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Tuesday, August 09, 2011 3:29 AM

More Overnight Intervention; Bear Market Vacuums and Heroin Rallies; Is the World Saved?

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Equity futures are ripping in early morning action following an equity market reversal in Asia Pacific.

  • Australia was down 4.7% and finished up close to 1%.
  • Hong Kong was down 7.35% and finished down 2.57%.
  • China closed flat after being down close to 4%.
  • South Korea was down over 8% and closed down 3.64%
  • Taiwan was down nearly 5% and closed down .79%

There was more red than green but the reversal off the lows was huge.

As I type S&P 500 futures are +27 after being down as much as 35. They have been going vertical for 2 hours.

Government Bonds

  • US Treasuries yields are up a bit across the board and yields in Europe are falling.
  • Spain 10-year bonds are down 15 basis points to 5.01%
  • Italy 10-year bonds are down 13 basis point to 5.16%

Taiwan, South Korea Intervene in Equity Markets

Bloomberg reports Taiwan, South Korea Stock Slump Prompts State Buying, Increased Scrutiny
A stock-market slump that dragged Taiwan and South Korea’s benchmark indexes 20 percent below their highs prompted state-run funds to buy equities and Korean regulators to bolster scrutiny of trading activities. Benchmark indexes narrowed earlier declines.

South Korea’s Financial Supervisory Service said it will monitor short selling and whether brokerages are following trading rules.

The South Korean gauge has plunged 19 percent from its May 2 record, having lost as much as 24 percent. It slumped 3.2 percent to 1,810.51 as of 2:48 p.m. in Seoul, having tumbled 9.9 percent earlier.

“We have taken actions yesterday and this morning,” Taiwan’s Yang said by phone from Taipei today. The four funds controlled by the government are the labor insurance fund, labor pension fund, civil-servant pension fund and postal fund.

Korea Teachers Pension, which manages about 9.5 trillion won, plans to buy more stocks if prices fall further, Chief Investment Officer Lee Yun Kyu said by phone today. Korea Teachers has room to invest 300 billion won for the rest of the year, he said.

“I think we’re now at a bottom,” Lee said. “It was really a broad-based sell-off so that we plan to add evenly across sectors.”
Notice how pension funds are aggressively targeting a bottom already.

S&P 500 Futures - 30 Minute Chart

The bulk of the move happened in exactly 2 hours. Each candle is 30 minutes.

Action is so fast that by the time one captures and edits a screen, price data has changed substantially. In the length of time it took to type that sentence, futures fell about 8 points.

There is no associated news that I can find.

Is the World Saved?

In a word: No. We do not know yet where futures open. Indications now are it will be green after being hugely in the red. Regardless, this is typical bear market behavior.

The fastest and most furious rallies are short-covering rallies in bear markets. We saw many of them in Autumn of 2008.

Bear Market Vacuums

Intervention is not calming, it is disruptive. Intervention puts distrust in markets by sending false signals.

Intervention may seem to work for a while but when it stops working and all the shorts are pushed out, a vacuum exists below. The buyer of last resort then becomes the buyer of only resort, or as we saw with Fannie Mae and many equities in 2008, after the Fed drove out the shorts, there were essentially no bids at all.

Flashback August 18, 2008: Fannie, Freddie Bailout To Wipe Out Equity Holders
Fannie Mae Daily Chart

click on chart for sharper image

Fannie Mae (FNM) nearly tripled in 5 days but has now given every cent back. A new 52 week low was recorded today at $6.47. Freddie Mac (FRE) is back under $5. So much for blatant manipulation efforts.
I do not recall now what action the Fed or SEC took to initiate that rally, but it was fast, furious, and failed. Manipulations always fail sooner or later. That one only took 5 days to start to fail, and a month to complete the job.

Pure Heroin

The latest Greek bailout lasted 3 days before the ECB went for an injection of pure heroin straight into the European bond market veins, hoping to calm the bond markets. For two days now it has. However, one thing we know about heroin is that each dose must be progressively larger to deliver the same high.

By the way, as I type now, in a single 30 minute candle while working on this post, S&P futures are +2. Poof, in a matter of minutes futures dropped 35 points from a high of 1148 to 1113.

This my friends is not normal action and it is going to spook investors in a major way. In edit, and with this sentence I have finished for the evening, S&P futures are now down 9. This is quite amazing action. Has intervention failed already?

Mike "Mish" Shedlock
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