What a well-planned trap bears prepared for bulls! For those people that thought yesterday was the capitulation day, they should have realized they were wrong before the market open this morning. Pretty much all news this morning was negative. Again, the news was mainly focused on the banking sector. Not surprisingly, the market opened sharply lower and continued to trade lower until 11am when Dow was down by almost 250 points. Then short-covering activities pushed the beaten down financial sector and homebuilding sector sharply higher and at around 3pm Dow was off 200 points from its low. Just when some people think we may finally get a “real” capitulation day, the market showed its hand during the final 30 minutes of the session and pushed all three major indexes back to their lowest level of the day. In short, bulls were really disappointed today.
There are a couple of things I’m watching right now to predict whether we have reached the bottom (of course this is based on my current judgement that what we have right now is a correction in the bull market not the start of a bear market). First, we need a day that the market is selling big in heavy volume then being pushed higher with even heavier volume. Ideally, we should get most sectors joining the rally; Second, we need to have a higher VIX level, say somewhere above 35 to indicate most weak hands have sold their positions already; third, we need yen unwinding trading activity to slow down and this is something that didn’t happen today even after Dow rallying for 200 points. As long as the Yen unwinding is going on, traders will be forced to sell risky assets so it means more drop for equities.
So now the question becomes will we get such a time next week? All I can say at this point is maybe. And in the meantime, a hedged position or simply holding cash may not be a bad idea after all.

Another roller-toaster day on Wall Street for this Thursday. Things actually started not too bad in the morning but quickly turned around after Bernanke’s testimony(although I really don’t see anything new from his speech). At 1pm, Dow dropped over 200 points while Nasdaq gave up more than 3%. When it looked like we were going to get another triple-digit down day, a sharp reverse in the financial sector pushed the index quickly higher and all indexes closed pretty much flat except for Nasdaq, which was still down by around 2%. It is certainly feeling like August 16th again and for those following my daily market update, you would remember that I made a judgement call in the morning of August 17th stating that the August 16th low would be the low for that round of correction. But the question is whether we had another capitulation day today? This is much trickier than the previous time. For one thing, the intra-day high of VIX is much lower than that of August 16th, indicating the market is not that panic after all. More importantly, right before August 16th selling off, almost all sectors had been sold off for a while so a rebound was warranted. This time, however, other than housing and financial sectors, most sectors were holding pretty well until yesterday. So it is difficult to see how everything can rebound nicely together (actually this can be seen from today’s action: when the index was bouncing back, they were mostly driven by financials and most tech names didn’t join the party). So my suggestion at this point is get hedged or simply hold cash as both Dow and S&P are near their 200-day moving average level, a rebound or a breakdown from here is equally likely.
One piece of interesting news this morning is the report that BHP was attempting to acquire Rio Tinto and this reminded me of what’s happening during the peak of the Internet bubble when American Online tried to acquire Time Warner. Although I didn’t foresee that the commodity bubble is going to burst right away, we do have some interesting statistics: when AOL announced its plan to acquire Time Warner, the combined market cap of the two companies was close to $300 Billion USD and today the combined market cap of BHP and Rio is actually more than that. During the past 7 years, the combined market cap of the latter has increased by more than 8 folds. Unfortunately for the shareholders of the former; they had lost almost 70% of their investment after the merge. It will be interesting to see whether history will repeat itself this time.

What a bloody day on Wall Street for this Wednesday! The tone was set overnight as US dollar got sharply lower after a Chinese officer talking about preferring strong currencies over weak ones. As expected, both gold price and oil price shot up and at one point, oil price was just a little over $1 below the $100 mark. Although the oil inventory data was a little bearish today, the commodity can easily reach $100 if some geopolitical events happen in the next few days. Financial stocks were weak across the board and several big names including Citigroup and Morgan Stanley have dropped over 20% just in the last 5 sessions. Some smaller names are faring even worse. For example, Washington Mutual dropped over 17% today and now is traded at a level last seen back in 2000. The VIX is back above 26 but still quite far from high reached back in mid August, so it may be a little early to do bottom fishing. Tomorrow will be another interesting day as we are going to get both AIG and Cisco earning results tonight and also the interest rate decision from ECB and Bank of England. On top of that, we are also going to get same store sales numbers from many chain retailers. Fed's chairman Bennake is also going to make some speech and certainly the markets will listen carefully during this turmoil time.

The market has a nice afternoon rally heading into the close. However, the sector performance is widely divided. One analyst downgrade of the retailer sector added more pressure to the already hammered sector while citi's price continued to slide as the stock being downgraded at another brokerage. Google, on the other hand, got a lift from an analyst upgrading the target price. Oil price moved sharply higher after yesterday's drop while gold price continued to move higher and now is within 2.5% to its historical high, which was last seen back in 1980. US dollar index broke a key support level at 76 today and this is cited as main reason behind strong commodity performance. Overnight, Alibaba's IPO in HK closed higher by more than 190% and with a market cap of 25 Billion USD and more than 200 times P/E ratio, it certainly feels like 1999 has returned.

It is certainly not a benign November so far for investors with more than 150 points swing(as for Dow) for each single session. Citi's CEO replacement failed to inspire buyers. The credit market continues to be jittery and all credit spreads have widened noticeably during the past week. Investors certainly are paying heavily for the loosened credit standards during the housing bubble. My concern is the credit problem may be larger than what the Fed chairman has predicted earlier(between 50B - 100B) and in the worst case scenario, it can spread to the whole financial sector and even bring down some institutions. Insurance companies could be the next to write down their holdings(which can be both on-balance-sheet and off-balance-sheet). In short, the market can experience more volatile days for the rest of this year. Oil price dropped by almost $2 today while gold price continued to climb higher. There are some huge selloffs in emerging marekts, especially in Asia and Latin America. Although it's too early to call the top of the emerging market boom, it is certainly not a bad idea to move some chips off the table from those markets.