S&P 500 Index: The Long Technical View

In this time of relative market turmoil, I wanted to step back and take a look at the long-term technical picture. This is the weekly chart for the S&P 500 Index (click to enlarge) with the usual accoutrement: Bollinger Bands centered around the 20-week moving average, 14-week RSI and Slow Stochastics. I purposely left volume out so we can concentrate on pure price.

The 20-week moving average is pretty significant here because it has basically acted as support to the stock market rally since last April. And the fact is that the 20-week moving average was broken this past week in a pretty decisive manner. Does it mean the rally is over? Let's just say it is compromised and the market will have a lot to prove over the next few days/weeks to show otherwise. To begin with, it would have to overtake our old friend the 20-week moving average which, in a metamorphosis known to technicians and traders everywhere, is now presumably acting as resistance, sitting at 1,088 as of Friday. Even more significantly, the S&P 500 index would have to break decisively above 1,100, also looming large as resistance.

It goes without saying that the technical picture can change in a matter of days but the longer the index lingers under the two previously mentioned resistance levels, the more likely it would be that the bull market that has pissed off so many people (mostly people talking their book, but aren't we all, one way or another?) since last March has ended. Now, the end of a bull market does not necessarily mean the beginning of a bear market. We could very well enter a phase of range-bound, directionless trading which might be even more frustrating to more people than the previous phase. But isn't it what markets do?

A Strong Bernanke Endorsement

Ringing, cogent and very convincing endorsement of Ben Bernanke by Alan Blinder, a former Fed vice-chairman. His conclusion, framed as a not-so-subtle warning to recalcitrant senators:

No nominee for Fed chairman has ever been rejected by the Senate. Even no votes are relatively rare. In fact, the nominee who received the most negative votes in history was Paul Volcker, who won re-confirmation in 1983 by an 84-16 margin. Yet, in the eyes of many, Mr. Volcker was the greatest Fed chairman ever. Those 16 senators look pretty foolish in the eyes of history. There may be a lesson there.

Contrast this with Paul Krugman's tepid endorsement or with this other lukewarm take on the subject.

Kool-Aid

I happen to agree with this part (among others) of the SOTU address (emphasis mine) :

Our most urgent task upon taking office was to shore up the same banks that helped cause this crisis. It was not easy to do. And if there's one thing that has unified Democrats and Republicans, and everybody in between, it's that we all hated the bank bailout. I hated it -- I hated it. You hated it. It was about as popular as a root canal.

But when I ran for President, I promised I wouldn't just do what was popular -– I would do what was necessary. And if we had allowed the meltdown of the financial system, unemployment might be double what it is today. More businesses would certainly have closed. More homes would have surely been lost.

So I supported the last administration's efforts to create the financial rescue program. And when we took that program over, we made it more transparent and more accountable. And as a result, the markets are now stabilized, and we've recovered most of the money we spent on the banks. Most but not all.

To recover the rest, I've proposed a fee on the biggest banks. Now, I know Wall Street isn't keen on this idea. But if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.

Does it mean I drank the Kool-Aid? A good friend of mine who's an institutional derivatives authority on Wall Street thinks so.

I'll throw in another quote, another gulp of the Kool-Aid if you will (emphasis mine):

Look, I am not interested in punishing banks. I'm interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

This, on the other hand, would seem to reverse a campaign promise:

Now, I'm not naive. I never thought that the mere fact of my election would usher in peace and harmony and some post-partisan era.

Technical Outlook for the S&P 500

What you see above (click to enlarge) are 2 different views of the same daily chart, that of the S&P 500 index. The first has the following indicators: 20, 50, 200-day moving averages, slow stochastics and volume. The second is the naked candlestick chart with the RSI indicator. I like this layout as opposed to cramming all these indicators on a single chart, which usually renders the information unreadable (unless you hook up your computer to a $160,000 Sharp 108-inch TV).

We are at this very moment hovering around the 1085 support that held throughout last November, right before the December/January liftoff. Whether it will hold is anyone's guess. [As a humble aside, technical analysis shouldn't in principle tell you what the market WILL do (that would be divination) but what it is likely to do. It's then up to the trader or investor, informed by the TA, to make appropriate bets.] The RSI and the stochastics have reached levels that stopped all previous sell-offs since the start of the bull move in March 2009, so a rebound from here would not be surprising.

That's on the plus side. On the minus side, the S&P 500 has broken below its 20 and 50-day moving averages and is sitting under a big round number, 1,100, that has forcefully rejected yesterday's rally attempt. So unless the market manages a serious rally in the next few days (preferably today or tomorrow), the odds of a prolonged sell-off will increase significantly. And if a sell-off does materialize, look out below: next support is basically at the 200-day moving average, clocking today at around 1,010.

Belief System Vs. Reality

Fascinating interview with Eugene Fama on the New Yorker website. It's a study in how a man holds on to his beleaguered belief system for dear life, the same way he would to a life raft. He basically denies the existence of bubbles, the role of the financial crisis in the recession (he thinks the economic recession caused the financial crash and not the other way around). He believes that at no point during the past 2 years did the financial markets cease to be anything but rational and efficient, that the government is 100% responsible for 100% of the financial markets' woes. The private sector on the other hand has been, according to him, its usual rational, efficient self throughout.

Naturally, he thinks the government should have let all the weak financial institutions fail (emphasis mine):

The experiment we never ran is, suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out? My guess is that we are talking a week or two. But the problems that were generated by the government stepping in—those are going to be with us for the foreseeable future. Now, maybe it would have been horrendous if the government didn’t step in, but we’ll never know. I think we could have figured it out in a week or two.

The only problem with this is: we did run the experiment, it's called the Great Depression and we all know how that worked out. A week or two for things to spontaneously fix themselves? Try a decade or two and a world war for good measure.

The closest Eugene Fama ever gets to admitting some sort of doubt in his theories is this (emphasis mine):

When all this (the financial crisis) started, I joined the debate. Then I stepped back and said, I’m really not comfortable with my insights into what the best way of proceeding is. Let me sit back and listen to people. So I listened to all the experts, local and otherwise. After a while, I came to the conclusion that I don’t know what the best thing to do it, and I don’t think they do either. (Laughs) I don’t think there is a good prescription. So I went back and started doing my own research.

But there's one person whom he never listened to and never will even (and especially) if he says things that make sense and that person is Paul Krugman:

My attitude is this: if you are getting attacked by Krugman, you must be doing something right.

The (Im)morality of Strategic Defaults

Yet another contribution (by Roger Lowenstein, the author of the definitive book on the LTCM fiasco, a book that, in many ways, foretold the events of 2008) to the ongoing debate over the morality (or lack thereof) of so-called strategic defaults (emphasis mine):

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

The subject was also treated extensively on the Interfluidity blog (here, here and here). Check out the comments, they're just as valuable as the posts.

The irony of having professional speculators and/or unfettered free market advocates berate folks for making rational economic decisions is not lost on anybody who's been paying attention. Then again these are the same people who gladly accepted the government's help when they were in deep trouble. And the same people again who are now biting (or trying to bite) the government's helping hand, for fear it might morph into a taxing and regulating fist (they might have a point there).

Krugman's AEA Presentation

Must read piece by Paul Krugman. It's more or less the presentation he will be giving today at the American Economics Association meeting in Atlanta. Excerpts:

[...]I’m skeptical about the optimism that’s widespread right now about recovery prospects. The main argument behind this optimism seems to be that in the past, big downturns in the world’s major economies have been followed by fast recoveries. But past downturns had very different causes, and there’s no good reason to regard them as good precedents.

[...]Maybe policymakers will become wiser in the future. Maybe financial reform will reduce the occurrence of crises: major financial crises were much rarer between the end of World War II and the rise of financial deregulation after 1980 than they were before or since. Meanwhile, however, the fact is that the economic world is a surprisingly dangerous place.