Why market mass selloff?

In general, market always goes up because people are working hard and business and industry support a lot of innovations to compete each others locally or globally. Nobody wants market to go down that is why our world is developing so much compared to the last century.

However, market frequently goes down due to

1. Mismanagement in politics.

2. Mismanagement in financial institution including banks, federal reserve, and credit rating agencies.

3. Mismanagement in business likes Lehman brothers.

4. Fraud in business likes Bear stearns.

5. Systematic manipulation by the greedy company such as greedy hedge fund.

6. Lack of required regulations.

7. Excessive regulations.
Dodd–Frank Wall Street Reform and Consumer Protection Act stabilizes the market initially. However, business can’t growth in America because of that law. In fact business have to move elsewhere that generate more unemployment. For example, Apple have many great innovation recently however they manufacture the innovative  product in Japan, the Philippines and China. Excessive regulations has made it too expensive to manufacture anything domestically.

8. More liberal agencies on excessive spending.

9. Unnecessary war like Libya.
Cost of Libya Intervention $600 Million for First Week, Pentagon Says

10. Excessive spending for majority of people to get votes

In fact, the combination of trigger needs to have sell off.

1. Combination of negative news such as Europe credit problems, US debt problems, S&P credit downgrade news.
Coming up: more bad news on Student loan debt grows, Consumer Credit Card Debt grows and so on.

2. Most of the TV station needs high rating in order to survive in the market. In fact, they like more bad news because bad news get more attention for viewers. That is also true for periodicals and comedians. In fact, they try to fire more bad news and bad news comment as well as bad speculations. Actually, they are no more than greedy businesses.

In this August selloff, US Public Pension Funds Lose Billions. According to the Huffingtonpost

• California’s main public-employee pension fund, the nation’s largest, has lost at least $18 billion off

• Florida’s pension fund has lost about $9 billion since June 30

• Kentucky, which has more than $20 billion in unfunded pension liabilities

Actually, those losses are penny compared to the Rich lost.

That is known as FEAR not normal market correction however this processes will be happened again and again. Selloff is de-risking from the market due to uncertainty. However, after Selloff, investors face another risk called currency risk because US dollar is fallen apart. In fact, most of the assets transform to Gold and US treasury which was just downgraded to AA+.

Recession or the Great Correction

Due to the uncertainty in US, Global Investors panic in market and fear of recession. China Shanghai Composite is already corrected 20% as of August 08, 2011. China and Japan already lost approximately 10 billion US$ each in treasury in one day. In the mean time, Economists keep saying “Don’t Panic and Keep on Fundamental”.

China-Shanghai-Composite-August-08-2011

Dow is already corrected 12.5% and there is also more room to correct up to 20%. We hope not.

Dow-August-08-2011

This could be the great correction and opportunity to enter the market based on your controlled risk. When to enter the market is based on your own judgment! It should be noted that wealth can only be created at the market downtime. Opportunity is now knocking. According to the graphs below, US is nowhere near recession.

Treasury Spread: 10 yr bond rate-3 month bill rate

[http://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdf]

Estimated Recession Probabilities for Probit Model

[Ref: http://www.ny.frb.org/research/current_issues/ci2-7.pdf]

Gold as a global reserve currency!

China calls for a new global reserve currency. Xinhua wrote “stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” recently. Actually, China is just playing politics as usual. Their goal is to knock down America as the superpower status.

Anyway… somebody forget something here that Gold has been acting as a global reserve currency for many years whether you’d agree or not. Gold is not only commodity but also new global reserve currency unofficially. This is a reason, many Governments buy gold regularly. If not, why do they want to keep it in the Vault.

“

The-Bank-of-England-Gold-Vault http://www.puregold24k.com/blog/?p=4

	Gold (tonnes)
European Union	10,792.6
United States	8,133.5
Germany	3,401.0
IMF	2,846.7
Italy	2,451.8
France	3,401.0
China	2,435.4
Switzerland	1,040.1
Russia	775.2
Japan	765.2

[Ref: http://en.wikipedia.org/wiki/Gold_reserve]

If the leverage is not allowed in trading, Gold is very solid. Gold can’t be printed or duplicated it as much as Government wants. That’s why Politicians really hate Gold as global reserve currency.

Gold Price after S&P downgrades US credit rating to AA+ (August 8, 2011)

If Dodd-Frank Act doesn’t prohibits Gold and Silver FX Trading, the Gold price could have been reached 2,000+ US$ by now.

It’s simple that just defined the entire price in term of Gold such as Oil price in term of Gold in how many ounces. In fact, most of the product prices in term of Gold price will be extremely stable forever. Then you have to convert Gold price with your local currency. The good thing is that the price only depends on your responsibility.

Now, the status is Dollar Will lose as a global reserve currency anytime soon.

Market Interaction

The Dow Jones industrial average was down more than 500 points on August 8, 2011. Its bear market time for both Equity and Commodity.

All average down as follows (August 8, 2011):

US Market

DOW JONES INDUS. AVG	11,383.70	-512.76	-4.31%
S&P 500 INDEX	1,200.07	- 60.27	-4.78%
NASDAQ COMPOSITE INDEX	2,556.39	-136.68	-5.08%
AVERAGE			-4.7%

In terms of lost, the drop trimmed about $800 billion(Total point down – 709.71), as measured by the Wilshire 5000 Total Market Index.

European Market

FTSE 100 INDEX	5,393.14	-191.37	-3.43%
CAC 40 INDEX	3,320.35	-134.59	-3.90%
DAX INDEX	6,414.76	-225.83	-3.40%
AVERAGE			-3.57%

(CLOSED BEFORE DOW SINK TO 500 POINTS)

Asia-Pacific Market

NIKKEI 225	9,318.65	-340.53	-3.53%
HANG SENG INDEX	20,844.60	-1,040.15	-4.75%
S&P/ASX 200 INDEX	4,108.70	-167.80	-3.92%
AVERAGE			-4.06%

(STILL TRADING on August 9th) [Ref:http://www.bloomberg.com/markets/stocks/world-indexes/]

Due to some unpleasant triggers (that can be speculated by so called experts), Fund or index A sell the equity. As a consequence, the program automatically sell Fund B and C. The similar is true for Fund B and C as well as shown in figure. Imagines millions of diversified funds sell each other globally within a second. As a result we have a downfall on Equity trading. That downfall on Equity trading can be stopped by one good news for the next cycle.

If there are more bad news instead of good news in the following day, there will be more downfall. If there is no intervention by any means, the Equity will be plunged. In fact, it’s similar to Domino Action. Now, we are waiting for the last Domino chip to resist the sell-off.  Bank Interventions may be somewhat related to the market interaction.

The similar is also true for reverse interaction. One good news trigger buy signal and the consequence will follow.

It is the effect of IT globalization or diversification in Equity market. If downfall continue, there is no safe haven exist even Gold price can be dropped as seen on August 8th sell-off.

Circle of Fear

Then, the market becomes over sold as a result of sell-off, the opportunity to buy the market again. Of course, the risk and reward always exist that is why we have rich and poor do exist.

List of Speculation:

1. US Debt Ceiling Debate. [Actually it was over long time ago]

2. U.S. economic data has worsened. [That is also not news since President Obama took office]

3. Investors there are worried about increasing debt problems in Italy and Spain. [That also exist for a long time ago, not yesterday]

4. Some investors also were selling to protect their portfolios before Friday’s monthly announcement of unemployment data. [That is a speculation. What if unemployment data goes down a bit]
(http://www.yousaytoo.com/dow-jones-today-august-4-2011-down-more-than-400-points/952895)

5. News on the rating downgraded by Moody’s and others.

6. Bank Intervention by Swiss, Japan and BOA instead of central banks monetary easing policy.

7. Concern on the CBOE’s fear indicator

8. U.S. Consumer Confidence Drops to Minus 47.6 in Bloomberg Index on Economy. [Ref:http://www.bloomberg.com/news/2011-08-04/u-s-consumer-confidence-drops-to-minus-47-6-in-bloomberg-index-on-economy.html]

9. US Economic Uncertainty.

10. All of the above.

Yen Intervention

Speculation of Yen Intervention had been carried out for a few weeks in CNBC and Bloomberg Television.  Many currency strategists have been guessing incorrectly recently. In fact, it will be a deadly guess. Some guru said “I don’t think Japan will intervene.” on national Television recently.

Today is the day we are waiting for. As we mentioned before, the movement of politicians are very predictable. (Read: Make Profit from the News)

Similar Graph for Gold in term of Yen,

The graph of USD/JPY pair compare to EUR/GBP pair at the same period, where there is no movement at all.

Japan last intervened to stem the yen in the aftermath of the March earthquake is shown below. (compare to today movement)

It is not silly that “believe in rumors, don’t ignore speculation, all you have to do is collect the profit and take vacation.”

It it very cool to see the initial and extended intervention.

Make Profit from the News

Politics is one of the influential factors on economic.

Huffington Post reported that on Monday “President Barack Obama and Republican congressional leaders reached historic agreement Sunday night on a compromise to permit vital U.S. borrowing by the Treasury in exchange for more than $2 trillion in long-term spending cuts.”

US doesn’t solve any debt problem because 2 trillion cut on 10 years is just a peanut. It will be cut only 200 billion$ a year. It doesn’t matter it is a Peanut or Walnut, after the announcement

Kospi	up 1.8%
Nikkie	up 1.8%
ASX	up 2.0%
Dow Future .	up 1.4%
S&P Future	up 1.2%
US Bond	up 1.3%

Dow Future, August 01,2011

In general, Dow Future up about 150. Dow already makes 150 billion US$ profit in 1 second based on news that US is probably going to cut 200 billion a year for 10 year which is of course a really peanut. I hope that average people can understand how Political news influence on Economy. Most of the political news are predictable. We hope that you are able to make profit from the news. Similarly, it is also true that AUD/JPY responses up 150 pip on this news in 1 second.

AUD/JPY August 01,2011

The game has not been over yet. Congress needs to approve that agreement. If something gets wrong there will be another opportunity to make profit. Just Keep Your Eyes Open. After all, Profit is not a bad word unless you believe in liberal agenda.

Different starting data points for FOREX

Most of the FOREX traders watch both Bloomberg TV and CNBC TV for the latest news and valuable information daily. I found out that their FOREX up & down signals and data are different even tho current quotes are the same.

Please attention on EUR/USD pair:

Forex Data from OANDA Live Platform vs Bloomberg TV Live

Bloomberg TV shows positive sign on EUR/USD at this instance.

Forex Data from OANDA Live Platform vs CNBC TV Live

CNBC TV shows negative sign on EUR/USD at this instance.

It seems to me that Bloomberg FOREX data is consistent with OANDA FOREX trading platform. This detailed information may not be important for other people except for FOREX day traders.