Stock Market Analysis

Wednesday, December 31, 2008

HAPPY NEW YEAR - 2008 recap!


2008 is over at last. It has been an extremely turbulent year and everyone's swept under its currents such that it was hard to see what actually happened, so, here's a recap of what happened in the stock market in 2008.

Summing up, the Dow lost a total of 4488 points this year, down 33.84%. The Nasdaq composite lost a total of 1075 points, down 40.54%. The S&P500 lost a total of 565 points, down 38.49%. The more volatile Nasdaq Composite became the loss leader this year just as it is expected to be the gain leader in a rising market, so, no surprise there. Both the Nasdaq Composite and the S&P500 went lower than the low of the last crisis in 2002. Only the Dow managed to stay above the last crisis level marginally. I had expected it to also make a lower low but it did not.

How did it all begin? Indications of this 2008 market crash actually started showing up as early as July of 2007 when short term bond yields begun yielding higher than long term bond yields in a bond yield curve (see bond yield curve) that is almost perfectly horizontal above the 4% yield line. Such a bond yield curve indicates excessive optimism in the capital market as the 20yr bond hit an all time low price (relative to recent years). Bond prices go down when demand for bonds goes down. Demand for bonds goes down when capital gets reallocated, usually into the equities market (for simplification sake), resulting in high bond yields. At that time, the Dow was trading well above the 13000 points level, just one step from the 14000 level resistance which marked the beginning of the 2008 market crash. At the same time, foreclosure rates had been and continued to rise nation wide, putting pressure on the value of the most complex derivative instrument ever created amongst investment bankers, CDOs or Collateralized debt obligations.

All 3 major indices hit their peak in October of 2007 and begun their long retreat. The retreat didn't look at all menacing for a start as all 3 major indices backed down to their respective short term support levels and even rebounded slightly, making it all look like a classical pullback in a strong primary bull trend. At that time, the Fed's still all confused with what to handle, inflation or growth, and talks of Stagflation begun showing up as real GDP went sideways in Q3 2007 and then retreated in Q4 2007. This was when 2 groups of economists; Recession Talkers and Goldilocks, begun their battle of tongues over the major wires. Of course, now we know who knew better. Sensing danger, investors begun taking positions in bonds once again, bringing bond yields down from their previous highs. The Fed also begun taking Fed Fund Rate down from its high of over 5% in August gradually (too gradually, argued by some economists). At this time, a perfect storm is brewing as the more the Feds cut rates, the lower the dollar goes and the higher commodities prices went (as well as prices at the pump of course), putting further pressure on the real economy.

The first warning sign of a recession surfaced in January 2008 as unemployment rate hit 5% for the month of December 2007. 5% is a psychological level that says that something might be wrong in the economy as full employment rate (normal unemployment with minimal cyclical unemployment) is around the 4.5% level (number arrived at from my own research). That was probably one of the catalysts that caused all 3 major indices to break their respective short term support levels downwards in the first month of 2008, threatening the integrity of the primary bull trend that was in place since 2003. At the same time, inflation continued to be a problem as oil continued it march to the $140 per barrel level while talks of CDOs becoming worthless due to significant doubt about the fixed income ability of mortgage loans built into them begun hitting the wire. In fact, it was around this time when analysts begun finding CDOs being over-rated by rating agencies (well, like one of the high profile analysts said, they belonged to the same club).

By February of 2008, it has become apparent from the charts that the intermediate term bull trend has been compromised as investors rushed for quality, depressing short term bond yields to almost half of what they were just a couple of months ago. On the charts, however, it could still be argued that the Dow merely made its first major intermediate term correction since the primary bull trend started in 2003. Such a technical correction is also an acceptable argument under the Dow theory as some technical chartists expect the major indices to make a rebound from that level, which, did not happen (even though the Dow did rebound just a little bit for a couple of months as technicians took position). At this time, however, the economy's already not looking at rosy as it did just months ago with rising unemployment, lowering durable goods order, rising oil price and a dropping GDP. Signs of trouble also begun emerging in the investment banking sector as major investment bankers started changing CEOs and writing off worthless CDOs and subprime loans. By this time, the Fed is beginning to get it that the economy is in real danger but has yet to take major actions on the fed fund nor to take coordinated action with central banks around the world. The dark cloud also spreaded into stock markets worldwide, making it obvious that this is not only an USA crisis but a world crisis.

By July 2008, investors were convinced that the economy is indeed in a recession (at last) and the credit crisis is deeper than most has expected. All 3 major indices made their first significant downwards breakout, totally disintegrating the previous primary bull trend, and stated without a doubt that the bear has arrived. All hell broke loose after that as Lehman Brothers closed down, unemployment rate soared and real GDP went negative. Investors begun rushing for the door, taking major indices down by a greater magnitude each month. The Dow was down 9% for the month of September and over 17% in October. At the same time, as aggregate demand drops in the economy, so did demand for oil as crude oil price dropped like a rock from its high of $140 per barrel all the way to below $40, taking CPI along with it. The US dollar also took a surprising turn and surged upwards against major currencies for months, wiping out forex traders trading on the "short-the-dollar-golden-strategy".

Right now, commodities prices are at lows that was not seen for decades, bond prices has formed a bubble waiting to be burst and unemployment rate has reached higher than the previous crisis. Talks of write downs are also disappearing. This is certainly the best time for enterprising companies to take advantage of better prices and start hiring once again. In fact, purchasing by companies are already picking up slightly as indicated by the latest PMI number. All the ingredients needed for economic recovery seems to be in place and I suspect we should see some real signs in 2009. 2008 has done a good job of quickly and mercilessly draining waste from the economy instead of making it a prolonged agony. With stocks this low and bond bubble waiting to be burst, the stock market definitely has a lot more upside potential than downside potential right now. Let's say a nice goodbye to 2008 and welcome 2009! :)

** I am sorry if I did not include many of the other major events that contributed in the 2008 crash as I intend to keep this as short as possible while correlating events in the economy to the stock market.


Monday, December 29, 2008

Another Sideways Day...

Looks like this week's market action is going to shadow last week's as investors continue to stay on the sidelines, not wanting to be the hero. Well, just 2 more days to 2009. Hope you guys enjoy the last of 2008.

Sunday, December 28, 2008

Welcome To Week 1 of 2009!

Welcome back from the Christmas holiday and into week 1 of 2009!

This is again going to be a holiday shortened week exactly like last week with the new year holiday on Thursday as well (see economic calendar). Again, this is probably going to be yet another sideways week like last week as traders and investors quit trying to be the hero, especially with the January effect being quickly arbitraged away in recent years. I am going to sum up the year and make my forecasts for 2009 on Wednesday, so , stay tuned.

Thursday, December 25, 2008



2008 have been a harsh year for all investors and traders and all of you who survived have learnt a lesson that cannot be bought with money. 2009 is going to be an exciting year and I expect it to be a recovery year as well, so, lets enjoy the rest of the year and start over in 2009!

Sunday, December 21, 2008


Well, who's in the mood to trade this week?

NOT ME! hahaha!

Well, this is a significant week not only because its Christmas week but also that GDP will be announced this week as well (see economic calendar). Nobody knows where this revision number will point towards but one thing can be sure, and that is, with everyone on holiday already, trading will be thin and swings will be BIG. Well, that's all I will say for today... snow's waiting for me right at my doorstep! ENJOY YOUR HOLIDAYS!


Thursday, December 18, 2008

More Flee For Quality...

More investors fled for quality today, not wanting to be caught by the quadruple witching and the weekend ahead, causing the Dow to drop over 200 points and further depressing bond yields.

Even though the drop today was pretty disappointing to those investors expecting a Santa Claus rally, it did not change anything on the technical front. The Dow continues to be in an extremely uniform short and intermediate term neutral trend with strong resistance at 9000 points. I do expect this neutral trend to continue within a channel of about 9500 to 7500 points due to the strong support offered by the Dow's monthly 200MA. I hope this neutral trend will breakout to upside in January on a strong January Effect and then followed by peak unemployment numbers and a recovery in the stock market for the rest of 2009. :) What is the January Effect? The January effect is a phenomena where the first few trading days of January are usually strong up days and more frequently end January itself positive. However, the January effect is so popular for so long that its effects are already wearing out year after year as speculators take position in December or even as early as November.

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Wednesday, December 17, 2008

Bond Traders Continue Retreat...

The Dow continued its neutral trend today as it retreats by 98 points from a lack of follow up on yesterday's "Fed Rally". What the Fed did certainly didn't impress investors as Bond Traders resumed their flight to quality, depressing bond yields to historical lows again (see bond yield curve). The market was depending on bond traders to come back into equities due to the low yields in order to provide the support and thrust it needs but it looks like its not going to happen after all. This makes the possibility of a Santa Claus Rally very slim. Obviously these 2 weeks have been great for Neutral Options Strategies but pretty dry for stock traders. However, I do expect a significant change of tone in the market once we leave 2008 behind us and look forward to what the January Effect of 2009 can bring.

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Tuesday, December 16, 2008

Fed Fired Last Bullet...

The Fed fired their final bullet today by taking rates down all the way to almost 0. So far, fed fund rate has been the only thing the Fed can do that investors are even interested in and I supposed Uncle Ben is doing that more as a political move rather than an economic move. With economic numbers deteriorating the way it has been, Uncle Ben certainly don't want to be the guy holding the last bullet while watching people die. Why do I say that? I said that because the effects of the 1% rate target will take at least 6 to 9 months to filter into the real economy and by taking rates even lower so quickly, there really isn't much fundmental reason to support why the rate wasn't cut all the way to 0 from the last meeting if it is going to come down again in just 1 month's time. Strangely, why hasn't the rate cuts helped stemmed the recession so far? Well, imagine you have an army of ten thousand up against an army of a thousand but all you do is send in squads of ten or hundred against that thousand all the time, would you ever win?

So, will a 0% rate help the economy? Definitely it will but it's just not going to show up within the next 1 or 2 months. These things takes time to filter into the real economy but I would say it certainly set the stage for a recovery in 2009. The Fed's job ahead would be to strategically bring the rate up fast enough to stem the effects of inflation. Well, discretionary monetary policies does have its drawbacks.

On the technical front, the Dow continued trading within its neutral channel today despite significant gains and with the futures pointing downwards after market, it seems like investors are trying to sell into this rally to make their year end accounts look pretty. Well, I am going to just leave 2008 behind me and look forward to 2009.

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Monday, December 15, 2008

Sideways Day Ahead of Fed...

The Dow went sideways today ahead of the FOMC announcement of tomorrow (see economic calendar). A sideways day on this blog is defined as a day with its trading range entirely within the range of the previous day. This is definitely going to be an extremely volatile rest of the week not only because of the Fed announcement but also because of this Friday's Quadruple Withching. The holiday shortened Christmas week coming up next week is only going to add to the volatility this week as some investors speculate on a Santa Claus Rally while some others take quick profit to close the year with. Volatility, volatility, volatility. That's the keyword for the rest of the year as we look forward to the January Effect next month.

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Sunday, December 14, 2008


It's FOMC week once again (see economic calendar)! :)

Why am I so happy? Well, because its real exciting to see what the Fed is going to do this time round. Its really going to be a tough decision to cross the 1% line and I think the Fed is going to hold rates steady this time round. I mean, why keep cutting rates when the effects of the previous rate cut has yet to filter into the economy in the first place? The Fed certainly isn't using monetary policies for the sake of the stock market, that's for sure.

On the technical front, the Dow has found excellent support on its monthly 200MA and has really moved sideways since October, establishing an intermediate neutral trend. Lets see which way this neutral trend breaks out to eventually. Personally, I see a much greater chance of a bullish breakout than the neutral trend we got back in July - September because there is obviously a lot more buying at this level than in the previous neutral trend.

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Thursday, December 11, 2008

Pullback Starts...

The Dow retreated almost 200 points today as I have anticipated yesterday in continuation of its intermediate neutral trend. The quality of this pullback is extremely important technically. If the pullback does not make a new low relative to the Nov low, then it would reinforce the neutral trend and increase the possibility of a bullish breakout but if it does, it would break the neutral trend and resume the primary bear trend. Changes within the framework of an oversold primary bear trend is always tricky especially around critical support levels such as this one.

Bond traders played it safe today by staying relatively still as the auto bailout becomes shaky. Well, economics has its way of eliminating the less efficient and effective and human intervention does nothing but prolong the pain and delay in the inevitable, resulting in more uncertainty to the market and their workers.

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Wednesday, December 10, 2008

The Good Thing About Economic Crises...

It is another sideways day for the Dow today as it continues to trade atop its 30 days moving average, reinforcing the intermediate neutral trend that it is in now (see my post yesterday). I would expect a short pullback soon but remaining within the framework of the intermediate neutral trend.

Well, since everyone's talking about how evil economic crises are, let me shade a different light about how economic crises are good and necessary. As an economy grows, the economy gets filled with all kinds of newer, more competitive, more innovative and more competitively priced products and companies. Because demand is strong in a heated economy, less competitive companies with their less efficient and more expensive products continue to make a living albeit at a much slower pace. However, it comes a time when an inevitable economic crisis hits and these less efficient, less competitive, old tech companies face tremendous pressure as consumers get clever about the way they spend money and then BAM, these companies close down, resources get distributed to more competitive firms, workers move to more competitive factories producing more competitive products and eventually, consumers get more of the better things in life. In this sense, economic crises are like the sinkhole of the economy where every once in a while, it clears out the trash and makes the economy even better after that. In this sense, I really don't see why those old tech, less competitive companies who are already having problems with the competition before the crisis begun are being helped by the government to continue their less effective products and ways. Yes, short term unemployment will result with their close down as these companies tend to be quite big but once these workers find employment in better and more competitive firms, they will be better assured of employment security going into the future. Think about it. Some pain are necessary, avoiding them turns progress backwards.

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Tuesday, December 09, 2008

More Bond Traders Coming...

Even though the Dow retreated over 200 points today, this move is nothing more than a sideways movement totally within yesterday's trading range. Something really unique happened today which gives more support to my recent observations of the bond market. The US treasury actually issued 0% yield T-bills today! Yes, T-bills are now not only zero coupon but zero yield as well. Buying them is as good as burying your money in the backyard! That is how hot the bond market is right now. With totally no yields on the table and stocks at extremely attractive prices, there is no doubt more bond traders would be moving back into stocks soon. When they do, bond prices will definitely fall through the roof as the "bond-bubble" burst. We can all benefit from that by taking a toe dip into an ETF known as the TBT which tracks the inverse of long term bond prices. Looks like the Dow's long term support level, which it is at now, could be a strong one.

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Monday, December 08, 2008

Dow Reverses Into Neutral Trend.

The Dow followed up on Friday's rally today with yet another rally of nearly 300 points as bond traders continue to rush into equities, causing bond yields to rise again across the board (see bond yield curve). This has reversed its intermediate trend from bear to neutral with neutral trading channel bounded by 9500 and 7500 points, which means that it is a good time for some neutral options strategies. Yes, 2000 points wide neutral channels are rare and can only be found in extremely volatile market conditions such as this one.

So, has the final capitulation that I have been talking about ended with the 2000 points ditch last month? Probably. Is the market ready to reverse? No. With all the job cut reports coming in recently, the forward looking unemployment rate doesn't look good. In fact, I personally think that peak unemployment rate should be 7% or higher. If peak unemployment rate has not yet been reached, the empirical probability of a stock market recovery remains pretty low as all previous crises have reversed on peak unemployment rate (there's pretty good fundamental reason behind that which I will not elaborate here).

So, have the stock market bottomed yet even though I don't think its time for a reversal? The possibility is high as the Dow has found tremendous support on its monthly 200MA, which marks long term support level. This also coincided with bonds generating yields of recently unseen lows, causing an exodus of bond traders back into stocks, providing the fundamental basis of support. If this support holds, this could well mark the bottom for this bear market and the Dow could go into an extended neutral trend until unemployment rate peaks before breaking out into a reversal.

Well, I still we should see the worst economic numbers come in during the first quarter of 2009, which will see recovery from the second half onwards. This means that the worst for the stock market could already be behind us.

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Sunday, December 07, 2008

Quiet Week Ahead...

Welcome back from the weekend! :)

This is going to be a relatively quiet week with no big economic release other than the PPI numbers which is not going to change anything (see economic calendar). The only surprise we might get this week is if Consumer Sentiment continue to move higher than expected with all the sales and discounts going around, we could get still some more bond traders pouring into stocks. Yes, bond yields are so low across the board right now that I have been speculating about an exodus from bonds to stocks that could provide significant support against the bear market. Apparently, that was what happened last Friday which ended a perfectly negative day wildly positive as bond yields rose across the board (at least the Dow did end the week negative as I have expected). If bond traders continue to come back into stocks, we could even see the Dow break its current resistance level and bring the Dow back into an intermediate neutral trend with the short term bear trend already broken. Could last Friday's 6.7% unemployment rate be the peak unemployment rate that will usher in a reversal?

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Thursday, December 04, 2008

More Job Cuts, More Downside...

More employers announced job cuts in the order of tens of thousands today, painting a grim picture to tomorrow's unemployment rate number as well as the next few ones to come. This resulted in the Dow selling off over 200 points today ahead of tomorrow's Job report (see economic calendar). From the way the job cuts are coming in lately, tomorrow's unemployment rate number might not be the peak unemployment rate yet, which means that there is still more room to downside for my final capitulation scenario. On the technical front, the Dow's trading range today was completely within its trading range yesterday, making today's move more like a sideways move. However, the fact that it did turn down upon reaching its declining 30MA line, does put the odds in favor of the bears. Tomorrow's unemployment rate is going to be higher, the question is, how high can it get? The latest unemployment rate reading already beat the peak unemployment rate of the 2003 crisis. Could it beat the peak unemployment rate of the 1975 crisis of 9%? From the way the job cut announcements and the unemployment rate numbers are coming in, there just might be a chance of that happening. For now, lower is the only logical direction for the market in general.

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Wednesday, December 03, 2008

Bulls Fight Back!

Well well, today's market action was truly out of my expectations. The bulls fought back and closed the Dow 172.6 points higher even though it opened over 100 points lower! The Dow is once again back up to the top of its declining channcel line marked by its 30MA line. The bulls really got excited as traders all over the internet predict a bullish breakout. Could the final capitulation have ended with last month's decline? Seriously, I don't think so. Traders usually get over-excited over one or two day market actions without looking for more confirmation. From the way I see it, today's market action is encouraging indeed for it occurred at an extremely important junction but it needs to prove itself with a breakout. As long as it remain below its declining channel line, I would not be convinced that the bottom is set. But with the recent market action, I am more convinced than ever that the market has only one last capitulation downwards before a reversal takes place. The bottom is definitely near and adventurous investors could start accumulating equities strategically and hedging them with options using the married put options strategy in order to hedge against the final capitulation if it comes and still gain from the rise in stock if the final capitulation does not come.

The market is probably going to go sideways tomorrow ahead of Friday's Jobs Report (see economic calendar). The Jobs Report is going to turn in lousier than last month's number but will the over enthusistic bulls take it as the peak unemployment rate and starts buying again? We will only know when Friday comes.

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Tuesday, December 02, 2008

What Happened Today?

Well, NOTHING! :)

Today's "rally" is merely a textbook pullup after a drastic drop. Almost all big drops are followed by a small pullup, like it did today, before the drop resumes the next day. So how does one tell if it is merely a technical pullup and not a reversal? The simplest way to tell is to see if the candlestick today make a lower high, lower low and a lower close. All the better if the high and close does not cross the halfway point of the big down candle. The Dow didn't really make a lower low today but it fullfilled the other criterias. This is going to be a negative week marked by decomposing economic data.

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Monday, December 01, 2008

Final Capitulation Resumes...

No surprises today as the Dow turned down, resuming its bear trend as expected. Investors were hit with the worst ISM index reading since 1981 today, pointing towards continued economic contraction in the months ahead. So, what exactly is this ISM index and what makes it such a closely watched economic indicator?

ISM stands for Institute for Supply Management. It is an Arizona based group representing purchase managers around the country. It conducts 2 main surveys; the Manufactoring Survey and the Non-manufactoring Business survey. The former is what we refer to as the ISM Index and the latter, the ISM Services Index. What they do is really very simple. They survey purchasing managers in the manufactoring sector monthly in order to arrive at the ISM index. How is it that the opinions of these purchasing managers is such an important economic indicator? The logic is extremely simple as well. When the economy picks up, manufactoring activities pick up and in order for manufactoring to pick up, purchasing managers need to purchase factors of production! :) In fact, the index is important for 2 main reasons. Firstly, it is the first economic number released every single month. This gives investors the first look at what to expect in the numbers for the month ahead. Secondly, the ISM index has produced an amazing correlation with real GDP! In fact, a reading of 50 has been shown to correlate with a real GDP growth of about 2.5% with an additional 0.3% growth every point above 50. In fact, the Feds also watch this number in order to eventually arrive at a rate decision.

So, the Dow is going to go down lower throughout the week, no doubt about that. This is definitely going to be a negative week with support at around 7200. That is when it will start to get tricky. This Friday's Job report (see economic calendar) could get tricky as well. It is definitely going to be a multi-year high unemployment number again but how will investors construe it? Will it be construed as the peak unemployment that everyone's been waiting for, spurring a reversal? Seriously, odds are good if the 7200 support level holds.

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