Thursday, December 13, 2007
Fed Bashing
by David Yu
(9:15 am EST) The DJIA (Dow Jones Industrial Average) dropped 364 points in less than 2 hours following the Fed's 0.25% rate cut announcement on Tuesday afternoon. On Wednesday, the DJIA had an intraday swing of 380 points following the news release of international central banks biggest coordinated effort to infuse more liquidity into world credit markets since September 11, 2001. This gut-wrenching Market Bulimia over the past 2 days apparently ticked off the same Wall Street cheerleading squad that had once kissed the ground Ben Bernanke walked on just a couple of months ago. The most notable critics seem to be the ones who had "predicted" the DJIA to reach 15,000 by year end. Fed bashing is now the remedy for covering up incompetence and ignorance on Wall Street.
The Fed owes no fiduciary duty to Wall Street speculators; it did what it's supposed to and expected to do. The Fed's action might've been the catalyst, and more likely the excuse, for the selloff, but it's not the cause. The market had been set up for the fall way before the FOMC meeting. Last Thursday, I'd alerted you the peculiarity of money flows divergence. I had also brought to your attention my concern over declining trading volume, which, to this "Volumist", was perhaps the most important technical datum.
The rapid descent of trading volume, as indicated by the PVO (Percentage Volume Oscillator) on Chart 1 below, and large amount of cash leaving equity funds and getting swept into money market funds (also see last Thursday's editorial) indicate a general lack of participation from the big guys. The big guys had been sitting on the sideline while small investors pushed the DJIA up more than 1,000 points leading up to the FOMC announcement. This is further evidenced by investor sentiment disparity.
Chart 1
Chart 2 below shows individual investors' sentiment, as indicated by AAII (American Association of Individual Investors) Bullish Index, rose abruptly from extreme bearish of 25.6% in the beginning of December to 40.7% last week while the Market Vane Bullish Consensus Index, which surveyed professional future traders, remained within neutral range of 50%-60%. This sentiment disparity indicates that individual investors were somehow led to believe that the worst was over while the professionals were still undecided.
Chart 2
Only a few moments before the opening bell... Let's quickly go over some of my proprietary indicators.
Chart 3 below is my composite intraday market breadth performance indicator; it's 20-day SMA (Simple Moving Average) had just crossed below the 50-day SMA. Last time this happened was in mid July, when the market topped out. But this is nothing compares to Nasdaq's demise.
Chart 3
The Nasdaq Intraday Market Breadth Performance Index (Chart 4 below) had deteriorated to an alarming level. Not only that the 20-day SMA had already crossed below the 50-day SMA on 12/5/2007, but it had also sunken, like a ton of bricks, to almost zero. I'll find time to elaborate on this later.
Chart 4
And, finally, the fast line (red line on Chart 5 below) of my intraday composite technical indicators index had also just crossed below the blue slow line and headed lower.
Chart 5
And, that's all the time I've got for now.
I'll write more this weekend. Have a wonderful week!!!
email: dyuguard-2@yahoo.com