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Is It a Bear Market or a Bull Market?

Published on August 26, 2008

Is It a Bear Market or a Bull Market?

August 26, 2008

What kind of market we are facing these days? One day it is up, but to give-up all the gains next day. 200-300points daily move seems like a norm for Dow Industrial. It is a good market for directional players, yet it is a bad market for directional player. Delta neutral seems a good idea but with such large moves, at one point or other, your adjustments might be triggered that will be useless the next day. Though it is volatile, the Option implied volatilities are not showing panic to that degree yet. Is it a slowdown, recession or deflation (Yes, I am talking about deflation not inflation).

What’s going on? Is it a short-term correction in an on-going bull market or is it a primary bear market? It is a trillion dollar question and whoever thinks they have the answer may want to have a reality check.

So far, smart funds have been selling into the rallies and I think until there is institutional buying there won’t be any sustained upward move in the markets. According to John of Hussman Funds, the US market is trading on theme that largely overlooks the potential of a significant US recession. At the point of recognition, we may very well observe abrupt weakness in both stock prices and the US dollar. He mentions a “Jaw of death” between USD 5-Year swaps spread and VIX, indicating that stock market is too comfortable with the situation and there is no panic while credit investors are very nervous. And be mindful though, the official arbiter of the recession decision-the NBER- has marked the economy’s peak publicly an average of 7months following each contract’s start which means we are in recession, will be declared when then meeting in few months time and markets may not like it. Read more.

Liobor-OIS spreads are warning another round of trouble and based on market actions it doesn’t seem that’s it’s going to settle anytime before 1st half of 2010. Former Fed Chairman Alan Greenspan said in June’08 that this spread, which is the difference between the three-month London interbank offered rate for dollars and the overnight indexed swap rate, should serve as a measure for telling when markets have returned to normal. A narrowing to 25 basis points in the so-called Libor-OIS spread would be viewed as a positive, he said. Forward markets signal that won’t happen until sometime after June 2010. The premium averaged 11 basis points in the 10 years prior to August 2007. Read More.

Linked to same topic, Caroline Baum of Bloomberg is questioning “Are bond investors crazy or waiting to exhale”? According to her, Inflation expectations are so weighted down that investors are buying 10-year Treasuries yielding 3.8 percent with inflation running at 5.6 percent and great de-leveraging might be unfolding. She is further examining that business are not able to pass all the costs to the consumers and hence margins are being squeezed.

According to Investech, this is the worst performance (decline by >11%) of S&P500 since 1940s for any pre-election period (till mid-Aug) when S&p500 fell by 19.9% (isn’t there an existing belief, that markets have smooth sailing in he pre-election periods?).

There is also data available that says markets rallies leading into the election months. So let’s see if we are going to see that. The summer season is almost over, big traders will be coming back to the market and it remains to be seen if volume will pick-up? and in which direction? Other bullish argument can be made that in spite of barrage of bad news, day after day markets haven’t fallen apart. It has been absorbing all the bad news.

There is no one answer. I shall cover more on the bullish argument in the coming days, stay tuned.

I covered options expiration here. I shared POT with OPN members. POT was pinned at $170 and some members made profits to the tune of >50% in few hours time. These are bonus trades to the OPNewsletter subscribers.

Profitable trading, OP

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