Sunday, March 16, 2008

Records are made to be broken

By now, a Friday swoon is all but de rigueur, nonetheless, the speed with with Bear Stearns found itself in trouble was astounding. The WSJ had an excellent report on this. Looking at archives for this blog, I found this post I wrote on Bear right after the New Century debacle. Soon after writing I thought I was being too harsh, little did I know how much it would have fallen! I was shorting BSC then, at around 150 if my memory serves. All I can say is that I wish I kept those shorts!

A couple of days ago, I pointed out the record CBOE equity put/call ratio. Well, records are meant to be broken and this one stood for only a week. A new high of 1.16 (meaning 1.16 equity puts for call was traded) was reached on Friday.

Concurrently, the VIX spiked up and closed at 31.16 on Friday.

Contrarian thinking would say that we are at or near an intermediate bottom. Many market historians point to major bank failures as signs of a market bottom. The situation at Bear probably qualifis as a modern version of a bank failure, not to mention the rumor that UBS may also be in a similarly unenviable position. By my EW count, we're in the final stage of this down leg, although there are alternative (read: more bearish) scenarios. Personally, I'm considering buying some calls on GS this week to play for a bounce with defined downside. I'll mention one more thing: if we're indeed at or near an intermediate bottom, the already considerable reputation of Martin Armstrong (see graph of Armstrong cycle here) will most certainly grow to legendary proportions.

Since gold touched $1000/oz on Friday, PMs merit a mention here. The FOMC meeting is the major event next week, with the futures currently pointing to an even probability between a cut of 50 and 75 bps. I'm leaning towards 75 bps especially if we witness another "run on the bank". Recall that for the last FOMC meeting on Jan 30, the question was whether the cut would be 25 or 50 bps. After Ben and company delivered 50 bps, PMs saw a temporary spike that quickly fizzled. I'll be watching out for a similar scenario this time around.