I may or may not get to my part 2 on speculation because of the market action today. I will get to that tomorrow. Today I think it would be best for my readers if I just run through my market indicators. Here goes:
- My knockoff of a famous oscillator indicates that we are ready for a short-term bounce. That bounce may have started at 3PM yesterday, when volume climaxed near the low of the day. That biases me long in the short run.
- On the other hand, the VIX under-reacted to the fall yesterday, indicating that not enough player reached for puts to hedge their positions.
- The Merger Fund has had a bigger correction than in February-March. It is likely due to difficulties with deal financing. Nonetheless, it is an indicator of how the gears of the market are jamming up.
- Bond volatility, whether measured by the MOVE or LBOX indexes, indicate a more volatile environment. No surprise that prime mortgage securities have been hit.
- Credit spreads have widened dramatically. Yields are another matter. With the fall in Treasury yields, yields on bonds single-A and above have fallen in yield, whereas bonds BBB and below have risen in yield. High credit quality corporations have a real advantage in this market.
- The emerging markets have gotten whacked, wholesale.
- The Euro and Yen are strong, and looking at falling forward interest rate differentials, threaten to get stronger.
- There is some liquidation happening in some carry trades. The New Zealand Dollar has gotten whacked versus the yen over the past two days. In general, the last three days have differentiated between countries with weak trade positions, and those with strong positions.
- Closed-end floating rate bank loan funds have gotten hammered recently. Another casualty of the LBO financing problem, but worse than the raw economics of the funds would indicate. Prices are falling much harder than NAVs.
- The FOMC seems tight at present, with Total Fed Credit growing slowly. Fed funds has missed the target on the upside on average since the last meeting, and no permanent open market operations have happened.
- Equity and mortgage REITs have both been hit, with equity REITs hit harder (but still expensive), and mortgage REITs nearer to fair value on average.
That’s all for now. In general, we are oversold, and should get a bounce Friday or Monday. I favor Friday. This bounce will be short-term in nature, so don’t put a lot of long exposure on for now.