An English Central Banker's Opinion of Ben et al.

Refreshing blunt criticism of the Bernanke Fed by a former member of the Bank of England's monetary policy committee, Willem Buiter. After conceding that the BOE hasn't exactly been brilliant dealing with the crisis, he has a few choice things to say about Ben and his acolytes (emphasis mine):

"Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole."

"Cognitive regulatory capture of the Fed by Wall Street resulted in excess sensitivity of the Fed not just to asset prices (the 'Greenspan-Bernanke put') but also to the concerns and fears of Wall Street more generally."

"Between the TAF, TSLF, the PDCF, the rescue of Bear Stearns and the opening of the discount window to (Fannie Mae and Freddie Mac), the Fed and the US tax payer have effectively underwritten directly all of the 'household name' U.S. banking system...and probably also, indirectly, most of the other large highly leveraged institutions."

"Although the Bernanke Fed has but a short track record, its too often rather panicky and exaggerated reactions and actions since August 2007 suggest that it also may have a distorted and exaggerated view of the importance of the financial sector for macroeconomic stability."

He also sees a "remarkable collection of analytic flaws" in general in the FOMC members and senior staff. This is as close to calling the FOMC a bunch of idiots as a central banker will ever come. Like a said, refreshing.

No Gold Medals for the Chinese Stock Market

While all eyes are on China, the Beijing Olympic Games and their seemingly superhuman heroes (Michael Phelps and Usain Bolt to name the two main demi-gods so far), not many people are noticing the Chinese Stock Market which, despite all the rosy predictions, has been in self-implosion mode since the end of 2007. The amazing thing is that you would think some kind of Olympic truce would have been observed by the sellers but no such thing happened and the selling has been fast and furious the last couple of weeks.

But as one can see in the weekly chart of FXI (click to enlarge), the main Chinese Stock Market ETF, we are approaching a significant support zone and some nibbling here would make sense. FXI is now trading at 39.63, near the March 2008 low of 39.44, the August 2007 low of 36.60 and the May 2007 high of 38.85, all potential supports. The 14-week RSI is at 35.63, near its level when FXI strongly rebounded last March. Getting long here would entail putting a mental stop a bit below 35 and keeping a close eye on FXI's behavior especially right after the Games are over.

I am not by nature a bottom-picker but nurture should take precedence over nature when a well-defined profit opportunity presents itself. While no sign of a bottom has been forthcoming, I like the notion of getting long at this level in small size (making the risk of being a little early bearable) with a plan to buy more if and when strong clues to a bottom start materializing.

Stay tuned.

Definitions of Technical Analysis

Courtesy of the Google MarketsList, here are a few definitions of Technical Analysis that I found at the same time particularly accurate and elegant:

- The study of market action (price , volume, open interest), primarily through the use of charts, for the purpose of identifying future price trends

- The art of inferring Expected Value of market price given data generated by the process of trading

- The analysis of available market data to unbalance the trading odds in your favor

And finally, maybe the most accurate...

- The subjective analysis of the markets dressed up in a lab coat

Long-Term Bears Watch Out

This chart (click on it to actually see something) should give pause to any rabid, long-term, it's-only-down-from-here, this-market-is-never-coming-back type of bear. On the weekly chart, the Dow Jones Industrial Average successfully tested a major rising support line. It broke it intra-week but that only makes it all the more important that support did hold on a weekly basis.

Adding to the bullish evidence the facts that:

- it did it with the highest volume in months
- the latest 2 weekly bars form a bullish engulfing pattern
- the 14-week RSI is turning up from an oversold level

and one can honestly argue that a very significant low was established this week.

Now I haven't turned bullish all of a sudden. For that a lot of technical things must happen such as the May high must be taken out and this past week's low must be successfully tested and we're far far from that yet. I'm just saying this could be the start of a multi-month bullish move and... just be careful on the short side.

Very succinct, to the point and illuminating post on Tim Knight's Slope of Hope blog going through every conceivable scenario for what the market has in store for us in the coming trading days.

Tim seems to be of the opinion (which I share) that the market does not NEED the VIX to go above 30 for a bone fide rebound to take place BUT... that it would sure be better and embark more people (suckers?) on the rebound rocket. He also thinks his baby the Russell 2000 Index (and its attendant ETFs IWM and the turbo-charged UWM) will be the one doing the most rebounding. I'll stick to the Qs.

The Very Long Term View

If we take a step back for a second and go way up the timeframe arpeggio to the monthly view, we have this pretty nasty looking chart staring back at us.
This monthly chart of the SPY (click to enlarge) with its attendant MACD indicator leaves no doubt as to where we've been (the glaring double-top) and where we could be headed as things stand now (the late 2002 lows around 76).
Obviously, things could change but reversing the built-in momentum present in this monthly chart will be a long and arduous affair. No one-day (or one-week or one-month) reflex rally will be enough to undo the damage incurred over the past year. Only a sustained rally above the May high above 145 could begin to spell the end of this bear market, maybe. What's most troubling is the striking similarity so far between this bear and the 2000-2003 one.

Barron's Bashing (part 99)

Today's Barron's has on its cover a big bad snarling bear with the caption "THE BEAR'S BACK" then in smaller print "But there's no need to panic".

What's interesting about this is that on 4/28, the cover showed a smiling bull, in swimming trunks, dipping his left foot in a swimming pool under a bright blue sky (with, I'll give them that, a few barely noticeable minuscule bear-shaped clouds - cute I must admit). The headline read "FEELS GOOD" followed by "the water's looking calmer for stocks" all but inviting you to "wade back in" the stock market. This a mere 3 weeks (and a mere 100 DOW points) before the DOW double-topped just above 13,000 and then proceeded to swoon 2000 points to just above 11,000 where we are now. And this while some bloggers (shameless plug and blatant lack of humility) were yelling "Time to Get Short Again" .

So...are the same guys who told us to buy at the (intermediate) high to be listened to when they tell you to buy 2000 points lower and with the DOW in free fall? Hey, weirder things happen all the time in the markets but I'd be extremely careful.

P.S. If there is one article worth salvaging out of this week's Barron's, it's the guest appearance of Lawrence McMillan in the Striking Price column. I leave you with his very wise concluding paragraph:

"This market decline probably will end as all others have - with traders panicking and the VIX spiking upward."

A Few Technical Musings on these Crucial Times

The least one can say about the current state of the financial markets is that we are at a momentous juncture, as evidenced by the twin Dow Jones Industrial Average charts above (click to enlarge), the first being the weekly and the second the daily.

The weekly chart shows that we are pretty much right on the trendline that connects the two lows (October 2002 at 7197 and March 2003 at 7416) that formed THE double-bottom that propelled the 2003-2007 bull market. That would argue for some type of rebound in the very short-term. This popular view is substantiated by the extreme oversold situation seen in the daily chart. The 14-day RSI is double-bottoming at around 25 and, should there be a potent catalyst, the rebound could very well be explosive.

However, there are many caveats to the forceful rebound scenario:

First, staying with the daily chart, one must acknowledge the fact that support around 11,700 was decisively broken last week. That support was all the more critical in that it was formed in January during the Societe Generale rogue trader incident and then held in March during the Bears Stearns collapse and subsequent Fed-engineered bailout. Not to mention the fact that a majority of market players were convinced (and the ensuing 12% rally attests to that conviction) they had seen THE low. So we have a previously hugely significant support that automatically becomes a hugely significant resistance level to contend with.

Second, both the 20-day and 50-day moving averages (always consequential) are falling fast and, should the potential rally procrastinate, will act as strong resistance and again prevent the DOW to make it too far above 11,700.

Third, if we go back to the weekly chart, one quick and dirty observation there is that the 14-week RSI (at 34.49) is still way above the 23-level reached in 2002.

Finally, and I feel compelled to mention this because so many traders and analysts have this on their mind, the VIX (at 24.76 as of this writing) is nowhere near the 35+ level it reached at previous intermediary lows. For more detailed and intelligent commentary on the VIX and its significance as well as the necessity (or not) of seeing a 35+ VIX before getting a rebound, I strongly advise you to refer to the Daily Options Report and the VIX and More blogs, in particular this post and this one.

What does all this contradicting evidence tell us?
Most likely that there could very well be a strong rally in the next few trading days. However, with all the resistance overhead, I can hardly picture (or chart I should say) the DOW getting even close to 12,000.
On the downside though, the 10,000 mark could prove to be an irresistible attraction in very short order.

Since it's been quite a while since I've said anything about Barron's, how about a little Barron's bashing? See next post.