UPDATE: 4:51pm 5 Feb 2010 - Extremely scary headlines on Bloomberg's home page : •Stocks Plunge, Euro Falls, Bond Risk Soars on Jobless Claims, Country Debt
•Trichet Struggles to Convince Markets of Europe's Solidity Amid Greek Woes . Suggesting great instability in the markets. Will the market exhaust its downside selloff as I suggested or are the so-called fundamentals so precarious we are on the precipice of a new crisis? Scary times isn't it?
Volatility has returned to the stock market. Yesterday night the DOW crumbled 268pts sending shivers down the spine of the steadiest investors. Last week it had 2 consecutive days when it fell by 200pts. I like to listen to "after the fact" explanations of all these falls. 2 weeks ago the falls were largely blamed on China for its tightening on bank lending. Last week's fall was blamed on Obama's newly proposed banking regulation also known as Volcker rules. The sight of Volcker standing by the side of Obama spooked markets and triggered a 2-day 400+ point selloff of the DOW. ...at least that was what CNBC said. The more sinister conspiracy theory version of this is Goldman Sachs wanted to show the US govt who's boss and sank the market with its program trading softwares - Volcker was from Chase a rival financial firm. Hmm...don't worry I'm still thinking logically, I don't believe in that piece of conspiracy theory, just wrote about it to show how creative people can get when it comes to explanations. Actually, I believe all these after the fact explanations have nothing to do with most of the market movements -while the market moved down, there was plenty of good news from the earnings front and economy that had no effect on the market. When the market moves down, journalists will pick the most plausible explanations to write or talk about.
As I type this, the STI has sunk 60pts and the HSI has sunk 650pts (11pm, 5 Feb 2010).
I want you to look at this chart of the HSI:
What it shows is the HSI having exactly one mini-rally and a selloff every month. In fact the size of these moves are not small rought 8-10%. The recent selloff being the biggest one. The 2nd observation I made over the past months the start of big multi-day falls on the DOW comes AFTER a fall on the HSI - usually without any clear reason. The current selloff came after a 400(?) point fall of the HSI after a positive trading session on the DOW - this happened a 2 weeks ago just after the DOW peaked. All the falls are accompanied by falls in commodities including gold which is suppose to be a crisis safe haven. The point I'm getting at is these 2-3 week falls of the market are caused by liquidity flows and highly leverage positions of some market players - they are like a mini house of cards that tumble when the wind blows slightly in an unfavorable direction....this explains the sharp falls in the HSI that occurs every month. It has little to do with the explanations we hear about on TV and read about in the papers - these events may serve as triggers for the selling but does not explain the magnitude. For example, the situation in Greece was known months ago....why did the market react so adversely?
After doing some other analysis much of which too detailed to post here - I believe the market will rebound in the short/near term (whatever logical explanation will be told to you by CNBC after it happens). You should really think about getting out regardless of whether this rebound materialise. The high level of debt that has build up by govts around the world may prove problematic in the longer run and leave them with little bullets when things go wrong. As for my own portforlio, much of my own exposure has been reduced in the past 2 weeks due to the trailing stops I put in. So while I believe the market may rebound in the coming days or a few short weeks, the medium to longer term outlook may actually be bleak.