Trader’s Narrative

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.

Want to see something that will knock your socks off?

US Financial Stress Index
The BCA US Financial Stress Index (left) is a proprietary and nutritious blend of these econometric and statistical ingredients:

• performance of bank stocks relative to the general stock market
• the yield curve
• credit spreads
• real stock prices
• consumer confidence
• market leverage
• private debt
• new bond issuance
• new equity issuance

BCA Research is the world re-known financial markets analysis firm out of Montreal. According to this indicator, the only previous crisis in recent history to outdo our present subprime debacle is the Savings and Loan boondoggle that was the epitome of the 80’s excess.

Which would explain why BCA Research is not giving up on their bullish bias:

The long running bull market in equities is not dead yet. The Fed is not the only game in town. The U.S.economy is not falling apart, the dollar has cheapened substantially and bond yields have melted. Most important, equities offer good value and the areas most exposed to the subprime crisis are already attractively priced.

If you’re still wondering how the Sub-Prime mess came about, there is no simpler explanation than this.

Here’s a more serious one (don’t forget to check the “How it went wrong” checkmark).