Summary for Week Ending 11th August 2007
In the past two weeks since the last report, we have seen plenty of volatility but in essence the market has not gone really anywhere. Whilst the punters are in a frightened state then reactions tend to become overreactions an hence we see plenty of wild swings going both to and fro. Looking back 2 weeks ago, we saw the market make a 1 day counter trend rally before succumbing to another downwards onslaught. In the week just past we saw a 2 day counter trend rally which again succumbed to yet another bout of selling pressure which ended on Friday when the Fed ( and other central banks around the globe) stepped in and added some liquidity to the banking sector. Most news reports on this measure were highly erroneous, giving the impression that the Fed was actually buying stocks.. there weren't. They are there to ensure that we don't see a credit squeeze which would only accelerate the selling pressure. For those who are interested, see the history of the 1929 crash to see what happens when a credit squeeze occurs.
Again the news is dominated by the CDO and sub prime debacle. The only amusing item that I read was the reference to NINJA'S:No Income, No Job, No assets! You have to hand to the finance guys as they really know how to put a spin on what is a crap loan in the first instance. Still reports indicate that only 20% of the Sub prime market is in default and that represents only about 5% of the entire mortgage market. If this is true, then it hardly seems plausible that this was the central cause of the slide. My guess is that it was the straw that broke the camels back;the tipping point. It would appear that the market was already scared and just needed a nudge to push it over the edge, and that's what we got. There are far more deeper issues at work here besides a number of crappy loans.
Looking at the chart the 135 day market produced nothing so we are off looking at the 180 day level which is on or around the 10th Sept. I'm still fascinated by the fact that the moment we hit the old 2000 highs we went into an almost direct reversal. This is certainly not what I expected and if the market does peel off into a secular bear market then we are going to see a very strange looking chart. Whilst the volatility is rising (the VIX is at 4 year highs) then to be honest anything is possible. Scared money is dangerous to predict, unlike confident money. There will be plenty trying to catch the bottom of this one, in the hope that we will see another rally. Those interested in trying to catch a falling knife are welcome to it.
the current volatility cannot continue too much longer as more and more punters will head to the sidelines and the whole thing will quieten down on its own. The worst that can happen now is a secondary disaster just to magnify the current panic. Sit back and wait for better conditions ( unless your writing option .. then this is your time in the sun)
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