Quick Market Update – Intraday Reversal – Day 1 Rally Attempt

Just a quick post to note today’s big reversal, which formed a hammer candle, which is the most classic reversal candle. Volume appears to be a question mark, but I’ve not had time to do a thorough analysis of that yet and maybe this chart of the NASDAQ 100 Index ETF is an anomaly.

As I noted on Twitter (original tweet here, copied below), I opened a small long position during the day (a little before noon NYC time):

Some panicy tweet crossing the wires… VIX over 50… Etrade fail whale: http://twitpic.com/evcz. Was enough for me to take a nibble.

I’m generally more of an end-of-day trader, but was away for the close so did not get a chance to buy more. VIX spiked to 58 intraday, which is extreme panic, then reversed (see chart, below).

A good comment from this MarketWatch article: “One fly in the ointment in all the high VIX hypothesis this time around is the ban on short selling. This has brought more than the usual crowd of doom sayers to the OEX and SPX puts pit. This, in turn, distorts the pic a bit and bloats the premium.”  Note on that article: The VIX has actually spiked much higher, I think around 100 on 1987’s “Black Monday” (and around 60 around the Sept. 11 peak), but the market structure and trading rules have changed since then, so a final capitulation may not ever get that high again (but you never know).

My guess is that this rally attempt may have some legs, especially given Murphy’s Law kicking in and having me miss the close (dooah!), but it might not be the final low of the bear market. For any low to stick, massive buying (90% upside days are best) needs to come in within about 4-10 days. Even though today saw a big intraday reversal, the overall stats were still decidedly negative. Time will tell! Cheers!

See this blog for (1) a video of Cramer (basically an idiot) capitulating, and (2) a series of Hank Paulson quotes along the lines of:

  • March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is going to be painful to some lenders, but it is largely contained.”
  • February 14th, 2008 – Paulson: The economy “is fundamentally strong, diverse and resilient.”
  • July 20th, 2008 – Paulson: “it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

Excerpt from this MarketWatch.com article:
Russian stocks plunge 20% amid relentless selling
RTS stock index has fallen 62% this year, making it world’s worst performer

“You can buy assets extremely cheap [in Russia],” said Reiner Triltsch, head of international equities at Federated Investors.
“It’s for someone who has very little risk aversion,” he said.

“Russia in under severe strain,” said Paul Biszko, senior emerging markets analyst at RBC Capital Markets. “It’s called deleveraging, right? Redemptions are very high, and that just means weaker asset prices.”

“The Russian marketplace is suffering from continued liquidations, margin calls and redemptions as well as global market fears,” said James Fenkner, principal and portfolio manager of Red Star Asset Management, a hedge fund that invests primarily in Russian assets.

LA Times article some of you may find interesting:
Is now a good time to panic?

By Tom Petruno
LA Times

If you’re at the point where you aren’t sure you can take any more of this, you have plenty of company. Worldwide.

One year into this stock market slide, we’ve reached a new level of despair. Many investors now have lost about a third of their stock portfolios’ value in the decline fueled by the implosion of home prices and credit markets.

“Why don’t you be truthful with the poor people who have their money in this market,” a reader wrote in a bitter e-mail to me over the weekend.

“You and I both know the market is not going up,” she said. “How can it. Our government has destroyed our economy by shifting good jobs to Third World countries. Giving expensive houses to poor people and hoping they would make the payments.”

And that plan for the Treasury to borrow $700 billion to buy up garbage mortgage loans? “Debt is what got us here and more debt is going to make things worse,” the reader, Joyce, wrote.

Bereft of hope, she signed herself: “A former investor.”

If you’re 30 years old, a 33% drop in your portfolio may not be a big deal. You know you’ve got time to make it up.

But if you’re 60, this is a disaster. And instinctively, you want to protect what you have left.

So the client calls are pouring in to money management firms like Silvercrest Asset Management in New York, which oversees about $9.6 billion for investors.

“They’re asking what to do,” said Stanley Nabi, vice chairman of Silvercrest. And like most market professionals, Nabi gives the standard answer: “I’m telling them to hold tight.”

There is, of course, a large element of self-preservation in that advice from investment firms. They don’t want clients pulling their funds and heading for the bank — or the mattress.

But it’s also true that history mostly is on the side of that counsel once stocks have fallen this much. Bear markets don’t go on forever. And they usually end just when investors are feeling that there is no hope of a recovery.

Monday wasn’t supposed to go the way it did. After Congress approved the financial-system rescue plan Friday, many investors were expecting the stock market to rally. Or at worst, to tread water.

Instead, after a devastating sell-off overnight in Europe, which has imported a banking crisis from the U.S., Wall Street suffered one of its most harrowing days ever.

Despite cutting an 800-point loss in half by the closing bell, the Dow Jones industrial average still ended below 10,000 for the first time since October 2004.

Yet in market parlance the first part of the day had overtones of “capitulation” — a final, mad rush to get out, regardless of price.

“The selling sure seemed as if it was completely indiscriminate,” said Andy Brooks, a veteran trader at T. Rowe Price Group in Baltimore. “We’ve reached the point where stocks are cheap, but people don’t care,” he said.

Those often are classic signs of capitulation.

Another sign is when pundits who usually are associated with an optimistic view of the market suddenly throw in the towel.

Jim Cramer, host of CNBC’s “Mad Money” show and someone generally regarded as a cheerleader for the market, helped stoke talk of capitulation with his extremely bearish comments on NBC’s “Today” show Monday morning.

Warning that the global credit crunch could drive the market down a further 20%, Cramer advised: “Whatever money you may need for the next five years, please take it out of the stock market. Right now. This week. I do not believe that you should risk those assets in the stock market.”

“I thought about this all weekend,” he added. “I do not want to say these things on TV.”

Six years ago this week, many investors also had a deep sense of foreboding about stocks. The bear market that began in 2000 was in its 31st month, driven by the collapse of many once high-flying technology stocks.

On Oct. 9, 2002, the Standard & Poor’s 500 index of big-name shares sank 2.7%, bringing the total decline from its March 2000 record high to 49.1%. That made it the most devastating bear market for blue-chip stocks since the latter years of the Great Depression.

Not surprisingly, on Oct. 9, 2002, most investors saw no reason to believe that things would get better. Yet that day finally marked the end of the long slide, for reasons known only to the market gods.

The current bear market, painful as it has been, hasn’t gone on as long or been as deep as the last one.

Coincidentally, the S&P 500 reached its all-time high on Oct. 9 of last year. It’s now down 32.5% since then.

What Cramer and many other investors fear, with good reason, is that the losses won’t stop here.

The nightmare in the credit markets is unprecedented in the post-World War II era. Worldwide, many banks have stopped lending to one another as loan losses mount and one financial institution after another collapses.

Without credit, the economy can’t function. The stock market, at these depths, clearly is factoring in — or “discounting” — a recession stemming from the credit crisis. And typically, the market goes down before a recession begins, and starts to rally before it ends.

The question is, if we’ve never seen a credit catastrophe on this scale in the modern global economy, how can investors know how much discounting they need to do?

The government’s bailout plan is supposed to end the credit crisis, in time, by taking bad loans off banks’ books. But what if it doesn’t work?

Cramer worries that the market could drop 20% more. Some analysts see much worse coming — a repeat of the 1930s.

Silvercrest’s Nabi predicts that, whatever happens in the short term, the S&P 500 index will be 20% higher than it is today by the end of 2009, assuming that it’s a recession, not a depression, that is unfolding now.

All that the individual investor can do at a time like this is to pick a time horizon and make a decision: Between now and however long it takes to resolve the credit mess and the hit it delivers to the economy, how much more pain can you handle?

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