Imminent and severe market correction

[dhukka]

Hi davo8. I'm looking to stock up on Xmas cheer. I've got one carton com'n when oil stays below 100 for more than a week. I'll wager ya another one this is the bottom.

I'll take that bet, only let's make it 10 cartons?

 

[Whiskers]

I'm not making a call on the USD yet. Profit reporting will be bad. The Fed is not going to raise interest rates any time soon. The credit crunch is far from over, and the next really bad period should be Sep/Oct (but around Aug 25th should be interesting).

Hey davo8, I called the USD earlier today in the gold thread. Safe as houses... well maybe not US houses.

I gather some of you are tipping the USDX to break down at the trend line... about where it is now.

I'm gonna say the USDX has put in a bottom.

Minor leg 1 is about complete, 2 should come back to around 75 - 76.

The first 5 minor waves should take it well into the 80's.

BUT, although I havn't completely figured the big picture in terms of EW it seems to me that even if this is a corrective leg on the way down, I think it could still get into the 90 to 100 range in the months or year ahead.

 

[Whiskers]

I'll take that bet, only let's make it 10 cartons?

Gosh, dhukka... what do ya think I am... a regular p!ss pot!

It'll take me two or three years to drink 10 cartons.

But are you sure you're good for 10.

 

[gfresh]

Well Japan is officially half-way into recession, with a 0.6% contraction last quarter. The wheel continues to turn...

http://www.reuters.com/article/economicNews/idUST11028920080813

By Yoko Nishikawa

TOKYO, Aug 13 (Reuters) - Japan's economy contracted in the second quarter at its sharpest rate in seven years, adding to worries that the world's No.2 economy has slipped into a recession as global growth shows more signs of losing steam.

Consumers and companies cut spending as they struggle with steep energy and raw material costs, while spreading damage from the U.S. slowdown hurt exports to emerging nations -- possibly marking the end of Japan's longest expansion since World War Two.

The 0.6 percent contraction matched market expectations and was the biggest quarterly decline since 2001, when Japan was last in recession after the Internet stock bubble burst.

"The data gave the impression that the economy has entered a recession, and I think it is in one," said Takahide Kiuchi, chief economist at Nomura Securities.

 

[dhukka]

Gosh, dhukka... what do ya think I am... a regular p!ss pot!

It'll take me two or three years to drink 10 cartons.

But are you sure you're good for 10.

It would probably take me longer, but I'm sure my old man could polish them off in a couple of months. Don't worry about me, I'm good for it. So do you feel lucky? Well do ya punk?

 

[davo8]

So do you feel lucky? Well do ya punk?

How about telling us exactly what the bet is? Could be there are others would like a piece of that action. Sounds like better odds than the market is offering.

 

[dhukka]

How about telling us exactly what the bet is? Could be there are others would like a piece of that action. Sounds like better odds than the market is offering.

I thought it was pretty obvious davo, Whiskers has called the bottom for the stockmarket (again). I'll bet 10 cartons of beer that the August 5th 4882 closing low on the XAO was not the bottom.

 

[Whiskers]

I thought it was pretty obvious davo, Whiskers has called the bottom for the stockmarket (again). I'll bet 10 cartons of beer that the August 5th 4882 closing low on the XAO was not the bottom.

No, no, no, no, no, not quite correct.

Previously, I said I'd be surprised if, and I don't think the market will go lower... which I was... cos I didn't figure oil going balistic.

However, this time I'm definately saying it won't go lower. :

 

[Sean K]

Cripes, The Aussie economy and banking system must be in trouble. I just watched an article on our banking system on CNN Latin America. The Latin Americans are worried about the credit crunch hitting them now. What's next, Africa?

 

[Uncle Festivus]

However, this time I'm definately saying it won't go lower. :

Brave call there Whiskers

I can see the same conditions emerging in the indices - ascending wedges - in the FTSE & DOW, with the FTSE again leading the breakdown. XAO just 'mushing' around being torn between the financials & resources again.

Give it time for this episode to work it's way through then we can get back to the USD counter trades re-emerging again?

 

[gfresh]

I've heard this is where I signup for a free 10 cartons courtesy of whiskers?

That low is only 5% away, that's only 2 days of negative moves with current volatility...

October I think will be nasty with the next batch of US results.. that's where we may see a new major low. Not enough bad news out there yet. US financials still falling rapidly last week, indicating there is still plenty of room to fall.

 

[davo8]

However, this time I'm definately saying it won't go lower. :

So you're prepared to sell an out of the money digital put option on the XAO with a strike price of 4882 for a premium of $500 (no cheap beer, thanks!) and a payoff of $500? Expiring when?

Have you done a Black-Scholes on that?

 

[CanOz]

Food for thought.

 

[kingbrown]

Is the fat lady starting to sing ?

Fear over resources boom

Fears are growing that the commodities boom is ending as investors who have fled the oil market desert gold, copper and other metals.
Oil prices have slumped 23% in four weeks, while gold and copper have fallen by similar amounts and last week lead plunged 15%.

The falls follow a fundamental shift in financial flows as investors prepare for a global slowdown, News Ltd reports.

"Commodity booms end ugly, they always do, and there has never been an exception," Access Economics director Chris Richardson told the newspaper.

"The speed and weight of money behind this move has been quite breathtaking," ANZ foreign exchange strategist Tony Morriss said.


http://smallbusiness.theage.com.au/growing/finance/fear-over-resources-boom-907256442.html

 

[davo8]

Re: Is the fat lady starting to sing ?

Not even clearing her throat.

Commodity booms are multi-year affairs. A few weeks in the wrong direction is just a blip. It'll take a lot more than that.

The current very rapid USD move looks a lot more like a gigantic short covering by world currency traders. Too far, too fast, time for a correction. The trend on the USD is still down, oil up, but not so fast.

The really bad stuff is getting close now. October, I think. Good month for bad news.

 

[CanOz]

Re: Is the fat lady starting to sing ?

The current very rapid USD move looks a lot more like a gigantic short covering by world currency traders. Too far, too fast, time for a correction. The trend on the USD is still down, oil up, but not so fast.

.

Agree.

 

[shmi]

A little bit of news how this is really starting to affect even more people in the US:

http://news.yahoo.com/s/ap/20080818/ap_on_re_us/schools_hard_times

And really, thats just what the US need, their kids to be LESS educated.

 

[Julia]

The following article from 'Compare Shares' is worth reading:

Resident Trader
Should you jump off the sharemarket train or hang on for the ride?
Will Kraa, August 18, 2008

The debate as to how to manage investments during the current downturn is not abating by any means. Fund managers obviously want to keep as much investor funds as possible under their management while most financial planners have an interest in recommending managed funds. It is to be expected therefore that we are being conditioned to keep our money in shares and are constantly being told that over the long term the market rises.

It’s not surprising then that most investors are firmly blinkered when it comes to deciding what to do in times like these. It has all been so easy for so many years and combined with the advice they are given constantly it leads many to think that the share market will shortly return to the upward trend and all will be well again. Even when I was speaking to a group of people who do understand the importance of risk management and have experience in trading I saw many surprised looks when I told them that what we have witnessed in the market in the last few years may well be a once on a lifetime experience. Australia does have many advantages as far as the resource sector is concerned but nothing is certain when it comes to what the rest of the world will be experiencing. There is no use having resources if the rest of the world can’t afford to buy them at the prices we would like to get.


There are some very good analysts and other assorted ‘experts’ who say that in their opinion the market has now reached a bottom and we can expect that things won’t get any worse. There are also equally qualified people who say there is worse to come. And of course there are some who say they don’t know quite what to expect from here on. I’m very much inclined to side with this last group.

At the last Expo in Brisbane I listened to a very entertaining talk given by Mark D. Cook, a US trader who has a very good reputation as a day trader and has won several competitions in trading. There was a questions period at the end and it was interesting to see that the bulk of questions did not relate at all to the kind of trading he is famous for but rather questions as to his view of what the market was likely to do from now on. He did his best to answer but it was an insight into human nature to hear these long term questions asked of someone who trades with a view to the next few minutes or at most hours.

It well illustrated that as humans we desperately like to be reassured by the opinions of those who are seen as experts without considering if their expertise is relevant. Research has shown that the bulk of analysts’ opinions are wrong. Get used to it, foretelling the future is a lost cause. This is not the way to recovery of lost funds.

So let’s get some perspective on the current situation. The All Ordinaries Index is now back to where it was exactly two years ago. So if you had decided to hold a portfolio of stocks reflecting the market as a whole for say the last five years you would certainly be well ahead by now but the gains of the last two of those extraordinarily good years would by now have been wiped out. So where to from here? Is it credible to believe that we will soon see a repetition of the spectacular run up we have seen in the last couple of years? Or, even if the bottom has been reached now, is it more likely that things will go sideways for some time or that there might be a modest rally? If so it might be quite some time (possibly years) before we see the index above the highs of last year.

If this article is too late for you and you can see now that you should have sold earlier, now may not be a good time to sell but it may be wise to place stops to prevent further losses. A 2.5ATR(10) chandelier trailing stop on a weekly chart has given good results after back testing.

If you are holding stocks showing large losses it is tempting to ask, ‘Is this stock likely to go up again so that I will get my losses back?’ but that could well be the wrong question. It may be wiser to ask, ‘Is it more probable that this stock will be profitable or is there some other stock that is more likely to do well.’ A decision to hold a stock should never be based on the desire (very human) to see it give back any losses that would be realised if it was sold now. A good stock trending up is much more likely to get some good returns than a company in trouble with a falling share price. Holding rising stocks is the most probable way of making good the losses rather than sticking your head in the sand and simply hoping that stocks that have fallen are going to recover. Some will but they are also likely to be the ones that have not fallen as much as others.

Don’t be deceived by the idea that losses are not losses until the loss is crystallised by selling. Liberating the cash for a better investment could be the way to success even if the realised loss is painful but do make sure that the new investment is indeed a better one. Just turning over stocks will not in itself lead to profit except for your broker.

Buying more of a stock so that the break-even price is lowered is an absolutely crazy idea unless there is a very good reason indeed to expect that the fallen stock is now going to turn around and do well. Usually that is only wishful thinking. The fact that you already own a stock should not at all enter the equation when deciding to buy. Buy only if that is what you would do if you had never had anything to do with the stock before.

Currently, if you are able to trade well, trading CFDs on a short term basis and being willing at times to short stocks is one way of making some money. Trading the indexes, Forex, futures and options may also be considered if you have the expertise to use them. Many of these instruments are not suitable for use in a SMSF so there it may be necessary to be patient and wait for the market to show definite signs of recovery rather than the present ‘up one day, down the next’ behaviour we have seen lately.

Keep in mind that once the market starts trending up the stocks that will do well then may not be the ones that have done well in the last few years. Some will be, but ones that have raced up and then fallen sharply are not likely to be candidates for another great rally. It is also good to remember that once the market starts to recover there will always be a few stocks that rise strongly and in a poorly performing market they will do especially well since they will be the most sought after stocks with not much competition. Buying them will be good and help you to do better than the market as a whole.

If stocks have been recommended to you on the basis of very good ‘value’ or fundamentals, buy (or hold) them only if the market likes them, in other words, the price is going up. Fundamentals are out of date by the time you get them but the market as a whole usually has the latest information. It will show in the price.

My watchlist of rising stocks is now much reduced in size and I have recently sold out of some of my SMSF stocks that were rising but then fell to my stops and I exited. For me this is not the time to hang on hoping things will get better.

Make it your business to trade well and the profits will in time take care of themselves.

 

[Aussiest]

Wow, thanks for the article Julia, great read.

 

[gfresh]

The spread between Corporate Bonds and Government Bonds are blowing out once again. As the risk for holding a corporate bond is perceived higher, the yields will often increase to entice buyers to holding a bond with the higher risk.

As the bond market is a snapshot of the wider credit market, large market moves downward seem probable in the next few weeks.

Investment-Grade Bond Spreads Surpass Record High Set in March

By Gabrielle Coppola

Aug. 18 (Bloomberg) -- The extra yield investors demand to own investment-grade bonds rather than government debt surpassed a record high set in March.

Spreads on investment-grade company debt widened 1 basis point today to 306 basis points, according to Merrill Lynch & Co.'s U.S. Corporate Master index. That's 1 basis point above the record set March 20 and matched on Aug. 15.

A basis point is 0.01 percentage point.