Trader’s Narrative

Over the weekend Barry Ritholtz showed the BusinessWeek cover (below) and since I had been reading the cover article of The Atlantic, it struck me that almost exactly 9 years separate the two:

Time to celebrate. This month, the current economic expansion became the longest in U.S. history. The boom has done more than create millions of new jobholders and stock owners. It has also restored the public’s confidence and given more people than ever a shot at the American Dream. We tell the story in HOW PROSPERITY IS RESHAPING THE AMERICAN ECONOMY.

Source: BusinessWeek February 14, 2000

The crash of 2008 continues to reverberate loudly nationwide—destroying jobs, bankrupting businesses, and displacing homeowners. But already, it has damaged some places much more severely than others. On the other side of the crisis, America’s economic landscape will look very different than it does today. What fate will the coming years hold for New York, Charlotte, Detroit, Las Vegas? Will the suburbs be ineffably changed? Which cities and regions can come back strong? And which will never come back at all?

Source: The Atlantic February 12th, 2009

It would have been perfect had it been BusinessWeek itself with the dichotomous cover. The Atlantic magazine is a much smaller publication than BusinessWeek as well as being a much more general publication. Time will tell if these two covers act as neat bookends for their eras. Also, check out a recent German magazine cover dishing more doom and gloom.

Isn’t gold supposed to be a haven in times of stress? you know, real money? What happened then? why didn’t gold skyrocket to $2000 oz.? if it isn’t going to go up when the world’s financial market is in meltdown, when is it going to go up? The answer deduced from market history is that gold’s role as a safe haven is simply a myth.

It speaks to gold’s weakness in this market that it bucked the seasonality trend that I pointed out for the month of September. The AMEX Gold Bugs Index (HUI) - the only index which is comprised of only gold stocks - started and ended September at pretty much the same level.

My favourite indicator to time the gold market is the k-ratio. To understand how, check out the previous link. Here is a long term chart:

The k-ratio held almost constant, treading sideways for five years as both the numerator, gold stocks, and the denominator, gold prices, kept pace with each other. Because I was using this indicator to time the gold market, I lost some money because I didn’t see a fundamentally attractive opportunity at those prices. While it was painful to watch this historically reliable indicator, it has once again proven its merit. This is probably what people went through when it continued going lower and lower in the late 1990’s and 2000.

So what accounts for the collapse of the k-ratio? While gold has fallen around 4% for the year so far, gold stocks have fallen almost 50%! Believe it or not, that’s actually more than the equity market (S&P 500 Index). A large part of this is probably due to the forced liquidation that we witnessed in the markets last week.

Ironically, now that gold equity prices have fallen this much, the k-ratio is at levels last seen in late 1998 to 2002 - when the gold price was ~$250! The current gold price is more than 3 times that.

The AMEX Gold Bugs Index (HUI) has strong support at 175, which would mean the k-ratio to the low 0.20’s and once again, it could set up as a buying opportunity. I really don’t think we’ll revisit the lows that the k-ratio set in 2000 because that was due to a huge asset dislocation (thanks to Greenspan’s bubble).

The following charts are from Jason Goepfert, of SentimenTrader.com, showing his proprietary indicator called the “Panic Button”.

This indicator measures stresses in the credit market and is expressed as standard deviations from the norm. So a 2.0 means that the aggregate measures are 2 standard deviations from their usual or normal place. Yesterday it reached 9.5 (intraday) but has since come down to “only” 4.

Notice how it dwarfs all other major crisis in recent history! This is similar to the long term chart of the 3 month Treasury Bill rate I featured yesterday.

Here is the same chart, zoomed in to the latest few years:

It is not only awe inspiring, I’m left wondering what in the world it all means. Have we left reality and entered a bizarro alternate one? of what use is history and precedents when they are so out of proportion with what is happening right now?

Lynching Short Sellers
Then there is the rumor of the SEC moving to ban all short selling or as the FSA across the puddle, short selling related of financial stocks. Need I or anyone else, explain that this is completely moronic? Short sellers, far from being the culprits in this mess, are actually necessary for the proper functioning of price discovery. Furthermore, the effect of short sellers is to actually slow down a crash.

If that sounds counter intuitive to you, consider that every single share sold short is in effect, a future buy order. So as prices come down, it is short sellers who buy, in selfish interest to lock in profits - thereby providing some sort of friction to stall the downside momentum. Simple stuff. Economics/Trading 101.

But the current US administration is so dumb that they couldn’t empty a bucket of water if the instructions were glued to its bottom. While they attempt to forestall the inevitable, hoping against hope to buy time before a collapse before November, they are only damaging the economy of the US and the whole world by extension even further.

Get A Clue
By the way, if you aren’t yet aware of news.tradersnarrative.com you have no idea what you are missing! The rumour of the SEC’s move was on there hours ago and many other must read links get posted regularly. If you have an interesting link that you’d like to share or comment on an existing one, you can now do so.

I can’t remember exactly where I first saw this graph but in any case, the source is cited at the bottom:

While it is a valid argument that in the long run the market has only one direction, it is also true that in the long run, we’re all dead.

While everyone waited for the open of today’s market with bated breath, the word crash was thrown around like confetti. Retail investors crapped their pants (again). Here are a few frontpage stories from digg:

That’s notable because digg occupies itself usually with technology and science news. The stock market and the economy rarely make it to the front page. When they do, it is sensationalist headlines like those above… which makes for great a contrarian indicator.

With so much anticipation, the only prediction that came true was the Fed “surprise” rate cut that had been telegraphed weeks ago. The market certainly did not crash. It quickly recovered after the gap down from overnight trading.

Volatility
The volatility indices finally spiked higher: VIX reached a high of 37.57 and the VXN 40.77 - an almost 5 year high.

I was surprising to find that the number of Nasdaq stocks above their long term (200 day) moving average reached a low not seen since 2002:

This indicator is saying that the market’s internal breadth is as bad as it was in the final days of the bear market. I don’t know what to make of this since we only reached such horrendous levels after a brutal 3 year bear market.

Now, we are nowhere near that kind of market condition. Even so, here we are - as oversold as then.