Thursday, August 4, 2011

1998 As a Template For 2011's Market Action (DIA; SPY; VIX)

Always remembering the second* Climateer Investing cannonical law:

"The map is not the territory"
-Alfred Korzybski
"A Non-Aristotelian System and its Necessity for Rigour in Mathematics and Physics" 
presented before the American Mathematical Society December 28, 1931

From Minyanville:
...One analog that I have been carrying around in my files because of the similarities in price structure, market sentiment and macro condition, is 1998. A number of other parallels to 1998 are:

  • The unbridled appetite for risk coming into 2011,
  • The sovereign debt issues in Europe in 2010,
  • The unwinding of a carry trade (yen) both in the beginning of the year and again today, and;
  • The proportions and scale of the move in the gold/silver ratio
As a quick reminder, 1998 was an articulated market environment with considerable strength and momentum in the first third of the year, followed by extreme volatility and rapid market declines in the summer, culminating in a staggering year-end rally. Throughout the year evidence continued to surface of persistent concerns about the Russian banking and financial sectors, culminating in the suspension of payment on sovereign debt issues and the float of the rouble in August of that year. The events were set in motion the previous year by the Asian currency crisis in 1997.

It sounds vaguely familiar to Europe's issues today, except that the European crisis has been contained within the EU itself. I believe to some extent this dynamic will continue to insulate the US markets from the extreme effects of the crisis abroad, although I'm sure there were many that believed the same thing until Long Term Capital Management brought the crisishome  to our markets....
...This is a weekly chart contrasting the two time periods through the SPX and the VIX. The equity declines in 1998 were extreme in the US market because of the Trojan horse that became LTCM.

...If and when the June lows are broken, I believe the next level of support will be found around 1220....MORE
*The first of our cannon laws is:
"The honest politician is one who 
when he is bought, will stay bought." 
-Simon Cameron
26th Secretary of War 
Democrat and Republican (!) Senator from Pennsylvania