* Funnymentals;
So, this credit bubble finally popped. The Fed injected record amounts of cash in 2005 and 2006 to offset the weakness that was growing in the credit markets and the large caps continued to rally. The smart money started to sell into these rallies since Dec 2006. Now, only 5% off from the index highs, there is record amount of new lows, the prices are finally snapping back. It took quite a bit time for the market to come to their senses that the easy credit era was finally over, it was because they had a lot of cash in their hands to burn, not because that cash was growing...
Sometimes an earthquake is an earthquake, not a simple crack on the asphalt. It takes time to rebuild. The way I see it, the monetary environment or the liquidity will not improve before the rates start to come down a bit. The earnings are set to slow down, but I think the situation will probably happen quicker now since the consumer and many corporations will be stressed with the credit conditions even more. There is a possible compounding effect here, even if the current conditions are nearly priced in...
From what I was able to read about the past history, just like every bubble has been driven by the easy credit sponsored by the gov'ts, another one just happened since 1998 during the former Fed Chairman Greenspan's era. This is the aftershocks of the 2000 bubble, they inflated another one immediately with the easy credit and it also popped over the past 12 months, but the last and largest injection of liquidity since 2005 managed to push the markets and convince the majority. It takes time for the crowd to change their perspective...
The best case for this market is a trading range for the next 2 quarters until the investor confidence rebuilds and some sort of liquidity returns to the markets, either by the Fed easing or growing earnings projections into 2008 at some point. The trading range should last until some more visibility emerges about Q4'07 or Q1' 08 earnings. But the Fed is really stuck with the USDX just above 80, so no easing at the moment. The earnings will slow down for a while longer, they will probably do better into 2008 and 2009, especially if the Fed can do something about it.
* Technically;
The long term cycle lows are not point events, we should remember the summer of 2006, especially given the market internals this time. I would think that if another major cycle is bottoming, what we have seen this week was probably the fastest part of the decline, but it should not mark the bottom of it right away given the downside momentum, I would think a slower decline will mark the lows around the middle of August and then only a retest of the lows around Sep or Oct, perhaps a higher low...
There is no catalyst for the upside other than the excess cash that the people might still have in their hands at the moment, so a strong bounce sometime this week is quite likely given the record put buying in the option markets. However, I think the market bounces a bit early next week and declines until the end of the week and bounces stronger instead during the expirations!
So I see that bearing a 1 or 2 day good bounce next week, the downside should still not be over next week, there should be a 10 week long trading range from the lows. If the USDX can improve, I can see the market climbing another wall of worry in winter since the Fed will choose to help for 2008 elections at least, imho. This is really the best case scenario assuming that the damage due to the credit bubble will not be compounded in the months ahead...
* Finally:
So, my question for the bulls is; if you see the market making new highs by the end of 2007, where will the liquidity come from?!?
Good luck,
- kisa
