Some points on the similarities between the markets in 07/08 and now. Courtesey Macro Story;

In early 2008 the initial selloff which I had been tracking was 15.3% and until today we were right at those levels. In the fall of 2008 the selloff lasted two months and was 36%. In fact the ultimate trading bottom of March 2009 was almost reached in the fall of 2008 when the SPX touched 835.

I believe the fall of 2008 is more comparable in terms of this initial move lower. In the fall of 2008 there was Lehman, Fannie and Freddie and AIG all collapsing. Today we have Bank Of America, Citi and sovereign nations like Greece, Ireland, Italy, Portugal and Spain.

Notice the similarities between the three rallies and subsequent selloffs as highlighted below. That is the emotional pattern I believe will repeat after this initial selloff ends.

Both the long and short term IV skew charts show no signs of selling pressure letting up.

As I’ve stated before I wish I could be more definitive here. This market really showed its hand today. The late day selloff was a sign of funds and or individual investors waiting for a chance to sell into strength to meet margin and or redemption calls only to find lower prices and forced to sell at the close. Bank Of America remains a wild card as well and the companies statement today basically said the market had it wrong. Not the calming words long investors want to hear.

What the fall 2008 pattern shows us is this market can remain oversold for a very long time. Initiating short positions at these levels is very difficult unless one is using hedged option trades such as vertical spreads. The volatility could easily turn a winning trade into a losing one. 

Lastly, remember it is human nature for others to relay their fears and limitations upon an event beyond their control. I’m listening to Carl Icahn right now say how this selloff is way overdone. He doesn’t see it lastly any longer but what basis does he have for saying that? Other than talking his book he has none. Don’t be greedy and don’t be a hero. There may very well be more selling ahead of this market.

As we suggested earlier today, markets will be saved by Ben. It sure looks like some (small) QE3 is out there. Welcome to Irrational Exuberance, that will ultimately fool everybody. Manic Markets 2.0. SPX Intraday action.

“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.

Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

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As history is rewritten every day nowadays, let us presenty the new King of the World. Apple surpasses Exxon as the bigegst traded company. When will we see the new IAlgo app, so everybody can join the Casino?

As the Markets are adjusting to normality, we see that the banks also seem to be doing the same adjustment. During the steroid period of the mighty QE2, the Banks stopped reporting losses, but instead all made money, every single day. Well that is rapidly changing. It is all back to normal (distribution), until we get that QE3 again.

Gone are the no losses World, while the Var is diminishing.

…but don’t forget, they still have those Algonators. Courtesey Omid Malekan;

Tradeanator 2: Settlement Day from Malekanoms on Vimeo.

Time to short some Gold as JP hasn’t had the best track record?…By Gold Core;

There were further signs of stagflation in the UK as manufacturing unexpectedly fell in June and the trade gap widened. This is further evidence that the economic recovery is faltering in the UK and QE has not worked. 

US Major Debt Holders

U.S. Treasuries dropped, pushing 10-year note yields up from the lowest level since January 2009, on speculation the Federal Reserve may introduce new stimulus measures today to boost financial confidence.

More ‘stimulus’, QE3 or whatever new fangled acronym is dreamed up by desperate policymakers will of course be bullish for gold and silver. 

Libor-OIS

J.P. Morgan Chase & Co. (JPM) and Goldman Sachs Group (GS), raised their gold-price late yesterday.  

J.P. Morgan now sees gold prices at $2,500 a troy ounce by year-end, while Goldman expects gold at $1,730 in six months and $1,900 in 12 months.

This may be a sign that the current sharp rally may have reached its zenith as neither bank has a great track record regarding short term trading calls on commodity markets.

In the short term there is the risk of a correction as gold’s rise is now becoming front page (on front page of FT today) and headline news.

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For all those comparing this market to 2008, we have already accomplished the down move we did in 2008. If this is something much bigger ending up in a total disaster is to be seen, but if we are to repeat some of the history, the market, at least in 08, bounced up rather aggressively. Beside the Economy and the World being in a slightly different mode now compared to then, we see the total dominance by Algo Machines as the biggest risk for the market to stabilise, both down and up. Once again, the regulators have approved of these predatory machines, without having relly understood what they actually do.

Guest post by Macro Story;

As a reminder from the 2007 comparison the move from Point F to the low in the highlighted red box was 15.3%. So far the 2011 move has been 14.5%. Something to consider as history does often repeat itself in emotional markets.

This market still appears very weak with internals about as weak as I have ever seen. At the same time markets tend to turn around when everyone is screaming sell. As a friendly reminder, don’t be greedy and don’t be a hero. Remember the FOMC meeting is tomorrow.

Manic Markets. After the ES futures traded at 1075, we are now at 1145. Europe has turned around in a huge reversal. Markets surging on no liquidity. The famous August trend still intact, but could be breached. This time around, Europe is showing the way. Greed and fear of missing out on all manic moves. What if, just a what if Ben takes the market to 1200+ later today? Stoxx intraday below.

Ft.com
The Royal Institution of Chartered Surveyors said its monthly gauge of prices edged up, the WSJ reports. The index reached a balance of minus -22 from minus -26 in June. The negative reading means prices are still falling http://ftalphaville.ft.com/thecut/2011/08/09/647461/uk-housing-sector-falters/

Bullion gained more than 2 per cent on Tuesday, Reuters reports, roaring to all-time highs for a second consecutive session to stand above $1,750 as equity markets dived on growing fears of a globalhttp://ftalphaville.ft.com/thecut/2011/08/09/647441/gold-hits-another-record/

A top US congressional committee is scrutinising Standard & Poor’s decision to lower the country’s credit score, in a sign of escalating political heat on the rating agency. A Democratic aide in Congress told the FT that the Senate banking committee was “looking into the issue and gathering more information http://ftalphaville.ft.com/thecut/2011/08/09/647431/senate-to-probe-sp-downgrade/

The US Federal Reserve’s FOMC meeting on Tuesday will be the most difficult and divisive in a year, the FT says. Sharply weaker economic data in recent weeks, a new peak in the eurozone debt crisis,http://ftalphaville.ft.com/thecut/2011/08/09/647416/fed-faced-with-stimulus-question/

Chinese inflation data for July failed to calm markets, showing a higher than expected increase of 6.5 per cent, up from 6.4 per cent in June. This compared to a 6.3 per cent average forecast from economists polled by Reuters and by Dow Jones. http://ftalphaville.ft.com/thecut/2011/08/09/647406/chinese-inflation-comes-in-higher/

The new leader of Tibet’s government-in-exile has condemned Chinese rule over his homeland, striking a defiant tone as he assumed the political role recently ceded by the Dalai Lama, reports the FT. In a strongly worded inaugural address http://ftalphaville.ft.com/thecut/2011/08/08/647251/tibetan-leader-vows-to-fight-chinese-%e2%80%98colonialism%e2%80%99/

Standard & Poor’s on Monday cut the triple A credit rating of government-backed mortgage financiers Fannie Mae and Freddie Mac following a similar downgrade of the US government on Friday, reports the FT http://ftalphaville.ft.com/thecut/2011/08/08/647241/fannie-mae-and-freddie-mac-downgraded/

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