The Numbers Just Don't Add Up
Sunday, March 01, 2009
What started off as a Bear market rally at the beginning of the week, quickly turned sour as the major indices retraced, coming back down to their prior lows. Even though comments of another stimulus package encouraged investor's sentiment at the start of the trading week, fears of a longer than expected market recession sent investors back into safe-haven, driving the Dollar index back to its prior high resistance of 88 points.
GDP results on Friday confirmed the worst possible scenario as numbers showed a 6.2% contraction for the fourth quarter, while spending fell 4.3% versus estimates of 3.5%. As mentioned in previous reports, consumers are allocating more of their income to personal savings, rather than spending it in the free market. The change in consumer's habits has had an enormous impact on the various economies, forcing countries into a massive slowdown due to declining exports. Countries like Japan have suffered the most from the situation due to high valued currency and a massive slowdown in exports.
By taking a glance at the chart below one can see the steep decline in Japan's exports, due to the lack of global demand.
*source ministry of finance Japan
Friday's U.S stock session demolished all hope of a rebound as all the sectors plummeted, with the financial sector leading the way, dropping by over 6.5%. The intraday selloff occurred as government officials finally agreed to boost their stakes in Citigroup, pushing out further private equity holders.
Investors are now concerned that other banks might see similar action as Washington struggles to stabilize U.S. banks. The Citigroup event, one of the most dramatic efforts to prop up defaulting banks, pushed the benchmark S&P 500 to lows last seen April 1997.
Despite all the signs of a major drop, not all the numbers seem to be adding up:
1) Volatility or the market's fear- When analyzing the market more thoroughly one can see that despite recent selling pressure, the Volatility index isn't acting accordingly. Over the last year, major U.S equity drops have coincided with a spike in volatility. This week the major U.S indices ended up at new lows, but volatility failed to increase with the same type of magnitude.
*courtesy of stockcharts.com
2) Put Call ratio- measures the number of put options divided by the number of call options on the S&P500 index as reported daily by the Chicago Board Options Exchange. This ratio and the volatility index mentioned above are two technical indicators that measure the emotions of a specific group of investors. Most professional investors use this index in a manner that is contrary to the crowd, meaning that when the ratio is low the market could be experience a correction and when it is high the market could experience some buying pressure. When analyzing the ratio compared to the S&P 500, one can see that unlike previous bottoms or tops the index is currently trading between extreme levels, confirming the uncertainty of the market and the current selloff.
*courtesy of indexindicators.com
Conclusion
Despite Friday's major sell off leaving the major indices at their lows, they are yet to present a full candlestick confirming the downtrend. In addition when analyzing other indices such as the Nasdaq, one can see that not all the sectors are agreeing to the extent of the current sell-off. Friday's session was felt mainly on the financial sector giving up gains of over 6%, while other sectors losses were far more modest. Furthermore, despite last week's negative session the Dollar index failed to break prior resistance of 88 points.
Monday's session should be observed carefully for a break, especially due to recent economic data showing plummeting consumer and investor's confidence. In addition traders should watch out for the major U.S event; NFP results on Friday, a number that could sort out the uncertainty regarding future direction.
Sunday, March 01, 2009
What started off as a Bear market rally at the beginning of the week, quickly turned sour as the major indices retraced, coming back down to their prior lows. Even though comments of another stimulus package encouraged investor's sentiment at the start of the trading week, fears of a longer than expected market recession sent investors back into safe-haven, driving the Dollar index back to its prior high resistance of 88 points.
GDP results on Friday confirmed the worst possible scenario as numbers showed a 6.2% contraction for the fourth quarter, while spending fell 4.3% versus estimates of 3.5%. As mentioned in previous reports, consumers are allocating more of their income to personal savings, rather than spending it in the free market. The change in consumer's habits has had an enormous impact on the various economies, forcing countries into a massive slowdown due to declining exports. Countries like Japan have suffered the most from the situation due to high valued currency and a massive slowdown in exports.
By taking a glance at the chart below one can see the steep decline in Japan's exports, due to the lack of global demand.
*source ministry of finance Japan
Friday's U.S stock session demolished all hope of a rebound as all the sectors plummeted, with the financial sector leading the way, dropping by over 6.5%. The intraday selloff occurred as government officials finally agreed to boost their stakes in Citigroup, pushing out further private equity holders.
Investors are now concerned that other banks might see similar action as Washington struggles to stabilize U.S. banks. The Citigroup event, one of the most dramatic efforts to prop up defaulting banks, pushed the benchmark S&P 500 to lows last seen April 1997.
Despite all the signs of a major drop, not all the numbers seem to be adding up:
1) Volatility or the market's fear- When analyzing the market more thoroughly one can see that despite recent selling pressure, the Volatility index isn't acting accordingly. Over the last year, major U.S equity drops have coincided with a spike in volatility. This week the major U.S indices ended up at new lows, but volatility failed to increase with the same type of magnitude.
*courtesy of stockcharts.com
2) Put Call ratio- measures the number of put options divided by the number of call options on the S&P500 index as reported daily by the Chicago Board Options Exchange. This ratio and the volatility index mentioned above are two technical indicators that measure the emotions of a specific group of investors. Most professional investors use this index in a manner that is contrary to the crowd, meaning that when the ratio is low the market could be experience a correction and when it is high the market could experience some buying pressure. When analyzing the ratio compared to the S&P 500, one can see that unlike previous bottoms or tops the index is currently trading between extreme levels, confirming the uncertainty of the market and the current selloff.
*courtesy of indexindicators.com
Conclusion
Despite Friday's major sell off leaving the major indices at their lows, they are yet to present a full candlestick confirming the downtrend. In addition when analyzing other indices such as the Nasdaq, one can see that not all the sectors are agreeing to the extent of the current sell-off. Friday's session was felt mainly on the financial sector giving up gains of over 6%, while other sectors losses were far more modest. Furthermore, despite last week's negative session the Dollar index failed to break prior resistance of 88 points.
Monday's session should be observed carefully for a break, especially due to recent economic data showing plummeting consumer and investor's confidence. In addition traders should watch out for the major U.S event; NFP results on Friday, a number that could sort out the uncertainty regarding future direction.
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