Monday, November 24, 2008

Oh What a Tangled Web

"Oh what a tangled web we weave,
When first we practice to deceive"
- Sir Walter Scott

"But when we've practiced for a while,
How vastly we improve our style!"
- J.R. Pope

This morning's press headlines provide plenty of reason for faith in humanity and the general goodness of people in the financial industry.

Consider the following web of stories:

Citigroup gets a bailout package from the Federales....

...
despite the fact that one of their primary "assets" is...err.....the tax benefit of their prior losses...

...and that Citi was one of the banks that made some, ahem, unsavoury bets against MS in September.....

...this being the same MS that went on a hiring spree in July....

....only to turn around and wield the axe in November....

....but of course, we all know how this is going to end!

Fortunately, there are some certainties in life, such as the singular inability of the British rail system to delivers its passengers to their destination on time and in comfort. Will any on Alistair's tax hike make its way into proving the rail system? There's about as much chat as that as of Macro Man being named Obama's Treasury Secretary today.

Moving on to markets, Macro Man has to give a tick to the Russkies, who've devalued the RUB again today. Theirs is a purer dishonesty which makes no bones about their desire to rip you off, unlike the sordid displays of "coming clean" that we've observed from (morally and literally) bankrupt Western financial institutions.

Elsewhere, the good news keeps on coming in Europe, where the ifo registered its largest monthly drop in history (tying the release after 9/11) and putting the index at its lowest level since the post-unification recession. Naturally, the euro's gone bid and Bunds have sold of sine the release; ah, the joys of illiquid, position-driven markets! As intellectually stimulating as reading a technical manual...in Finnish.

Finally, Macro Man feels compelled to pass on a technical observation that he made last week, and which he's only now coming to grips with. A number of punters have no doubt observed that the SPX has broken a double top from 2001 and 2007. What's particularly chilling, however, is that the price target of the neckline break is the same distane from the top to the neckline.
In this case, the size of the top is 811 points, with the neckline at 762. This puts the SPX price target at......-49!

It's been commonly said that this financial crisis will permanently change the nature of financial markets. Macro Man can only wonder if that includes the lognormal distribution of asset prices. What a tangled web that would be for your risk management system!

14 comments:

Charles Butler said...

Lognormal? As if 4 years of low volatility and such weren't the same thing. Technical analysts, and the like, take note - the investigators' fingerprints are all over the evidence.

Anonymous said...

yeah... the double top is well in place.. the good news is that having this tech figure been completed in some 7-10 years we could well be some years away from this target to be hit... this would be a better outcome as it would imply quite a deceleration of the recent trend!
A part from jokes, another week another bail out... next week will bring the US autos one, hopefully. Time for a swing in sentiment? or reaching 50% drop from the highs in s&p isn't worth a bounce?. Much more than from citi news,mi temtative bullish stance takes confort from our policymakers (JCT, Weber and c.) talking of "very serious situation" and "worst still to come" less than 3 months after having called this a "soft patch" and a Weak episode".


sick trader

Damcanu said...

I don't think many would be surprised to see a big bear mkt rally from these levels, even taking into account all the dire news.

-------------------------------

From Gary's 'The Smart Money Tracker' blog:-

If we put in the final bottom for this leg down on Friday then this was the second largest percentage decline in history at 43.5% in 3 months and 7 days. Only the initial crash in 1929 exceeded this with a decline of 45% in 2 months and 6 days.

Does anyone remember Newtons third law. For every action there is a reaction. The same holds true for the stock market. The more extreme the decline the more extreme the counter trend rally. Action/reaction. In 1930 that 45% initial decline produced a counter trend rally of 50% in a matter of months.

Anonymous said...

usually say after turnaround tuesday take the rest of the week off due to it being an ultra thin turkey shoot, but with VIX this high every day been acting this way...some think VIX will lose 70 for good today...
note the ted spread and the libors not reacting to your +4% squeeze in footz/dax...need a retest after this month on the new SPX low(SPX/NDX lost -8% last week), monthly volume way too high:
http://www.tigersharktrading.com/charts2/081124SPX.gif
-deac

Don said...

From "The Snowfall" by D. Justice

The landmarks are gone. Nevertheless

There is something familiar about

this country.

Slowly now we begin to recall

The terrible whispers of our elders

Falling softly about our ears

In childhood, never believed till now.


Don the libertarian Democrat

Anonymous said...

Nobody would be surprised by a big bounce, and since everybody's looking for the bounce, that's why it hasn't happened

Camabron said...

Macro man, apply the same S&P projection, but using a log chart. It will take you to the 420 (1994 levels) area which is quite plausible, since it's the level from which the stock mania began. Bubbles usually return to their point of origin.

Macro Man said...

Funnily, I was looking at that very chart....I saw the target at 370, but either way...it's a lot lower than here.

PureGuesswork said...

As to the double top in S&P, it might be instructive to look at it like this.

The region of the 2003 low is approximately a 61.8% retracement of the move from 1990 to 2000. We have yet to significantly break that support.
There is also a longterm trend line made by the 1982 and 1990 lows. We are close to that.

But I would not be surprised to see the decline continue to the next level of fibonacci support, somewhere between 550 and 600.

Anonymous said...

so what should we do with this +10% ? fade it. Ok when? Forgive me if i don't join the "end 2009" debate... as MM noted days ago, 11% is the 2006 range... and 2008 has still to finish. So i remain more tactical. We could see again another end of month shift out of bonds into equities, as valuations are more extreme than end of october. But all recent rallies aborted very soon. Still i like this move.

sick trader

Anonymous said...

don't fade.

Wait for a sell set up first.

The trend is clear, and in this market you should be short or flat until the market tells you to do so otherwise.

If you really want to be fancy and punt, I would go long in very small size given that the rally is more than likely to continue (the reason that is that we are coming from such oversold levels!).....however do be quick to switch your position in this market.

Mencius Moldbug said...

Don,

A nice quote. And then, of course, there's R. Jeffers...

Jesse said...

Assuredly others have noticed this.

See the last chart here: http://tinyurl.com/fiftypercent

Its a rather sloppy H&S, more like a double range top, and placing the neckline is a bit of a problem, because of the jagged midpoint which ought to have set the neckline or lower bound more properly in a double ranged top.

444 is a good working number, but in real rather than nominal terms 49 could work, depending on how badly the Fed whores out the dollar. :)

Don said...

Mung Dzi, Thank you for the Jeffers.

Take care,

Don the libertarian Democrat