Friday Sept 23, 2011
No One Rings a Bell at the Bottom
The FED hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.
Wall Street Journal, 9/22/11
The FED has been lowering rates for three years to no avail, and, gee, the market seems to have beaten Ben Bernanke to the punch. Let’s take a look at why we may be much closer to a bottom for risk assets (stocks) than most analysts think.
Ben we’ve been here before. Market opportunities occur at extremes of valuation, which is derived from the extreme social mood of the participants. At the worst of the Fall, 2008 financial crisis, thirty-year bond yields dipped to 2.6%. Today, they are at 2.78%, pretty darned close to that fifty-year extreme. Ten-year note yields are already lower than in 2008! Then the low was just over 2%, yesterday the Ten Year closed at 1.715%.
And this is a replay of the same thing Ben did last summer. QE II was announced/began on August 10, 2011. Bond yields immediately bottomed and bond prices fell for five months. Stocks rallied.
In 1986 I spent a day at the Merrill Lynch trading room in New York City. The bond trader had a fancy computer display for prices and yields. It even allowed the placing of trend lines and such. Today anyone with a discount brokerage account has that. And so literally everyone looks at the same charts. This leads to even more ‘herd following, group think.’ The blogs are awash last night with ‘downside breakdown’ types of comments. And so ‘the crowd’ focuses on even lower prices. But Thursday the New York Stock Exchange had 946 new lows, topping the August 8, 2011 panic low of 943! Or as Joe Granville remarked on Financial News Network after the 1987 crash, ‘when it takes a foot and a half in the newspaper to print the new lows, that’s a low!’
Here is a specific example of what I mean. In the last hour of trading the QQQ, an Exchange Traded Fund which mimics the NASD Composite 100, had a low of 53 for the day. It broke that low and traded to $52.75. Bingo, that was the low. It then marched up to $53.80 in the last half hour. Everyone thinking it was going to new lows was fooled by the false break lower. As we said, no one rings a bell at the bottom. So, we have an extreme in stock market new lows and an extreme in the flight to safety, bond yields, anything else?
Ah yes, there is that most emotional of all indicators, the price of oil. Indeed it dropped 5% Thursday. But at its low of the day , $79.66, it is still above the recent panic intraday low set August 9 at $75.71. Patterson PTEN fell out of bed, breaking its $20 ‘support level.’ That has no doubt turned all bearish and it’s a quick two bucks to the next chart level at $16. We have been warning that the top at $34=35 for PTEN would bring much lower prices, and so PTEN has lost half its value already. Not a good thing for the Permian Basin, but probably over done on a short term basis.
Investors have adopted a rear view mirror strategy. Fearful of being caught in another Fall, 2008 meltdown, all those ‘long term investors’ have fled risk assets like stocks and oil for the ‘safety’ of long government bonds. The markets are some 4,500 DOW points higher now than in March, 2009. But the bond market has dialed in the same degree of fear as when the DOW was 6,666. So, the market is long fear. Funny thing, the US markets are up a bit this Friday morning in pre-opening trading.
When everyone is certain prices must fall further, they usually don’t. Bear markets feature stunning rallies from oversold extremes. Nine Hundred new lows sounds extreme to me. The low may have been yesterday or it may be next week, but no one rings a bell
