WHERE TO NOW?

Gong Xi Fa Cai! The Year of the Rat should usher in element of water, which we really need now to temper the extreme volatility from the Year of the Pig. And what a roller coaster January has been! We’ve had our worst January since the 1960s (with the first 5 day declines matching the meltdown in the 1930s), and France’s Societe Generale suffering over US$7 billion (that’s about 3.5 billion pounds) in losses attributed to a single rogue trader. (who can blame him for taking long positions on the market? Weren’t we supposed to have January effect, by the way?). In contrast, Nick Leeson only cost Barings banks a “pittance” 800 million pounds. The Fed quickly came to the rescue, lowering interest rates by 1.25 percent in a week. But was the Fed a little bit to late to stem the tide of negativity pervading the markets? Will we have a crash this time round? (defined as a market going down by 37% and above……Amazingly, during the granddaddy of all crashes in 1932, the market went down by 86% and didn’t recover until 22 years later! I’m sure we won’t have that this time round).

The Dow has been struggling of late (not unexpected since we've rallied 1,000 pts off the lows) and hit resistance at its monthly uptrending line (which used to be support but which now functions as resistance). After being repelled at this level on Monday (4th February 2008), the Dow subsequently went down 370 points the following day the weak ISM service numbers. This number, which printed below 50, follows hot on the heels of a negative Non-Farm Payrolls number, and probably provides redemption for the analysts who have been saying that the USA is already in recession. A recession in the USA, will of course, slow down everyone else in the world and temper the demand for commodities. (I obviously don’t believe in decoupling, although the Australian economy is proving everyone wrong – this is in the next posting). The S&P meanwhile looks like its locked into a range from 1400 to 1265, with mild support at 131. If the range persists, using options for Credit Spreads look a good bet (Make sure you use PUTS on Calendars to be positive Vega and negative Gamma, should volatilities rise).
(Click in Picture to enlarge)

What’s the good news in all of this? The forex fundamentals are showing a probable near term turnaround. This means capitulation in the markets, and a quick (albeit short term) and sharp rebound to the upside. Either way, it’s time to have our guard up – because MONEY CAN AND WILL BE MADE!

P/S-I just read the Feng Shui analysis by Joey Yap during the weekend. He expects the market to go up early in the year, but to face headwinds in August. Seems like last year, doesn't it? I'm laying low, using interest to generate income, since the the Rat is not kind to Horses....

Chief Shook