Orange Seeks to Invest in Bitcoin Startups

Edward John Gerety IIIOrange SA is looking to invest in bitcoin startups in the coming months, making it one of the first big international phone carriers to become interested in the technology behind the digital currency.

“There’s something intriguing in this technology, so we want to be there as early as possible,” said Georges Nahon, chief executive officer of Orange Silicon Valley, a division of the Paris-based company. “This could be a digital platform of the future,”

While bitcoin’s price has almost dropped in half in the past year and the prospects of the digital currency are uncertain, its underlying software is attracting investors. The technology can be tweaked to record changes in ownership of any asset in a public ledger using a distributed network of computers, and could help facilitate transactions at businesses like carriers, banks, stock exchanges or insurance providers.

The bitcoin blockchain technology, as it is called, could be used to cheaply transfer money between different countries, Nahon said. Like other carriers, Orange is building up its mobile-payment business as more people use their smartphones to make purchases or transfers. Orange already has more than 12 million users for its money transfer service Orange Money in Africa and the Middle East, and is looking to expand the business.

Chatting up Start-ups

Orange Silicon Valley has been holding bitcoin events at its offices in San Francisco and is talking to two bitcoin companies, Nahon said. The group can invest $20,000 per startup and is part of global team that can spend up to 3 million euros ($3.2 million) per company.

The carrier recently expanded its venture-capital effort with the creation of Orange Digital Ventures. The goal is to have supported 500 startups worldwide by 2020, Orange said in March.

“Even though we have a large internal R&D organization, given the pace of innovation we need to compliment our own initiatives and projects with what the outside world is doing,” Nahon said.

Bitcoin venture-capital investments hit an all-time quarterly high of $233.95 million in the first quarter, according to researcher CB Insights.

Google Ventures and venture arms of several other large tech companies have made investments in bitcoin-related startups. Even the biggest U.S. stock exchange operators are taking steps to embrace bitcoin. This year Nasdaq OMX Group Inc. licensed its technology to a bitcoin trading company, while the New York Stock Exchange invested in bitcoin startup Coinbase.

While telecommunications companies have mostly stayed on the sidelines, several have begun to dabble in bitcoin. Perseus Telecom, which provides high-speed global connectivity services for traders, announced it would begin supporting bitcoin trading. Dish Network Corp. began accepting bitcoin payments last year.

What is Hallowing out the US Middle Class?

Edward Tj GeretyPerhaps the biggest question in American political economy right now is why middle-class wages have been falling. There are three main hypotheses. Roughly, these are: Robots, unions and China.

The robots theory gets by far the most play in the news media, since it’s by far the scariest — if automation is replacing big chunks of the human workforce, things are only going to get worse as robots become more capable and efficient. This interpretation has tentatively been embraced by many on the political right, since it doesn’t imply a need for substantial government intervention in the economy (though it might imply a need for redistribution). The unions theory is favored by the political left, since it implies that giving more institutional power to this traditional liberal power bloc would shift the distribution of national income toward workers.

Neither side really wants to blame China. The right generally represents business interests and capital owners who have made a lot of money off of China, and hope to make a lot more. The left is afraid to go against the free-trade orthodoxy that has dominated postwar American economic thinking, and also fears a potential cold war with China.

But there’s just one problem: The evidence may point to least favored answer being the right one.

A new National Bureau of Economic Research paper by economists Avraham Ebenstein, Ann Harrison and Margaret McMillan examines the impact of offshoring to China. They compare industries and occupations based on their exposure to Chinese offshoring after China’s accession to the World Trade Organization in 2001. They find that when exposure is greater, wage declines are much bigger. They also find that competition from Chinese imports affects wages, but to a much smaller degree.

Another paper, by economists Michael Elsby, Bart Hobijn and Aysegul Sahin looks at the China story from a different angle. They ask why the share of income going to labor has decreased in the U. S. They examine two variants of the robots story and also the unions story, and find that these explain only a small part of the decline in the labor share. But when they look at industries exposed to imports, they find that import competition is responsible for most of the variation in the payroll share of value added. Our biggest new source of imports, of course, has been China.

And then there is the famous 2013 paper by economists David Autor, David Dorn and Gordon Hanson, entitled “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” They compare areas of the U.S. based on how exposed they were to Chinese import competition from 1990 to 2007. Their abstract states their conclusion in no uncertain terms:

Rising imports cause higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import competing manufacturing industries…[I]mport competition explains one-quarter of the contemporaneous aggregate decline in US manufacturing employment.

In other words, there is a growing body of research showing that globalization — and, in particular, the rise of China — has been the biggest factor hollowing out the American middle class. Naturally, supporters of the robots explanation have challenged some of this research, but the papers keep piling up.

Meanwhile, the robots hypothesis is also starting to get serious pushback on other fronts. Celebrity economist Larry Summers, who has expressed concern over the possibility of automation replacing human jobs, has hedged his bets. He points out that productivity hasn’t surged as fast as one might expect from a robot revolution. He also notes that if robots were replacing humans, we’d expect to see a temporary boom in human labor, since people would be needed to build and install the robots. We haven’t seen that. Although Summersstill believes robots are a factor, he points out some reasons to be skeptical of the story.

So if the U.S. middle class has been gutted because of China instead of robots or de-unionization, what do we do? Reshoring initiatives are becoming popular, but so far they have had limited effect. Trade barriers against China are unlikely to do much, since offshoring investment will just shift to other low-wage countries — as it is already doing as Chinese wages rise. And the globalization cat is already out of the bag — now that markets and supply chains are global, walling off American industry will probably just cut American companies out of fast-growing global markets, and lead to slower growth in the U.S.

The only solution to the problem of globalization may be to wait. Chinese wages have risen a lot, and only India is big enough to take China’s place. As global economic convergence proceeds, the U.S. will look more attractive as an investment destination, and reshoring will increase. That isn’t an answer that people want to hear, but it may be the right one.

BitCoin is growing in Africa!

africaIt is a well-documented fact that Africa has a huge number of unbanked, which in some countries goes beyond 70%, and also incurs very high costs of money transmission. It follows then that when Bitcoin is mentioned in the same breath as Africa, it is often as a technology that is in a position to help solve these problems.

However, there is another opportunity in cryptocurrency that is attracting attention, at least in some quarters of the continent’s population. And that is being a source of income as a tradable currency online.

A few weeks ago I was added to a Kenyan Bitcoin Social Media group, where members share all manner of information on Bitcoin and other cryptocurrencies. And for the time I have been there, I noted that apart from how to get into mining, the other question that kept coming up is how one can trade Bitcoin online and generate income.

In line with this demand, TagPesa and BitPesa, two Bitcoin exchanges operating in Kenya have recently made efforts to facilitate online trading in bitcoins. Indeed, BitPesa did hold an event on February 13, 2015 dubbed ‘Hustle with Bitpesa’, which was specifically targeted at traders. Since then, the company has been holding similar events in other major towns around the country.

The same is being replicated in other African countries. The South African Bitcoin exchange ICE3X that took place last January launched its services in Nigeria, which will help the locals buy and sell bitcoins using naira, the local currency.

New phenomenon

Of course, it would accurate to say that online trading in Africa is still in its early age. Online Bitcoin trading will probably furthermore remain marginal for many years to come even as internet penetration grows at a relatively high rate.

Nevertheless, there is some activity taking place in this area.

Tech-savvy, mostly young people in cities like Nairobi, Cape Town and Lagos are taking the initiative to learn the ropes. I must mention however that almost all of these pioneers are people who have been trading online before using other methods.

One perfect example of such a trader is Nelson Lemashon, a Kenyan, who has been trading currencies on the ForEx market for close to five years. He decided to venture into BTC in 2012, and he believes there is an opportunity for Africans in this area too.


Lemashon acknowledges however that just like with other Bitcoin traders around the world, those trying it from Africa have to overcome a number of teething problems and other challenges.

“We have to face the challenges of not well-developed trading tools,” says Lemashon. “For instance, apart fromBTC-e, few other bitcoin trading platforms have the MT4 software. Also in order to leverage on volume, you have to invest a larger amount of value as compared to when trading other currencies or assets.”

Michael Kimani, a founding member of the African Digital Currency Association, thinks that more Africans are going to interact with Bitcoin through trading.

“It can happen as the means of moving money between local currencies and bitcoins are becoming available,” says Kimani

Indeed, it will take time for a vibrant community of online Bitcoin traders to grow. However, with the continent holding its first Bitcoin Conference on April 16-17, 2015, and a growing list of exchanges opening up shop on the continent, there is little doubt that it will happen.

Bank Suspends Polish Bitcoin Exchange’s Accounts

bitcoin-europePolish bitcoin exchange has had its bank accounts suspended by Bank BPH.

BPH initially said the suspension was the result of a technical glitch, but later claimed it was due to outstanding debt and lack of credentials, according to The exchange said it discovered its BPH accounts were suspended on 26th January. founder Michal Pleban told CoinDesk that the real reason for the bank’s decision was prompted by a query filed by the local district attorney’s office. The filing revolved around one particular transaction on the exchange, which was allegedly performed with stolen funds.

“For that reason, the bank decided to close all our accounts and refuse our business,” he said.

The exchange never received a notification from the bank or the authorities, according to Pleban. He said he was unable to see the query that eventually prompted the bank to freeze the accounts.

In addition, Pleban said the bank’s compliance team made a mistake by closing the account before it disabled the IT connector. This resulted in transactions being channelled to the already disabled account. The bank said the transactions would eventually be returned to their senders.

CoinDesk has contacted BPH for additional comment on the matter, but no response had been received at press time.

New bank account

Pleban said the exchange has decided to create a new company to take ownership of and is seeking to open a new account with a different bank.

He added that the exchange is trying to normalise operations:

“This should take no more than two weeks. In the meantime, we have re-enabled electronic fiat transfers which will be warehoused at the payment processor until a new bank account is opened. We also re-enabled crypto deposits, and all withdrawals are performed normally from my own personal account. Normal (non-electronic) fiat transfers will be re-enabled once a new bank account is established.”

Pleban is also looking into the possibility of taking legal action against the bank, claiming his lawyer is preparing the necessary paperwork.

“I am currently on a quest to find a bitcoin-friendly bank in Poland,” he added. opened in March 2014, promising to offer superior security following a number of attacks on local exchanges.

One of the Largest Bitcoin Exchanges Just Went Dark After Getting Hacked

Edward Tj GeretyJust a few days after reports emerged that the infamous Mt. Gox meltdown was an inside job, one of the biggest, oldest, and most trusted bitcoin exchanges—Bitstamp—just went offline after a security breach. Bitcoin exchanges come and go all the time, but this is different. Bitstamp is supposed to be the reliable one.

A hack is never good news in the bitcoin world, though Bitstamp’s breach sounds like it could’ve been much worse. The company reassured its customers that the hack only affected its “operational wallet,” that is only “a small fraction of customer bitcoins” that were stored on internet-connected servers were vulnerable. The vast majority of Bitstamp’s bitcoin are kept in “cold storage,” servers that aren’t connected to the internet.

This latest bitcoin exchange breach doesn’t have anything to do with the Mt. Gox bitcoin blunder, except for the fact that it sends a message to the world that bitcoin is far from secure. Bitstamp’s CEO referred to his company as “the backbone of the entire Bitcoin industry” last year, and if that statement’s true, that bone has just been broken by a bunch of greedy hackers. This, as the cryptocurrency’s price continues to tumble, is bad news for everybody.

Does Bitcoin deserve Worst Investment in 2014 Award? — I think not!

Bitcoin is worst investment of 2014Bitcoin has been called the worst investment of 2014 after its price dropped by over 50% during the last 12 months.

The unenviable title has been bestowed on the world’s best known and most valuable cryptocurrency by the business website Quartz, which compared the dollar price of bitcoin at the beginning of 2014 to its current value, saying it has declined by 52%.

The title of worst investment of 2014 is given more weight when you consider the huge price drops seen in the price of Brent Crude oil and the price of Russian rouble in recent weeks. Though considering the on-going issues in Russia in the last 24 hours, bitcoin could potentially lose its title before the end of the year.

However if you take into account that bitcoin was trading at over $1,160 in December last year, the fall to its current value of around $330 is even more dramatic.

Throughout 2014 bitcoin’s price continued to fluctuate wildly on a day-to-day basis with hundreds of companies being founded on the back of the cryptocurrency, driving interest in bitcoin and its potential.

According to data obtained by Reuters, many of the bitcoin wallets which continue to be created on a regular basis are lying empty with liquidity in the cryptocurrency still remaining limited.

A libertarian’s economic dream 

Bitcoin continues to confuse many as regulators struggle to get to grips with something which is not really a currency at all.

The anonymous nature of bitcoin and its decentralised nature make it a libertarians economic dream, but these very traits also make it an attractive proposition for those looking to purchase illegal goods on the dark web or carry out money laundering.

Indeed it is these very uses for bitcoin which have waned in 2014 thanks to increased scrutiny of law enforcement agencies (see Silk Road) and it is the decrease in use of bitcoin for these activities which could have led to price depression overall.

Bitcoin will continue to intrigue and confound in 2015 and it is entirely possible that in 12 months time we will be hailing it as the best investment of the year, but as we know, with bitcoin, you can never really tell.

Is this a Bitcoin Price Correction? Maybe…

Bearish pressure has pulled the Bitcoin price into a deeper correction. The advance is on hold pending ongoing price correction. Most markets including Gold and equities are engaged in sudden counter-trend price movement – a condition that seems temporary.

Many strong reversals are evident across the board in the past 48 hours. The Gold price dropped to $1,227 from $1,250 today. The S&P500 has surged back to support near 1,970, and the US Dollar has resumed advance toward 86. Possible factors underlying these changes, as well as the sudden Bitcoin drop, are not evident, and a return to the longer-term trends should resume in the coming days or by next week.

Unless a swift reversal takes price back above $368 and then $400, we can only assume that wave 2 will target one of the Fibonacci retracement levels at 50%, 61.8% or 89% of the entire advance of the past three weeks from $275. The following Bitstamp hourly chart shows the Fibonacci retracement levels on the righthand side. The 50% (.5) retracement is at $346 and the 61.8% (.618) retracement level is at $330.

Yesterday, before price broke out below the consolidation triangle, the correction had been labeled a-b-c-d-e. A new wave count is annotated and shows price action in wave 3 of wave C. We’ll refine that as more of the wave structure becomes apparent.

The final wave in the expected sequence, wave 5, is shown to terminate at $330 although it may equally well extend all the way to the .89 Fib retracement level at $290. We cannot know at this stage whether wave 5 will end nearer $330 or $290, but a sensible trade strategy is outlined below.

Edward J Gerety III









Trading The End of Wave 2 

The same advice given during the past week applies: It is recommended that traders do not short trade this decline. Doing so is risky because the decline’s lower target is unknown and, once terminated, reversal could be swift.

One trading strategy is to systematically buy into wave 2 as it approaches its potential reversal levels at $346 (50% retracement), $330 (62%), etc. down to $290. A stop-loss placed at $275 would then close the position at a loss should price continue declining to $260 or $205 to make a new decline low. However, this strategy is wasteful and resembles stepping in front of an approaching bus.

A more sensible strategy and the one with the highest probability and lowest risk is to wait patiently for wave 2 to complete. Once price action reverses and starts heading up in those first few long green candles, the urge to buy into the apparent advance will be strong, but don’t pull the trigger just yet. Wait longer still. The risk remains that what appears to be a reversal at the end of wave 2 (at say, $330) is not the end of wave 2 at all.

Once price action has drawn some long green candles and makes a correction without making a new low – this is the time to buy into the advance. Place a stop-loss just below the reversal level where the advance started from.

If price does turn down again to make lower lows, your loss is minimal, and the process can be tried again at 62% retracement and again at 89%. If reversal occurs at one of these points, you will have gotten in near the beginning of wave 3 which is characterized by swift advance and great distance.

Edward J Gerety









Wave 2 is drawing the Bitcoin price into a deeper correction than was initially expected. Prepare to buy in lower at $346, $330 or even $290, but don’t short-sell the market here since the reversal level is not certain.

Edward J Gerety







Price may eventually print a new decline low, but we’ll deal with that scenario once the wave down declines below $275.

Once wave 2 reverses, the advance in wave 3 can be expected to commence with great vigor. For now, we observe and wait for a reversal above $275.

Ecuador and Dominica are taking on experiments with digital currency

ecuadorVirtual currency, still in its nascent phase, has prompted scrutiny by economists and regulators around the world. But in Latin America, two countries – Ecuador and the tiny Caribbean island of Dominica – are taking on very different experiments with digital currency, with government support.

Ecuador announced earlier this summer that it planned to begin issuing a new digital currency through its central bank in December, targeting poor and rural segments of the population without access to traditional banking. The move would make it the first country in the world to have government-issued digital money.

Details of the plan are still scarce, although a presentation on the Ecuadorean government’s website lays out a few more specifics: The new currency – which does not yet have a name – will rely heavily on mobile transactions for the estimated 48 percent of the population lacking a traditional bank account. President Rafael Correa said that the new currency would exist in parallel to the U.S. dollar – Ecuador’s official currency – and be backed by liquid assets.

This stated goal of financial inclusion and focus on mobile payments appears to put the new Ecuadorean system closer in line with M-Pesa, the mobile monetary transaction system that has been wildly successful in Kenya. M-Pesa has been credited with providing a faster and more convenient way for poor and rural populations to make payments, send remittances and run businesses. But M-Pesa is a mobile platform for dealing in the existing local fiat currency, whereas Ecuador’s system would create an entirely new digital-only currency.

The decision to create a new form of electronic money rather than just adopting a mobile payments system has prompted some analysts to suspect that Correa’s real aim is to devalue the U.S. dollar. Ecuador, which adopted the dollar as its official currency after facing a banking crisis in 2000, is currently in debt to China for $11 billion, or one-seventh of its entire economy. A devaluation would make that debt less of a burden.

But while many other details are still unknown, Correa has emphasized that the new system will not resemble a cryptocurrency like Bitcoin, which is not controlled by any central authority and relies on a fixed supply. In fact, the law that authorizes the creation of Ecuador’s new currency simultaneously prohibits the use of decentralized currencies like Bitcoin.

Meanwhile, in the tiny Caribbean country of Dominica, Bitcoin is surging ahead. The “Bit Drop,” sponsored in part by a handful of Bitcoin businesses and interest groups, is a planned event to send all SMS-capable residents of the 70,000-population island a small, unspecified amount of bitcoins on March 14, 2015, thereby creating the “world’s largest and highest-density Bitcoin community.” According to the sponsors of the “Bit Drop,” the project has received cooperation and backing from Dominica’s government.

The groups behind the “Bit Drop” include Bitcoin wallet service provider Coinapult, Dominican insurance firm Aspen Assurance, nonprofit organization College Cryptocurrency Network and the Bitcoin Beauties network, which is aimed at encouraging women to adopt Bitcoin.

Project manager Sarah Blincoe told CoinDesk, a Bitcoin news site, that Dominica’s small population, widespread mobile usage and diaspora make it a strong test case for the use of bitcoins in making local payments and sending remittances. College Cryptocurrency Network executive director Jeremy Gardner also told CoinDesk that his group would hand out educational materials about Bitcoin to local retailers in an effort to use the drop as a launching pad for longer-term adoption.

It’s unclear whether the project would actually have a lasting impact on island residents’ perceptions and usage of the currency, or if the drop – which will coincide with an island-wide party – is simply a clever, one-time marketing campaign. Still, the support of a national government is a significant step for the cryptocurrency movement.

But elsewhere in the region, digital currency – especially Bitcoin – is still very much in a fledgling state. Bitcoin usage has been on the rise in Argentina and Brazil as national currencies face rising inflation, but difficulty of access and perceptions of high risk mean that proponents still have far to go in gaining traction for virtual currency in the region.


– or at least maybe the end of this most recent stock market correction …

A very helpful tool for spotting intermediate-term bottoms is to watch large outflows, or signs of capitulation, in key exchange traded funds (ETFs). To do this, first identify which areas of the market are getting hit the hardest, look at a widely followed ETF for that market, and then watch for fund outflows to hit an extreme to mark capitulation. A case in point is the early February bottom in which the 20-day average of fund flows for the SPDR S&P 500 (NYSEARCA:SPY) ETF reached the lowest level for the entire bull market. Here’s the chart I showed at the time where fund outflows correctly signaled the February bottom in the S&P 500:

Source: Bloomberg

Similarly, back in the middle of April I argued we were nearing the end of the pullback in the markets when viewing the technology-heavy PowerShares QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq 100 Index. The 20-day average of fund flows for QQQ reached an extreme level and suggested we had reached selling capitulation in the markets. The extreme selling in QQQ that was highlighted in April is shown below (click for link):

Source: Bloomberg

This go around the selling appears most intense in the small-cap equity and junk bond market segments as discussed last month (click here and here). Given these two areas were under the most pressure, I looked at fund flows for both segments and based on the 20-day average of outflows for both I would suggest a bottom is likely in for the markets. As capitulation selling in the SPY and QQQ marked earlier bottoms this year, we’ve clearly seen capitulation in the junk bond market as the 20-day average of outflows from the iShares High Yield Corporate Bond ETF (NYSEARCA:HYG) reached the worst outflows seen since the bull market began in 2009 as nearly $100M in average daily outflows have taken place in the last 20 days.

Source: Bloomberg

Even greater outflows were seen in the iShares Russell 2000 ETF (NYSEARCA:IWM), which averaged $162M in daily outflows over the last 20 days. Outflows of this size have marked prior bottoms over the last few years and suggest we’ve seen yet another intermediate-term bottom in the markets (Note: two red arrows did not lead to intermediate market bottoms).

Source: Bloomberg

So Bearish It’s Bullish

Last Thursday I highlighted that breadth had turned so bearish that we were reaching levels associated with market bottoms. For gauging market breadth I analyze the Russell 3000, which makes up roughly 98% of the entire US market capitalization. The percent of members below their short-, intermediate- and long-term moving averages (2nd panel below) has reached levels associated with prior market bottoms. We’ve also seen a spike in members with 3-month new lows (4th panel below) and one of my favorite indicators, the percent of members with a MACD line above zero (5th panel below), reached the 30% threshold, which has marked solid bottoms over the last few years. All of this suggests the markets have bottomed and what we need to watch now is how strong and robust is the recovery off the lows.

(click to enlarge)
Source: Bloomberg

Buy Signals on Major Indexes

One indicator I’ve come to rely on that has proven to be quite reliable, particularly at bottoms, is the Bloomberg TrendStall indicator that attempts to find changes in trend. When the conditions for a reversal have been met the indicator paints the index purple and when the actual trigger is met a triangle is shown for the signal – a red triangle for a sell signal and a green triangle for a buy signal. Currently, we have the conditions for a reversal (see green circles below) in all of the major indexes but the trigger has not been given yet. As seen below, past buy signals by the TrendStall indicator have proven to be spot on in calling prior bottoms over the last two years and if the buy trigger is given that would be another nail in the coffin that the bottom of this pullback is probably in.

Source: Bloomberg

Given Strength of Economy, Recent Pullback Not Indicative of Bull Market Top

With the weakness in the markets this past month, particularly in small-cap stocks and the junk bond market, there have been a growing number of bears calling for the end to the present bull market. Given that most bear markets are associated with recessions it is always worthwhile to take a look at the economy and its trajectory before making a bear market call. Doing so shows the risk recession for the US economy in the near future is in the low single digits according to our recession model, which currently calls for only a 3% chance of a recession on the horizon.

(click to enlarge)
Source: Bloomberg

Additional data also suggests near-term recession risks are remote. Today we were treated to the Fed’s Senior Loan Officer Opinion Survey for Q3 2014 and there was a lot of encouraging data to suggest the US economy is still on solid footing. For example, the net percentage of loan officers reporting stronger demand for commercial and industrial (C&I) loans from large and medium firms is near the upper end of the range for the last two decades and not yet showing any deterioration. This is very encouraging as loan demand typically falls off well before the onset of a recession (see red arrows below). If anything, loan demand is currently accelerating (blue arrow).

Source: Bloomberg

Commentary from the Fed’s release is provided below (emphasis added):

The July survey results showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. Domestic banks generally continued to ease their lending standards and various terms for commercial and industrial (C&I) loans…Banks also reported having experienced stronger demand over the past three months, on net, for many more loan categories than on the April survey.

In addition to strengthening C&I loans we also saw the strongest demand for commercial real estate loans since the late 1990s:

Source: Fed

Demand for consumer loans also increased to the highest level since 2005:

(click to enlarge)
Source: Fed

The data from the Fed’s survey shows not only banks continue to ease standards as liquidity is readily available, but the demand for that liquidity is growing as business and consumer loan demand continues to grow. These are not the conditions you see before a major economic slump.


Based on capitulation-like selling in both the small-cap equity and junk bond segments of the market, it is quite likely that Friday marked a low. While the recent pullback was not fun it also wasn’t the beginning of a bear market as many bearish pundits claimed. The risk of a recession is simply too low and, if anything, the economy continues to build on the momentum coming out of the second quarter as banks, businesses and consumers show expansion.

While it is probable that Friday marked the low, there clearly has been some damage done to the market’s technical condition and some repairing needs to occur over the coming days before we can say with confidence that the low, not just a low, is in. For that, I’d like to see the S&P 500 reclaim its 50-day simple moving average and the iShares Iboxx High Yield ETF (HYG) also begin to trend higher and see strong fund inflows.

I would also like to see a strong surge in momentum of enthusiastic buying that has accompanied other bottoms. While we are clearly oversold (see middle panel) we need to see a surge in demand (bottom panel) for the final element of a market bottom. Currently, we’ve only seen 8% of the Russell’s 3000 members generate a MACD buy signal in the last 10 days. For a solid bottom to be in place we need to see this number jump at least over 15% and ideally higher for a stronger signal. I’ll touch back on this indicator later in the week for an update and provide any other clues as to the market’s direction.

Source: Bloomberg