Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stock Market Trading Lessons From the 1998 Russian Debt Default

Stock-Markets / Stock Markets 2010 Apr 23, 2010 - 05:38 AM GMT

By: Steven_Vincent

Stock-Markets

Best Financial Markets Analysis ArticleI remember the 1998 Russian debt default crisis and the associated Long Term Capital Management collapse very well. I was a novice trader who found the bearish arguments of the time convincing. It was evident, they said, that the market was in a massive bubble based on debt and loose money and that it couldn't go on much longer before the whole thing blew up. All that was needed was the right catalyst. Not knowing yet that the trend is your friend, I lost money continually trying to short every rally.


When the Russian crisis struck I began to short heavily and made some remarkable gains for a time. In the end all my profits and my capital evaporated in the massive rally that came out of the shakeout.

The current situation surrounding Greece reminds me of the 1998 setup in many respects. Both events involve an extended, overbought bull run. Both involve scenarios that seemingly manifest the deflationist bear criteria for "the collapse". Both follow up scary financial panics (the 1998 affair was preceded by the 1997 Asian contagion crisis).

There are many differences of course. Today we are rallying against a 10 year bear trend after a historic financial panic and the move is only now being accepted as "real". In 1998 the market was well into a major, nearly continuous bull trend and it was broadly accepted with widespread public participation. And twelve years ago, Russia's debt troubles were primarily internal whereas Greece is much more involved in the international debt markets and the condition of global financial markets was not nearly as suspect then as it is today. Russia was clearly an isolated, primarily internal problem whereas the Greece troubles are part of a continent-wide European sovereign debt crisis.

Interestingly, when the decline began in July the price of the S&P 500 was at nearly the same level that it finds itself today--1191.

The first indications of trouble in Russia came on March 23rd when a political crisis came to a head as Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet. After an extended, nearly continuous run off an early year bottom the first wave of fear rippled through the market and it began to falter.

On July 13, a $22.6 billion International Monetary Fund and World Bank financial package was approved on to support reforms and stabilize the Russian market by swapping out an enormous volume of the quickly maturing GKO short-term bills into long-term Eurobonds. As you can see from the chart, the market was not expecting IMF/World Bank intervention and was caught by surprise.

On August 17th, Russia announced the suspension of debt payments and other measures which amounted to sovereign debt default. A panic ensued, leading to a total 23% decline in under 2 months.

A month later, Long Term Capital Management collapsed as a result of the Russian crisis and was bailed out.

Does this scenario sound familiar? The Greek Tragedy unfolding on the world stage today has thus far followed the Russian script nearly to the letter.

In January the market topped as the Euro rolled over and the US Dollar surged on fears that Greece would default and trigger a European financial contagion. As in '98, the market quickly caught its footing and rallied nearly vertically to new highs. Are we now at a peak similar to that of July 1998?

This week the International Monetary Fund, the European Union and the Greek government are meeting to attempt to resolve the crisis. The consensus seems to be growing that there is no way for Greece to avoid using an IMF/EU bailout fund established last month, which would in effect be a sovereign debt default.

A default announcement could even come as soon as this weekend. Greek debt downgrades have become an almost daily event with the latest coming today from Moody's.

What can we expect when the news on Greece is announced? Will the analogy with the Russian crisis end there with a "buy the news" response? Indeed, there is potentially a setup which allows for this. In many ways the news is already out and may be priced in; this is in sharp contrast to the surprise of IMF/World Bank intervention in the Russian affair.

On the other hand, the markets are quite overextended and in all probability the only element missing from a good shakeout is an excuse. A Greece default would provide one, however anticipated. Most of the recent rise appears to be late, public money "piling on" and of course such positions are generally shaken out before the real move commences.

My guess as to a likely scenario: an initial mini-panic on the news which drives the SPX to a partial decline within the Ascending Broadening Wedge formation--a bullish setup for an quick reversal and breakout to new highs. Bulkowski's Encyclopedia of Chart Patterns estimates a 43% gain resulting from this setup. I would put a target of SPX 1150--the January high--on the partial decline. This would also retest the 38.2% Fibonacci retracement level from the February low as well as the 50 EMA. A more serious correction would take the SPX down to the 200 EMA and the 23.6% level from the entire bull run at the 1080-1090 zone.

In summation, I would not expect the fallout from a Greek default to result in a major trend reversal or shorting opportunity. Rather, it will more likely set up a good buying opportunity. I'm in cash.

Epilogue:  Russia returned to the international debt market today for the first time since 1998 with the sale of $5.5 bln in bonds.

Generally these reports as well as twice weekly video reports are prepared for BullBear Trading Service members and then released to the general public on a time delayed basis.  To get immediate access just become a member.  It's easy and currently free of charge.

Disclosure: No current positions.

By Steve Vincent

http://www.thebullbear.com

The BullBear is the social network for market traders and investors.  Here you will find a wide range of tools to discuss, debate, blog, post, chat and otherwise communicate with others who share your interest in the markets.

© 2010 Copyright Steven Vincent - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules