Although my IS email traffic has been a mere fraction of the usual volume, all current questions have a common theme. "What can we expect" is the collective topic on trader's minds.
Again, I'm sticking with my top-down scenario based on current fundamental and also historical market behavior during somewhat similar times. Technical analysis does not help us at all right now. It's a measure of market price action at any moment in time with all facts, information, rumors and emotional guesses combined. Tuesday's events occurred without subsequent market action to record technical indications of investor reaction, so we are essentially blind to that study right now.
It can be stated that markets are already in an oversold condition based on weekly and daily chart signals along with a VIX spike above 37.00 and subsequent drop from there. Tuesday pre-market futures were positive and rising before fundamental events changed this picture.
Since then, federal governments have taken numerous steps to prop up markets on an artificial basis and are poised to take further action as well. Pumping liquidity, easing corporate buy-back parameters to thwart short-selling availability of shares and possible immediate interest-rate cuts are all artificial steps to keep markets at higher levels than natural buy/sell demand would seek. Does this place a firm, lasting bottom beneath market action? Certainly not.
Inevitably, free market enterprise will seek out its own level of perfect pricing. This can be manipulated up or down in the short term but not long term. Eventually the markets will decide what stock prices for airlines, banks, real estate, insurance, retail and consumer goods companies are truly worth. They can easily be propped up for now, but not forever.
Institutions may agree to come in and support price levels in the market as well. Many believe our own government will be large- scale buyers of long S&P 500 futures contracts to prevent a widespread crash. The "plunge protection team" theory of our federal government manipulating the SP01Us market has many inside industry believers. Individual investors may feel pent-up emotion to buy American companies in a show of patriotic support, quite possibly with more capital than they can afford to actually lose.
Does any of this sound like the makings of a long-term, significant market bottom to you? Suze Ormond was on CNBC this morning in her usual melodramatic fashion stating that we may have just seen a quiet capitulation in the markets this week. Traders large & small may have vowed to go long and abandon shorts across the spectrum out of patriotic emotion. Nice thought Suze, and I'm sure those stirring words brought a lump to many throats but alas, long-term reality is not on your side.
Global Markets All eyes are on the U.S. indexes come Monday morning. Everything we've seen in Asia and Europe has been in anticipation of what will happen here. Pure anticipatory action on light volume says little or nothing about what we can expect here compared to overseas action this week.
Standard & Poors itself predicts the recent act of war will likely push the U.S. into a recession ahead. Our own government has plainly stated we are at war with an undetermined enemy in unknown countries of sanctuary or alliance. These are not favorable future predictions for a global economy and financial markets already weak and testing multi-year lows. Does that sound like the makings of a firm market bottom to you?
We must also keep in mind that vast sums of foreign money seek haven in our debt and equity markets. The debt markets (bonds) found plenty of takers today and may rally to incredible levels next week. But that should not be a vote of confidence for all stock markets, either. Just because investors have faith that the U.S. government will not default on its securities DOES NOT mean that investors unilaterally believe the equity markets will be strong right now. Our federal government has NEVER in its history defaulted on any notes or bonds, but the equity markets have sold off or crashed many times in the process.
Faith in bonds does not equate to faith in equities by any stretch of the imagination.
Patriotism is a very strong emotion. It will play an important part in how short-term market action behaves but again is merely an artificial effect. Foreign investors will readily sell into the hands of emotional patriots if fundamental facts compel them to. Who do you think will make the correct, long-term fiscal decision? A foreign trader shorting high-end retail stocks as we head towards possible recession by S&P's admission or the emotional patriot who buys said stock to show his national support? You be the judge on that one.
Option buyers holding calls or puts have most likely suffered a week's worth of time decay when Monday's open arrives. Massive premium has bled from both directions unless the day of expiration is advanced until the following Friday, which is mere blind hope on those affected. SEC and CBOE risk of option trading outlines found at every brokerage site clearly warn of the risk for trading options due to unforeseen acts that can cause trading to cease or be delayed through long adverse periods of time. Don't expect option expiration to be extended beyond its usual schedule unless something extremely unusual were to happen.
Does that sound like the makings of a calm, orderly market open straight ahead to you? That's what media pundits are doing their best to indoctrinate, so you be the judge for yourself.
The facts we have tonight tell us that many market participants on numerous sides of the equation are pent-up and ready to take action. That's the short-term outlook.
We are also told by many market-neutral sources such as Standard & Poors that current events could point the U.S. toward a recession soon, and global economies and financial markets have been on the brink of such weakness already. That's the medium term outlook.
Our national leaders continue to prepare for an act of war in their own words predicted to be extensive and drawn-out against undecided enemies in unknown countries of origin. Those are their words and predictions, not ours. That's the long-term outlook.
Piecing it all together, I encourage you to draw your own unbiased conclusions. Do you agree with the facts I've given? Do you disagree 100%? My approach has merely been to gather all of the documented facts I can think of and sort them into three piles: short, medium and long-term affects on the market. I've done my best to remain emotionally neutral and analytical in the process.
Emotions drive short-term markets but logic drives long term action. Warren Buffett has a wonderful quote much more eloquent than this that essentially says the same thing. Expect emotion to drive Monday's action and the near-term beyond. expect logic to drive medium and long term action into Q4 2001, year 2002 and beyond.
This is how I've prepared myself for what to expect, the process used and facts to support my market guess. A runaway bull market would be welcome with wide-open arms by me, but in the end we will get the market that's given to us regardless of bias or hope.
Best Trading Wishes,