Black Monday risk as August ends
Posted on 30 August 2009 with no comments from readersWill there be a sudden plunge on financial markets on Monday as the month of August comes to a close? Markets do seem to be riding for a fall.
Certainly a bout of end of month profit taking can be anticipated after a record rally from the lows of March. It would not take much more logic to conclude that this long rally is also coming to an end and that a renewed plunge in markets is inevitable.
One thing we know for certain about stock markets is that they do not move upwards in a straight line. Therefore after a long run up in prices you can anticipate at the very least a correction of 10-20 per cent.
But these are not normal times. Developed markets are locked in the worst recession in two generations and any ‘recovery’ now evident is more by way of a bottoming out than anything stronger.
Recent trade data is not encouraging. Japanese exports to the US are down 38 per cent. Chinese exports are running 25 per cent down. The Baltic Shipping Index has tumbled again over the past 11 weeks, an ominous repeat of last summer’s collapse.
Stock markets are pricing in a strong recovery that not only looks unlikely, but clearly just is not happening. The Shanghai market has been down up to 20 per cent over the past few weeks. Is this the beginning of a global trend?
It looks very obvious, so much so that I think short positions are advisable. To stay long in stocks and not to hedge at such a time is surely foolish.
September is also a traditionally weak month for stock markets. The worst ever collapse was in September 1931 when the US market fell 30 per cent.
There is the old adage attributed to Keynes that markets can stay irrational longer than the players can stay solvent. But behaving irrationally is also likely to leave you insolvent, and holding long positions after a rally is over makes no sense.
Look at it another way: how much more upside could there be in financial markets versus the downside risk of staying exposed? So sell on Monday!
no Comments posted by readers:
Aug. 31 (Bloomberg) — China’s stocks plunged, with the Shanghai Composite Index falling the most since June 2008, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy.
The benchmark index tumbled 6.7 percent to 2,667.75, capping its biggest monthly loss since October. The gauge has slumped 23 percent from its 15-month high on Aug. 4, entering a bear market. It’s the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.
“The local market bears are convinced that tightening is already underway,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only “a very strong set of macro numbers in August” or “stronger statements from central authorities” would change this trend, Wang said.
I recommend watching hedge fund manager Hugh Hendry’s video report from China.
http://www.youtube.com/watch?v=ektMQGbW3wk
The city he visits in the interior resembles a metropolitan sized Potemkin village, not exactly the investors paradise and economic miracle as so fabled by the financial journalism community.
The trigger for today’s action was a “weekend report that Chinese state-owned companies will be allowed to default on commodity derivative contracts.”
These are the rules of the road in a Communist system.
Dear Peter, with a stock market plunge, do you think we will see the Dollar strenghten against the majors? If the Dollar strenghtens before it too plunges what currencies do you advise holding as a safe haven?
Ed note: Singapore dollar, Canadian dollar
Peter:
Nice commentary today!
Over the past month, US markets have been very weak, although the Dow has recorded a 3% gain, thanks to government manipulation at the end of each “bad day” (they do this by purchasing massive amounts of Dow futures and S&P futures, which drive up the price of that current day’s Dow & S&P (etc.).
But in the final analysis, our government will have a much harder time in keeping the US stock markets up, considering the following:
1. the tight relationship between all financial markets, and
2. Factors external to the US financial markets (e.g. China).
As you and I have been saying on your blog for the past month or so, “how much more upside could there be in financial markets versus the downside risk of staying exposed?”
Two weeks ago, I shorted the US market. In all likelihood, I will add to my short positions over the next 30 days.
Ed note: the markets seem to be behaving rationally today!