Asian Market Selloff - Is This the Bottom?

Brian, Any feeling for the bottom? What is interesting is as I talk to business people nationwide; not including selling or buying a house or selling a mortage.
Business is fine. No major layoffs. Are we just having a 20% correction to bring things back to reality?

Jake, I think we are pretty close to the bottom, though Tuesday could be a “limit down” day with a selloff in the Dow of over 500 points. This is what the futures say, and what is happening in Asia right now. We could be in the 11,500 range by tomorrow night, but that may be it.

Here are the indicators I will look for: a big pop in the VIX (which I think we will see tomorrow) to over 35 followed by a gradual reduction in volatility indicating the storm has passed. Looking back, I can see that most bottoms occur about the time the VIX goes below its 20 day moving average for good. You can see that average on a good charting program.

I will also look for the spread between the US Fed Funds rate and the 2 year Treasury to approach 0. Right now, it is almost 2.0, with Fed Funds at 4.25 and the 2 year around 2.50. I bet 2 year approaches 2.0 tomorrow with a panic.

The Fed will have to cut rates before the next meeting and may go 1.0 given the problems with global markets. That would bring the Fed Funds to 3.25. With another cut to 3.0 or even 2.75 in February, the 2 year might strengthen and narrow the gap towards zero. Remember back in 2003 when the bull began, the Fed Funds were at 1.0 and the 2 year was around 2.0 and went on up to 4.0 before the Fed Funds rate followed. A steep yield curve shows a strong economy and likely a bull market.

If the Fed does nothing (hard to imagine), then the bear goes on and 11,000 is not even safe. But for those who have lots of cash (you, but not me), that will just mean better deals. I have about 5% in cash on the sideline and another 10% in the BEARX funds, though that percentage increases every day as my long portfolio shrinks and my bear fund increases. I think this selloff will also show how dangerous Asia and basic materials have become, at least in the short term. Glad I am out of both.