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January 22, 2009


What a nasty session for equities. The market served up two pernicious whipsaws and ended in a state that left both the daily and intraday SPX charts virtually illegible with regard to near-term prospects. I noted in the comments section this morning that something didn't feel right about the early drop. I was searching for technical backup to that read, but finding none, I was drawn in on the short side as the SPX lost the 820 level. The first whipsaw threw me back out as it passed back above 820. Such are the travails of discretionary trading.

stock index chart

On a normal day (whatever that is), such a trade would have been like walking into a bank and helping yourself to the teller's drawer. The second whipsaw had its own bit of nastiness:

stock index chart

Typically, when the market experiences excessive whipsawing, a big move is coming. The question is one of direction, and the answer is I don't know. Such situations are what straddles are made for. However, option premiums are too high for comfort, so I remain on the sidelines waiting for something tradable. As for feel, if you hold a gun to my head and threaten to take away my morning coffee, I'll confess... but not because of the gun. My instinct still says higher.

Bonds took another 2-point dive. The recent volatility in Treasuries has been nothing short of phenomenal. Does anyone remember way, way back in oh, 2007 or so when a half point move drew headlines?

treasury bond chart

If bonds are simply correcting, any equity rally from here will probably be short-lived. In fact, when the inevitable collapse in bonds arrives, I'm not sure it will help stocks so much. Perhaps there will be an initial reaction higher, but I don't see how soaring yields are going to spark a sustained equity rally. In a healthy economic cycle, stocks and bonds move in tandem. Higher bonds prices mean lower rates which makes stocks more attractive. They can both move up because credit is expanding, increasing the money supply. The opposite is true during recession.

In crisis, everyone wants Treasuries and the flow of money into bonds is so powerful, it drains funds away from all other investment classes. If we ease out of crisis mode and Treasuries start a big decline, the spike in rates could actually push stocks down further. So in my opinion, equities are going to be under pressure either way.


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