More Pain Arrives, More on the Way?

We would like to welcome Bob Lang to The CBOE Blogging Community. Bob has been a private trader in equity and option markets for several years and manages several accounts. He has managed a $300 million pension and 401(k) plan for a Southern California cooperative. In early 2000, Lang started a hedge fund for private and institutional clients. This fund, Aztec Partners, was a top-performing fund that year relative to its peer group. In 2002, Lang worked with floor traders in the active bond-trading group of Countrywide Capital Markets. In May 2011, Lang launched an options newsletter called Explosive Options. Welcome Bob!

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There is no sugar coating the market action last week, it was downright awful. What looked like a promising start turned into a disastrous finish with the Dow finishing off 600 points in two days, the SPX off a staggering 70 on Thursday and Friday.  

 

The gap down to end the week was a killer on the charts, any support levels were crushed. Speaking of support, in this time of highly charged emotions we cannot honestly point to any areas of chart support. When the selling commences you just have to stay out of the way. It becomes an exercise of time and not price – the two most valuable tenets of technical analysis. Thus, the technicals provide very little guidance but serve more as observance of the left side of the chart. Estimates are futile and wild guesses.

I suspect the markets are overreacting to a very weak economy. But as with anything we often find the cart is put before the horse. The media profiles the awful market action and immediately throws people into a panic.  

 

Look, there is no arguing with the economic numbers, they are truly awful and we saw a big dose of how bad things might be with the recent Philly Fed report, Empire State report and Michigan sentiment. There is no doubt in my mind that the 3% GDP estimates from the Fed for 2H2011 are way off the mark – in fact more than one brokerage house has taken their estimates down sharply (Goldman Friday night snuck in a GDP downgrade, taking a page from S&P by hitting the market before the weekend). The dependence on the Fed to stimulate demand via monetary policy just won’t work this time, inflation expectations are elevated now far more than in 2010. A year ago it was .5%, today it is north of 2%, so not much room to inflate.

From a technical point of view charts are a mess. I have observed short term and long term charts and they all seem to tell the same story – Pain. You probably don’t need me to tell you that. With summer nearing an end and the party may just be getting started. I guess we can hope buyers can come back in earnest – but hope is not a great strategy, now is it?  

 

Looking at the daily action it appeared the washout post S&P downgrade put the downside in the rear-view mirror. That proved to be incorrect. Next week many are once again hopeful that Ben Bernanke will say something cheery about another QE program, perhaps bolder and bigger than before. Those hopes and dream are likely to be dashed this time around unless there is some globally coordinated action. Europe? Unlikely to participate. We’ll see if the other major nations can rally around to provide some help. At this point, I’ve gone from being optimistic to hopeful.

 

Bob Lang is the Founder of Explosive Options