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Trend Watch:A healthy correction or an important inflexion point?

The big news this week was a Volcker Rule and how it would affect Wallstreet:

FOR MONTHS, former Federal Reserve chairman Paul Volcker has been advocating a far-reaching repair plan for Wall Street: to re-draw the line between commercial and investment banking. Since the repeal of the New Deal-era Glass-Steagall Act in 2000 (and even, to a large extent, before that) deposit-taking institutions have been allowed to make money not only the old-fashioned way — lending it out at interest — but also by running hedge funds and other speculative means. Mr. Volcker argued that, since their deposits are federally insured, the big banks were enabled to take bigger risks for which the taxpayers would ultimately take the hit. He insisted that this incentive structure was not only unfair but also at the root of the current crisis. Correcting it, he argued, is the key to preventing future crises.

For months, Mr. Volcker’s ideas made no impact on Obama administration policy. Both the administration’s regulatory reform proposal and the House bill based on it took a different approach to “too big to fail”: namely to raise capital requirements, set up a prospective government bailout mechanism and empower systemic risk monitors. Then Republican Scott Brown won the Senate race in Massachusetts. Two days later, Mr. Obama embraced both Mr. Volcker and his concept, and he even christened it “the Volcker Rule.” No doubt, the embattled president likes the populist resonance of a plan to “break up” Wall Street. But what about the policy merits?

In hindsight, the U.S. financial sector systematically underpriced risk of all kinds. One reason for this — though hardly the only one — was the perception, rooted in reality, that certain enterprises were “too big to fail.” Under the Volcker Rule, only less-risky commercial banks would in theory enjoy that status. Investment banks, hedge funds and private equity firms would be on their own, subject to market discipline in both good times and bad. Voilà: clear signals to the market.

It’s an attractive concept. Alas, the hastily unveiled administration proposal was light on detail. How, exactly, to draw the line between financial operations safe enough for commercial banks and those that are not safe enough? Will a U.S. Volcker Rule drive more banking business to lightly regulated financial centers in other countries? It is not clear that the Volcker Rule would have prevented the current financial crisis, which began with the collapse of a pure investment bank, Lehman Brothers — which many now say should have been rescued. Two non-commercial banks, Bear Stearns and AIG, did get rescued; their interconnection with other institutions, not size alone, frightened the government into saving them.

The buildup of government-backed risk in Fannie Mae and Freddie Mac — both based in Washington, not Manhattan — arguably did the most to inflate the mortgage bubble in the first place. Would the president’s proposal apply to them?

Still, Mr. Volcker is right that, more than almost anything else, the financial system needs clarity as to the roles and permissible risk profiles of its component institutions. There is a fighting chance that the Volcker Rule’s ambiguities can be ironed out in the debate to come. The president has injected a useful element into the debate. If we have Scott Brown to thank for that, so be it.

Perhaps due to this, Wallstreet and the world stock market went on 3 day losing street, correcting almost 6%. Its been a long time since March 2009 that we have seen such a scale of correction. The question on people’s mind is whether this is the signal for a healthy correction or have the market marked an important top?

SPY Weekly Chart

Since Oct-Nov i have been talking about long term negative divergence and the need to successfully challenge their fibonacci resistance. Perhaps, on a 5 year chart, you really dunno when the break is gonna come. The way i see it, still too early to tell anything.

I am starting to think Fibonacci Retracements are useful as support and resistance. Here you would see that the 1170 region in the S&P 500 was not breached. The next support should be around 1030 on the S&P 500. And the next long term support is at the 850 region!

MACD on the long term charts are beginning to go in a corrective mood.

EEM Weekly Chart

Almost all country ETF charts shows a rising wedge pattern and we should be looking at another 5% fall on the EEM to an important support at the blue line which is the 50 EMA.

EWS Weekly Chart

Here is a chart on MSCI Singapore ETF. Similarily, the 50% retracement for the long term fibonacci coincides with that of the 50 EMA. This could be an important region. another 5% drop?


So in view of these price movements what is likely to be my cause of actions?

  1. There are some positions that i have for a long time that were bad decisions. They have since recover a fair bit. I will sell those positions and consolidate.
  2. Surprisingly, My new defensive positions in SingPost and M1 are chionging on a down day. That is a difficult decision. Likely i will take profit on them in the hope that i can buy them back cheaper. I am buying in for yield for such positions so the more they drop the better yield i get. My only worry is that they don’t drop. I made a decision for these defensive stocks to watch certain long term moving average readings that if it violates them, I would move to cash rather than hold them. In deflationary conditions, even defensive stocks get killed. You just have more time to make decisions. The risk of all this is that i run big trading cost.
  3. There are still 2 open positions, AREIT and SUNTEC. I closed Rotary and SembCorp on Thursday (luckily). I should be closing them. Hope i am still profitable for AREIT.
  4. Areas to watch are the supports. I hold the believe that should the 1970s situation happens, and the market move sideways, it will prove difficult for us to identify such a choppy market. The other likely scenario is that the market just drop past the March lows. I will likely make my decision to position on SDS when the fight starts at the support below.

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