I suppose it goes without saying that this was one of the most volatile weeks in the history of the market, and the coming week promises no relief. Tread lightly
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ESZ8 10-17-08
While the market was volatile yesterday, it moved in more normal patterms than normal. It actually seemed like I was trading again.
Despite a plethora of bad news this week, today’s chart shows the market zig zagging along in a very tradeable pattern. You might also note that I have begun to post Multi=Charts/DecisionBar charts to show you some of the entry and exit points tht were available throughout the the day. As you can see there were plenty of long and short breakouts, and short failures that allowed for a profitable trading session, and an enjoyable one, too.
As usual, I will not even begin to comment on the dreadful spate of news that has plagued the financial markets, only to say that in all my years trading I have never seen such a mess. I am a reasonably non political fellow, or at least I won’t burden you with my political views on this blog, but I think I would be safe in saying that we have not seen anywhere near the worst downward moves in the market yet. For an excellent review of economic news I prefer to read the blog Calculated Risk to ascertain important economic insight and data. I am a trader, not an economist, like the guys over at Calculated Risk…the blog is just excellent and I highly recommend reading it.
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ESZ8 12-16-08
We’re down, we’re up….the market has been reduced to trading on the tiniest bit of news, whether it is good or bad.
The good news is that inflation seems to be in check.
The bad news is that most of the economy is,more or less, flat on it’s ass…manufacturing numbers are terrible, consumer spending numbers are terrible, the banking system has been very slow to loosen up, and the outlook for housing is somewhat less than rosy….so we went up 400 pts today. Go figure.
As traders, we don’t really care if the market goes up or down, but it might be nice if there were at least so semblance of order in the process…I wouldn’t expect any soon.
I had a great day, and have been trading exclusively with DecisionBar, with great results, it has made me a much better trader, and kept me out of several lousy trade set ups…I can’t recommend it highly enough.. 14 points today on 2 contracts.
Here is the TED Spread from Bloomberg. The TED spread hit a record 4.13 this morning. This is far above the highs reached during the previous waves of the credit crisis.
Note: the TED spread is the difference between the LIBOR interest rate and the three month T-bill. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to “risk free” treasuries).
From Bloomberg: Libor Dollar Rate Jumps to Highest in Year; Credit Stays Frozen
The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day.
…
The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record.
The credit markets are still in severe distress.
Courtesy of Calculated Risk
The charts today, along with the story is very similar to the last two weeks. The market is in the process of deleveraging and jettisoning the assets they have to raise cash. Unfortunately, many of the assets that are integral to this process are of dubious or not value, especially the CDO and credit default swaps that accompanied them. So it has been raining cash in the markets for the last few weeks, and today was not different.
The Federal Reserve flailed at the problem today by lowering interest rates 50 basis points, but this was of little consequence to a market focused on unloaded debt, and assuaging the fear that has become integral in the market of late. So the market bobbed up and down and all around with some of the longest bars to date, and finally settled on -189 and change. So much for interest rates solving the problem.
The chart below is from yesterday and you need only substitute todays comments for yesterdays comments as the song has remained fairly constant in the current economic environment. I would expect some bounces up in the coming day, but that is just a guess on my part. Of course, the interest cut was bad news for the dollar and it was roundly pummelled throughout the course of the day.
The volatility today convinced me to stay on the sidelines until more manageable volatility prevails….using 3 point stops, or even 5 point stops, it is virtually impossible to stay in a trade.
So I watched today with grim fascination.
The market correction related to the recession and the credit crisis was in full swing today as, at one point, the market was down a record 800 points.
Obviously, I stayed short during the morning session and tried to stay long in the afternoon session. It was not easy to stay in trades again today, as it took extremely wide limits and stops to take advantage of the price movement. The volatility was extreme and it took a steady hand and steady nerves to scalp trades with any effectiveness. Of course, my conservative nature was tested by this market action, and I bailed out of several trades when I had made my three points, but if I had let the trades run they would have been much more profitable. Past readers of this blog will be familiar with me self flagellation on this issue, but I figure a bird in the hand is worth two in the bush and have never been able to dislodge that thinking from my constellation of thought.
The blogs and posting boards have been chirping about a possible government intervention in the market this afternoon. I find it hard to believe that the market could back from 800 points down, especially with many small investors idled and the hedge fund cabal playing the markets conservatively of late, but come back it did, all the way to the mid-300′s. I’ll let you decide as to the nature of the dubious comeback the market staged, as I am not much of a conspiracy theorist by nature.
Anyway, the market did hold some nice support and resistance lines through the day, and when it did pierce those lines it was usually on exceptional volume so the calls were not difficult to make. As I said, tuning out all the noise and movement in the market was my primary objective. I even turned the television off at one point in the afternoon, as that lunatic on MSNBC went on rant of unparallelled intensity…at one point suggesting anyone who needed their money in the next five years to get out of the market now. Ah…the guy is more of a distraction to trading than a valuable source of news. I ended up 10 pts. on 1 contract on a day that there was far more for the asking.
As for continuity of movement, the market rallied on the Senate passage off the bailout bill, and conversely, dropped like a rock when the House passed the measure on a second vote. In the midst of all this chaos, Warren Buffet methodically carved out equity positions in Morgan Stanley and GE.
My strategy for the week was to stay very conservative and not over trade, setting a limit of only 5 trades per day as my goal. For the most part, this turned out to be a good approach for this market. Time after time, setups would arise and the market would move in exactly the opposite direction one might expect it to move. I widened my stops some to counteract the wild volatility I experienced, and delayed my entries longer than usual to account for the tendency of the market to make unpredictable moves.
I threw the oscillator based entries out of the equation as they fluctuated will nilly and were more a distraction than help. Instead, I focused on volume, support and resistance, and price action and relied on the oscillators as confirmation. There was profit to be made, but it took a bit of restraint to not jump into familiar set ups, which often fluctuated to the losing side.
I’ve taken some time today and read most of the financial blogs and financial websites I generally use, and have decided that tomorrow ought to be an interesting day, to put it mildly.
1. It appears that Lehman Brothers has found itself at the end of the road, as no suitors have come forward to save the beleaguered firm. This is the fourth largest investment in the US and the implications for the potential implosion of the firm has far reaching consequences. Most articles are stating the negotiations are ongoing, so there may be some new developments later in the day to calm the markets, but as of this minutes it appears Lehman Brothers is going the way of the Titanic.
2. Crude oil may spike some as the damage for Hurricane Ike is assessed and it’s implication on refining are revealed.
3. Washington Mutual appears to be in desperate straights, too. The implications for this bank failure are absolutely enormous. I can’t imagine the effects it may have on the market.
It is my opinion that all the meddling the government has engaged in to prop up the beleaguered banking industry are actually putting of the inevitable, which is a dramatic correction in the markets. We need to find a market bottom somewhere in this mess and though it would be a painful measure, we might actually be able to sort out just where we are. As it stands, the Fed and others are plugging holes in the financial dike to stave off this correction. In doing this, I believe that many financial institutions have hidden much of their suspect Alt-A and sub-prime exposure….which really isn’t doing anything but buying time, for the time being.
Of course, some economist believe we could “inflate” our way out of this mess, that is, get interest rates to rise and, in effect, stave off market worries by increasing prices and values in several troubled banking areas. Needless to say, this approach would be less than desirable for the average consumer as inflation is a hardship for the middle class. And there is much more inflation out there than our government would have you believe. There is an excellent discussion on how the government currently calculates inflation number they disseminate, as oppose to the way they used to, and the way other countries calculate inflation number. You can find excellent discussions on the topic in past posts on the Calculated Risk and Financial Armageddon blogs, which are listed on the sidebar of this blog.
As a trader, I am not affected by wild swings in the market. To the contrary, volatility is an important factor in how we trade. But as a consumer, many of the implications of the Feds policy of late are far from consumer friendly.
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