Monday, 27 June 2011


S&P500 hourly, summer 2007 (red) / summer 2011.  

This analog suggests a modest bounce here, then a shocking drop to new lows 
leading to a significant turnaround and major rally.

(Position as of 27th June 2011)

With cries of alarm over Greece now ululating across the financial airwaves, there's a sense of deja vu among some who recall the wild summer market of 2007.

You'll remember of course that this was when the long-brewing potential crisis over subprime loans suddenly lost its pussy-footing prefix.  While Ben (O-he-of-the-beard-of-purest-white) Bernanke was insisting that the 'risks over subprime remain contained', the markets got busy putting on their tin hats and stocking up on beans and ammo.

2007 - disaster became opportunity...
became disaster.
Between late July and mid-August of that year, the S&P500 index took an ugly 12% haircut - before growing it all back into October and topping out at what remains its all-time high of 1576.

But take a close look at the chart at the top of this post to compare how it fell then with the way it's falling today. So far it's more than a little spooky.  These so-called analogs with previous periods always fizzle eventually, but while they're working they are often worth following - or at least not worth betting against.  

Emerging from recession:
US analogue from 1992 plays out in 2003
Patterns repeat not through voodoo but because similar psychology and supply-demand dynamics among market participants pertain across different time periods. When you consider the parallels in market sentiment between then and now - the sense of dread surrounding a seemingly inevitable crisis, mixed with a strong dose of denial and residual bullishness in the aftermath of exuberant market highs - it makes the similarities all the more compelling. 

In my previous post I suggested a dead-cat bounce was imminent.  Technical evidence and sentiment extremes continue to point that way and the decline has at least halted, yet price has so far only made a few feeble attempts at a rally and is struggling above critical support at 1258 on the S&P500. 

When all the evidence suggests markets should rally yet prices fail to respond, the market is giving a powerful sign of distress that investors should sit up and take note of.  This is the kind of behaviour that precedes waterfall declines.

A likely stab lower in stock and commodity prices should therefore come as no surprise over the next several days or weeks.  However, while even the savviest investors see a major crisis in the eurozone as pretty much a forgone conclusion, I'm not convinced that putting on my full bear costume right now in anticipation of a crash would be a smart move, late August 2007 being a prime example of how too-eager bears can get skewered in a sudden reversal.  

Greece appears set to pass their austerity measures this week, which would KiCaDoR* a few more yards.  (If those measures don't pass, expect a mass market evacuation).  Also, a temporary improvement in the US economic picture may reassure markets as oil prices ease back, corporate earnings satisfy and Japan stages a bounceback from its 'nuclear fallout' in March.  

'Kick the can down the road' is the latest mind-numbing buzz phrase among pundits for those never-ending european bailouts which succeed in doing nothing but buy time.  It is used so often it has become utterly loathsome, so from henceforth it is banned on this site and will be abbreviated.  

So although I remain convinced of the dire long term picturea tactical switch to a more bullish posture over the next couple of months could prove quite profitable for those with a strong stomach.  Just wait for a washout to new lows and/or clear signs of strength before taking the plunge back in.  

And if the market starts slipping off the edge, whatever you do, don't wait to feel the canyon floor before you bail.