Here’s the Treasury Eurodollar spread again (Bloomberg):
And here is the VIX (Yahoo! Finance):
It is rare, to say the least, to see these warnings lights stay on for more than a day or two, and these levels are unprecidented in the crisis.
To crash or not to crash?
Short-term timing is the hardest part of trading. Sometimes you are offered opportunities with a 90% certainty of a payout (such as an overextended multi-week rally in a bear market), and sometimes it is a complete toss-up. To preserve your batting average, it is essential to go neutral for your time horizon if you don’t have a high degree of certainty. You don’t have to swing every time.
It will be very interesting how the markets resolve over the next few business days after the bailout becomes law. I made the call for an historic bear market and depression more than a year ago, and things are playing out so far without surprises, other than the rapidity of the government’s reflation attempts (which have been fully expected and will only worsen matters). It was a simple matter to see that the credit bubble would burst and drag down asset prices. It is also plain as day that the US equity market’s fall is not even a third over in value or duration. What is uncertain is the timing of the rallies and mini-panics that will continue to comprise the bear market.
Last Friday I noted the freeze in the credit markets and said that a crash (in my mind, roughly a 20% loss in a few weeks, punctuated by days like this Monday) was highly probable. Even though the market let out a lot of steam on Monday, it might have built it back up on Tuesday.
A major crash from here would still not surprise me, but neither would a multi-week or even multi-month rally. I have detected a lot of bearishness lately from people who were slow to catch on to the situation, and this makes me wonder if we have seen our sell-off for now. The market, of course, does the opposite of what the majority expect. Maybe the majority thinks that there will be a big rally after the bailout, or maybe they have finally become sensibly cynical.
At any rate, I will be selling any rally and covering shorts in any plunge, because after a plunge always comes a rally, especially at this early stage of a bear market.