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Technically Crunching the Market
Author: Charlie Santaularia (info)
Website: http://www.parrottradingpartners.com
Posted: November 20th, 2007 at 10:58 am EST
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The market’s action has made it fairly clear that this “wall of worry†will be tough to climb and unlike earlier in 2007, we might actually be headed for trouble. High energy prices, “agflationâ€, a soft dollar, a weakening economy based upon the trembling merits of a housing recession (if not an outright housing depression) will all soon factor into a potential stagflation scenario. I personally am not calling for stagflation, but the ingredients are mixing and the path may have already been aligned. Stagflation occurs when the economy slows to a standstill while inflation increases. Although current 2nd and 3rd quarter GDP numbers are north of 3%, I do not believe these numbers will hold up as inflation continues to depress consumers at the pump, in retail stores and while they shop for groceries. However, alluding these signs may be, I do not want to get into a statistical argument. Instead, I want to take a technical look at the market. It is not pretty, and it might not be getting any better heading into the holiday season.
Just a few months ago the S&P 500 was posting record highs in what seemed like consecutive days, for months on end (in fact, it was only in July that we were setting historical records). What “surprised†the market at that point - the subprime crisis - was not really a surprise at all. February 2007 endured its own mini meltdown when subprime paper became a cause of concern, but it didn’t truly have any long term effects on the market until July when anything related to subprime paper began to significantly drop in value. Eventually bids became nonexistent and prices on the paper began to disappear, leaving traders bewildered as the credit markets began to slide.
Where was the market heading and for how long would the drag continue? Soon enough, the market retested the February lows around 1375 and bounced hard back near record highs. Below is a 60 minute chart from one of the time periods discussed above - August 9th to August 21st. During that time, the market fell approximately 135 points from its high to low. I have drawn a trend line (blue) that the market obviously had trouble getting above. Notice that after falling to its lows and quickly recovering on August 16th that the trend line held as resistance before the market dramatically blew through the chart (I’m sure many of you recall the key reversal day on the 16th). That left traders on their way to bid markets higher across the globe until another round of the credit crunch came along in October & November.
In all honesty, this second round (really the third round now) of the credit crunch did not come unexpectedly. Credit conditions never truly improved significantly from late August to late October, but instead they consolidated (see commercial paper chart below). The markets were alleviated with Fed rate cuts as traders and media pundits glossed over the gloomy scenario still looming. That said, we have a market that is truly reacting to what is out there – a bad credit market that does not have a lot of positives to look at in the future. A weaker dollar, a stagnant economy, a tight job market, a housing market in despair at the same time it looks like a majority of financial firms who’ve invested in the subprime deep black hole are struggling to price their subprime assets.
Take a look at the chart below. It is a 60 minute chart of the S&P 500 from October 31st to November 19th – the third round of the credit crunch. Notice any similarities between the two charts? It should be pretty obvious that the trend line is following a noticeably similar line (and decline for that matter). The August drop took us from 1510 to 1375 (approximately 135 points), while this decline has taken us from 1560 to 1440 so far (120 points). Both of these drops are due to similar reasons, although today’s drop has come along with more write-downs, a weaker dollar, slower consumer spending and inflation hawks on the prowl. We seem to have gathered a plethora of information on who holds this paper, but the assets still can’t be priced accurately. The financial innovations that are so well received when they first hit the market are now being scrutinized by regulators, compliance committees and risk management. Although we feel like there has been a lot of information uncovered, it seems that it could be just the tip of the iceberg as we head into the final month of the year.
Will this market be able to rebound or will we slowly fade into the New Year? My thoughts will be scrutinized by some, but the markets do not look to be in good shape. Yes, we can rebound somewhere in here – it could be 1440, 1400 or 1375 – but prospects for the future are misty and dreary.
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Authors, Charlie Santaularia, Economics, Indexes, Stock Market, Trading
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One Response to “Technically Crunching the Market”
February 8th, 2008 at 8:31 pm
Let me give you a scary statistic regarding the SPX index.
In the last 13 years the 20 week MA has only crossed under the 50 week MA once. It happened back in the year 2000 when the index had dropped from a high of 1557 to a low of 1303. During that drop the moving averages crossed. After the drop down to 1303, a couple of weeks after the MA crossed, the SPX rallied from 1303 up to 1491 (a 10% rally) and then proceeded to drop for the next two years to a low of 885. The next few weeks after the index reached 1419, the index simply got into a soft downtrend without any major moves down but about 3-4 weeks later and after a rally from 1257 up to 1383, the SPX dropped in one fell swoop down to 1083.
Scary!
One year later after the low at 885 was made, the 20-week MA crossed above the 50 week MA and the SPX rallied from 996 to last year’s high at 1577.
These are the only two times in the last 13 years the weekly MA’s have crossed. It is a rare occurance in this index (happens more often in the others) and both times it has been extremely indicative of a strong trend thereafter.