Further Bear Market Signals

By Colin Twiggs
January 17, 2008 3:00 a.m. ET (7:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use.

Stock Markets

The FTSE 100 crossed below primary support at 6000, joining the Dow and S&P 500 in a primary down-trend — further confirmation of a bear market.

ftse 100 crosses below support at 6000

The Shanghai Composite index recovered from a secondary correction, but has now encountered resistance at 5500. A fall below 5200 would be bearish, while reversal below 4800 would signal the start of a primary down-trend.

shanghai composite index encounters resistance at 5500

Treasury Yields

Ten-year treasury yields broke support at 4.0% in anticipation of further rate cuts.

Vertical lines in 2000/2001 mark the last official recession and follow shortly after the yield differential (10-year minus 3-month treasury yields) dipped below zero. There is a significant lag after the negative yield curve in 2007, however, as banks resorted to off-balance sheet SIVs to avoid the credit squeeze — creating a greater lag and, quite likely, a more severe backlash.

10 year treasury yields and yield differential with 3 month treasury bills

Financial Markets

Commercial paper rates are falling sharply in anticipation of further rate cuts by the Fed. Three-month treasury bill yields have found support at 3.00%, indicating return of a measure of stability to financial markets.

commercial paper rates compared to federal funds rate and treasury bills

Bank Credit

Bank credit growth is maintaining at above 10 percent, with commercial & industrial finance compensating for the slow-down in real estate.

bank credit growth

In the gray market, asset-backed paper remains out of favor and a surge in financial sector issues has been necessary to make up the shortfall. Further contraction would squeeze bank credit.

commercial paper outstanding balances

Consumer Credit

Consumer credit growth remains at a precarious 5 per cent. Further falls would sound a recession warning.

consumer credit growth

I believe that Jonathan Wright's recession prediction model is discredited, having failed to account for the damage caused by a negative yield curve in a low interest rate environment. The model is displayed for academic interest only and shows probability of a recession (in the next four quarters) at a low 10 percent.

wright's recession prediction model

During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them have done away with the need for character in the individual or the ability to think.

~ Bernard Baruch:
My Own Story.

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