Hair Of The Dog
By Colin Twiggs
January 24, 2008 8:00 p.m. ET (12:00 a.m. AET)
The Fed cut the fed funds to 3.5% and the Bush administration announced agreement on an economic stimulus package including tax rebates for individuals and business incentives for investment in new equipment. With Federal Government debt already at $9 trillion they will have to borrow the money. That fixes the underlying problem about as effectively as three fingers of scotch fix a hangover — or mailing your bank manager a check to settle your overdrawn bank account.
The rally on the S&P 500 and the Dow is typical of a bear market rally: a sharp reaction accompanied by heavy volume. Volume reflects the number of stockholders taking the opportunity to sell down their positions. Be careful of confusing hope with probability: the index is likely to meet resistance at 1400 followed by a sharp reversal.
The FTSE 100 similarly, is likely to test the former primary support level of 6000.
The Shanghai Composite index broke through support at 4800 to join other markets in a primary down-trend.
Ten-year treasury yields have fallen sharply as funds flow from stocks into bonds.
The yield differential recovered as short-term yields fell even faster.
Commercial paper rates fell sharply in response to the rate cut by the Fed. The fall below the new fed funds rate of 3.5% shows that further rate cuts are expected. Three-month treasury bill yields also fell sharply, the continued wide spread warning of further instability in financial markets.
One (short-term) positive aspect is that bank credit continues to grow at above 10 per cent.
Commercial paper markets found some support, with the level stabilizing around $1.8 trillion. Further contraction would squeeze bank credit.
Improve Your Market Timing
Colin Twiggs' weekly review of the global economy will help you identify market risk and improve your timing.
Join our free Trading Diary mailing list with over 140,000 subscribers.
Consumer credit growth remains at a precarious 5 per cent. Further falls would sound a recession warning.
Jonathan Wright's recession prediction model is displayed for academic interest only, having failed to account for the damage caused by a negative yield curve in a low interest rate environment. The model shows probability of a recession (in the next four quarters) as a low 9 percent.
If the government is really bent on protecting the public's
earnings, it should begin at home with the purchasing power of
the dollar............ If any company listed on the Stock
Exchange had engaged in equivalent financial practices, its
directors would be facing prosecution by the SEC.
~ Bernard Baruch: My Own Story.
To understand my approach, please read Technical Analysis & Predictions in About The Trading Diary.