From Market Mania to Depression in One Month

Seeking Alpha ^ | 5-22-2010 | Sean Maher

[blam]

From Market Mania to Depression in One Month

by: Sean Maher
May 21, 2010

On April 15th, I wrote:

The S&P 500 is overbought over every measurable timeframe and the momentum in market breadth is deteriorating. The CBOE Put/Call ratio (a contrarian sentiment measure) at 0.32 has hit its lowest level since 2004, while the VIX Index has reached levels last seen when the market topped out in 1998 and 2000. I'd still foresee significantly higher volatility and therefore higher risk aversion over the next few weeks and into Q3.

Monthly, weekly and daily momentum indicators are topping out and/or posting non confirmations. It suggests that further upside will be limited, whereas the risk of a significant intermediate correction is increasing, and it will be significant, in the order of 15% plus, mirroring the 1994 and 2004 experience.

On just one morning this week, investors have had to cope with rumors of a Europe-wide short selling ban, an unexpected jump in American initial jobless claims, exceptional volatility in currency markets as hedge fund carry trades unwind (look at the spectacular AUD/Yen collapse); and a seemingly relentless sell-off in equities. When I predicted this imminent burst of volatility last month and a deep market correction, it was hard to imagine the extreme rush to liquidity we've seen in recent weeks.

So is the global recovery stuttering? Is deflation looming in the US? No, investors have suffered one of their periodic manic-depressive epsiodes and not much has really changed in the real world. Certainly, leading indicators are losing momentum as is typical at this point in a recovery, but the risk of a renewed slump into recession is negligible; the endless squabbling among eurozone governments hasn't helped soothe nerves, but Europe has been an incoherent political mess for ever, and its citizens and companies just get on with life.

Germany has ratified its share of the eurozone's €750 billion stabilization package, the US finance bill has passed its Senate vote, so at least some uncertainties that have unnerved investors are abating. The Advance/Decline index on the NYSE has hit the extremes of the last 20 years while a mere 7% of stocks are now above their 50-day moving average, a feat not equalled since March 2009. We've swung from complacency to dread in a few weeks, and neither are justified.

A CNBC poll this week found that 38% of respondents believed the Dow is headed to 5,000, or half current levels (overexposure to media hound Nouriel Roubini and those Elliott Wavers is bad for your rational faculties). We should bottom imminently, and with hedge fund balance sheets now liquid to an extent not seen since late 2008, the scope for a sharp rally in risk assets like oil, resource equities and the AUD and a sharp selloff in the Yen, gold and short-term bonds, is high over the summer. The point about investing is to remain disciplined and rational, and recognize that much of what happens is anything but; the markets are an emotional barometer as much as an economic discounting machine.

There is plenty of great value apparent after the shakeout, from Japan to oil service stocks (in fact resource stocks generally have gone from expensive and overbought to reasonable value), European large-cap exporters and even US banks. A lot of babies have been thrown out with the stagnant bathwater, so for those who retreated to the sidelines a month ago, a little contrarian courage will pay off handsomely.

In a few months' time, it's a good bet that the debate will be back to how soon the Fed needs to tighten in a robust US cyclical recovery, China will have begun revaluing, Europeans will be feeling less anguished after a month on the beach (although you won't find many Germans on a Greek one), and 38% of CNBC poll respondents will believe that the Dow is headed to 15,000.

[blam]

The Loonie's 'Gloom and Doom' Week

[DoctorBulldog]

Nope. I don’t believe him for a second. I’ve already liquidated my assets and bought gold, silver, and a healthy supply of ammo.

If I’m wrong, big whoop-dee-doo. It’s not like gold and silver are going to become useless, or something. If I’m right, then I’ll be sitting here laughing my @ss off as brokers start jumping out of windows (so to speak).

You did notice that Sean Maher, who wrote the article you cited, makes his living by making contrarian calls, right? This would be one of those contrarian calls. In other words, it goes against current “wisdom.”

(Of course, maybe he knows about Obama’s hidden policy of pumping money into the stock market and artificially propping it up everytime it starts to dramatically fall)

You also noticed that Sean Maher is a London based economist, right? In other words, he isn’t here in America getting a feel for the stress Obama is putting on the country.

Simply put, he’s out of touch with the instability and volatile nature of America, right now. You know, minutia, like those feelings of impending doom which Obama has blessed We the People with.

Cheers