by Ben Bauer

The important line in the sand is the 200 day moving average in bonds.

If this breaks then we will see pricing improve.  But until then locking at the 200 day moving average is prudent as it is a very, very tough resistance line.  The main reason is because if the market goes above it then this will signal a major trend shift (See charts below).  Stocks are popping in a relief rally after 4 days of brutal losses, this is not unexpected as this is a pretty standard pattern when we get a large loss.

If we break above, then it signals a major trend shift. This is why the battle at the 200 day moving average is so brutal between the market bulls and market bears.

The question is; is it over? In my view I think this is a long term correction playing out that will not take days or weeks, but months. This started last October in the very first phase. Market corrections do not happen overnight, they are long term events. A good friend of my sent this to a client yesterday and thought it might be useful as a comparison to the process leading up to the 2008/09 crash. Although, I think we are in Phase 2 of the below. Also, it is important to note that not all corrections happen the same way, this is more of an example.

1. S&P 1552.50 – 1433.06 (7/13/2007 – 8/3/2007) PHASE 1 ——-> We’re probably here.

2. S&P 1561.80 – 1288.14 (10/12/2007- 3/14/2008) PHASE 2

3. S&P 1425 – 1242 (5/16/2008 – 7/11/2008) PHASE 3

4. S&P Flat line (7/11/2008 – 9/16/2008) Capitulation (no more buying but no selling)

5. S&P PANIC ! – 9/16/2008 – 03/13/2009 – Exhaustion (time to buy)

Yesterday Chinese market was down once again in what can only be described as a 1929 panic type of sell off for their market (see chart below). The Central bank cut rates and reserve requirements by .25 and .5%, which in the big picture in nothing in the size really needed. This is one of the main reasons our market is up today, along with some relief buying.

What could change these markets? Well, I think China doing QE would give a pop to the markets and there is a good chance they could start QE given the recent free fall in markets.

In other news, two Fed officials came out yesterday and both said rate hikes were appropriate this year. It seems the Fed really wants to raise rates, even in the face of 1500 point market loss. I think many Fed officials what to stop the trend of the tail wagging the dog as the market has pretty much led the Fed in their policy. If the Fed does raise rates it will impact the 1, 3 and 5 year notes but have a nominal impact on to 10, and 30 year notes. So in other words, the short term loan rates will go up, while long term will likely not move. I think the fed will be forced to take any rate hike back in the near future (6 to 8 months) if they do in fact hike.

How does all of this impact housing prices and buyer activity. Well, buyers seem to be pretty pensive these days and yesterday I had two antidotal events about how this could impact Real Estate activity. I had one new buyer (just reach out last week to me) tell me that he wanted to hold off. I had two other buyers (bothers buying a duplex each from same owner) say they were going back to the seller to ask for an 8% (50k) concession. Now these are only two recent events but I think if we continue to see heavy volatility in the equity markets it will cause buyers to be more discerning.

There are several charts I look at over time. One is High Yield Credit or what is known as junk bonds. These are bonds that companies with weak balance sheets and income statements take out. Think of it as subprime for companies. Many investors has gone into High Yield in search of a return, which has driven down interest rates in these markets. Meaning subprime companies have been getting prime interest rates. You can also see that High Yield credit usually has a strong correlation with stock prices. Well as you can see there has been a large divergence over the past 3 years. What happens if these do in fact converge once again?

Now if central banks go into panic mode once again and start printing money again in a coordinated effort all of this changes.