay.
Capitulations in the economy:
1. Bankruptcy of major institutions. Every recession or bear market must end with the close down of a few major players and I think we might have witnessed it in Lehman Brothers.
2. Surge in unemployment. Every recession or bear market must end with a huge surge in unemployment. The last recession ended with unemployment rate at 6.3%. We are certainly near that level once again with 6.1%.
3. Sudden and powerful collaspe in oil price.
Capitulation in the stock market:
1. Multiple blow off days near critical support levels. Both the Dow and the Nasdaq composite formed 2 blow off days right at the July low levels, once again forming a strong support and a possible rebound. We need to see a J hook over the next few days to confirm this.
2. Rush to Bonds. Every recessions and bear markets also ends when investors are most negative and rushing into bonds. We saw bond yields ditch across the board this couple of days as bond traders rush in.
3. Surge in volatility. A surge in the VIX almost always lead to a significant market rally. The last time the VIX was this high led to the 2 months rally from March to May.
So, why no rate cut today? Because there is no need to. As long as oil price stays below $100/barrel, the lower production price would increase short run aggregate supply to the point where the okun gap could get closed up without an increase in aggregate demand, returning the economy back to near full employment equilibrium. Near? Yes, I am one of those who do not believe that the economy functions at full employment equilibrium for any sustainable period of time. The economy is always either slightly at above full employment equilibrium or below full employment equilibrium. The Fed is definitely more comfortable keeping the economy at slightly below full employment equilibrium in order to keep inflation at bay.
Labels: fundamental analysis, technical analysis
posted by Jason Ng at 6:04 PM
1 Comments:
Great information!! Thanks. I was surprised you did not scream REBOUND, and was glad you did not because today (Wed USA), the market is crashing.
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