I want to update my two Thursday evening pieces. First with respect to Liquidity for the Government and no Liquidity for Anyone Else, the degree of financial stress in the short-term part of the market is worse. Here’s the graph:
Much as the government wants to eliminate stress in the lending markets, I don’t think they are succeeding. The little bounce still leaves the indicator below Thursday’s close.
One reader brought up the timing mismatch in this indicator, because I have a 2-year Treasury versus a 90-day commercial paper series. I use the 2-year Treasury, because it is very sensitive to changes in expectations for short-term interest rates. I suppose I could use 3-month T-bills to match, but this indicator arose out of comparing two different series that change in opposite directions when the economy strengthens or weakens.
Now for my article Now We’re Talking Volatility. Okay, so we had three 4% moves in a five business day period, well, now you have four of them. Now how do the statistics look?
Oddly, after four 4% events in five days the average return is lower than that for three 4% days. Most of the history here comes from the Great Depression, and we are dealing with the “Law of Small Numbers” here, so I am not inclined to offer definitive analysis here. I will give you my guess, though. Extreme volatility often begets an opportunity for profit, but also sometimes begets significant future losses. I lean toward the profit side here in the short run, but I also realize that the actions of the US Government might not be the best for the markets, even if the markets have interpreted it positively in the short run.
I would be neutral-to-positive on the US equity market here. The presidential cycle is a positive, as is the current market volatility. Given the difficulties with financials, I can’t get very positive, though. Play defense, wherever you are.