David Fry's Market Outlook for Thursday

How big is this so-called credit market problem? No one knows. Until we get some understanding of its scope markets will remain accident prone and volatile.

Hedge fund redemption notices begin Wednesday, which don't take effect until the end of the quarter. How much cash needs to be raised and securities liquidated is anyone's guess.

Conflicted bullish talking heads are being paraded out to get you to buy this market. I say "conflicted," since most guests are pushing financial products and services their firms sponsor. After all, bears don't typically advertise in the financial media and therefore won't be frequent guests.

The other day I watched Abby Joseph Cohen, Goldman Sachs strategist, tell us how cheap stocks have become during this sell-off. Her job is to cheerlead investors while her firm scrambles to deal with their own hedge fund difficulties. By the way, have you wondered what special deal Hank Greenberg and others got from GS to add $3 billion to their failing hedge fund? Did it come with a guarantee not available to existing investors? Just wundrin...

In our last public podcast interview with Emerging Markets Monitor [London], they advised to watch the Sterling/Yen cross rate for signs that the "yen carry trade" was ending. Such an unwinding would be a sign that the equity bull market was ending. I posted this chart a week ago, which showed a breakdown in the previous trend.

Sticking with currencies for a moment, the dollar continues to rally against European and high-yield currencies, but fell against the yen. The repatriation of assets invested overseas continues.

On the mind of every investor is one question -- "Is the U.S. stock market crashing?" I don't know the answer to that either. It looks more like a slow but steady grind lower. With uncertainty, most folks would rather not own anything -- hence the late day sell-offs.

Breadth is decidedly negative, while volume, for the middle of August, remains well above average. [I'm still uncertain whether the data below is right since another page I'm viewing shows NYSE volume at 4.2 billion shares.]

But are we oversold "again"? McClellan Oscillator says moderately so, while the Summation Index indicates a more serious distribution.

In other market equity market sectors, let's look first at the problem children.

Then there are the other major U.S. markets.

Lastly an overseas sampling:

Are we only seeing the tip of the iceberg? I suppose if we gathered all the usual mortgage underwriter suspects, sent them to GITMO, then "water boarded" them until they came clean with what garbage is out there, we might get a handle on the situation. We could even have Crammer [not a typo] do the interrogations. What fun!!!

Since that's not going to happen, we'll just have to follow the tape and do our thing. I expect more, not less, volatility as mortgage contagion spreads, popping up intermittently here and there. When events are calm then expect sharp rallies. It's going to be that kind of roller-coaster for an indefinite period.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: CurrencyShares British Pound ETF (FXB), CurrencyShares Japanese Yen Trust (FXY), PowerShares DB US Dollar Index Bearish (UDN), streetTRACKS Gold Trust ETF (GLD), iShares Lehman 1-3 Year Treasury Bond ETF (SHY), iShares Lehman 20+ Year Treasury Bond ETF (TLT), Financial Select Sector SPDR ETF (XLF), streetTRACKS KBW Bank (KBE), iShares Dow Jones US Real Estate ETF (IYR), Rydex S&P Equal Weight Consumer Discretionary ETF (RCD), ProShares Short MidCap400 (MYY), ProShares ShortRussell2000 (RWM), iShares MSCI Emerging Markets ETF (EEM), iShares S&P Europe 350 (IEV) and iShares MSCI Brazil Index ETF (EWZ).

Comments

[jr7107:]

David, very good comments. This is what a hangover feels like, visualized, and with monetary consequences.

The KBE looks so painful, and nobody has raised their hand to indicate there is a problem.

Overall market down 10% from the high for those waiting for a correction, but I cannot yet stomach another drink.

2007 Aug 16 01:42 PM

[David Fry:]

There's nothing wrong with the sidelines sometimes. Most money managers don't view "cash" as a useful tool but it is.

Dave

2007 Aug 16 05:29 PM