A Pot Pourri tonight.

First off despite the now US$1.6 trillion bailout, lending policies, at least at one US Bank, have not changed. Here’s why I say this.

A friend of mine living in Las Vegas tells me he bought a US$250k home with a US$100k deposit and borrowed the rest. The lending bank did not ask to check his income records. Now admittedly my friend has a great credit rating but I cannot envisage any bank in Hong Kong, Singapore or Sydney not vetting his ability to repay.

Amazing! Haven’t US banks (or at least this one) learnt anything from the current debacle?

Secondly, US bonds may have given an upthrust Change in Trend sell signal (prices down, yields up) in the 12-monthly swing (yearly trend). Not only was this a 12-m Upthrust, it was a 12-m Horizontal Terminal. A Horizontal Terminal Forecasting Pattern in the 12-m suggests that the 60-month trend (5 Year trend) has changed from up to down. Both signals will only be confirmed with the September monthly close.

Let’s examine the charts. Figure 1 shows the trend channel since May 84; Figure 2 shows the change in trend signals.

bonds-09-23-2008-12m.jpg

Figure 1 12-M US Bonds

In Figure 1, we see the channel US Bonds have been in since May 1984. The 100^28 represents the current line-change price for the 5-year swing. This is our minimum target for the move. However given the Horizontal Terminal formation, we would expect to see full-blown bear market. Later this week, I shall review a long-term yield chart for possible downside targets.

Figure 2 shows the Horizontal Terminal. Note that C was less than 90% of AB, so that E would have been difficult to anticipate. (See Nature of Trends for a description of a Horizontal Terminal). Normally in a Horizontal Terminal, C retraces AB by 90% or more. This retracement sets up a penetration of A by E. Since C was below 90%, we would have expected a Complex Horizontal Terminal to form i.e. E to be below A.

bonds-09-23-2008-12m-ht.jpg

FIGURE 2 12-M Horizontal Terminal

Finally, Sentiment Trader provided a great chart of the last time the US Government banned short selling. Figure 3 shows the result. We saw a short term rally followed by a collapse.

djia-09-23-2008-short-sale-ban.jpg

Figure 3 DJIA and Short Sell Ban

This chart, the 12-M upthrust sell signal in the S&P and the 60-M Change in Trend in the US Bonds, are all reasons to think the same may occur next year. Add to that the anecdotal evidence that US Banking practices (at least in one instance) have changed little, and you have a high probability occurrence for a bear market in 2009.

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