Quick Market Update – Interesting Stuff Today

As shown on the chart above (NASDAQ 100 ETF: QQQQ), today’s pre-market coordinated rate cut failed to spark an opening rally, although something did develop midday, then failed and closed near the low of the day and below yesterday’s close.

The pattern you see over today and yesterday is called a possible gravestone doji. I say “possible” because…

…the pattern requires confirmation tomorrow. I also say “possible” because, even though the selling has been quite sustained and dramatic, there has been no shock-and-awe day yet. I.e., no obvious capitulation.

However, today marks six down days in a row (at least as measured by the NASDAQ 100), which is something that did not even happen once during the 27 March 2000 to 9 October 2002 bear market, when the NASDAQ 100 fell 83% top to bottom.

Sidenote: Tomorrow is the 6-year anniversary of the bottom of the previous NASDAQ bear market. Tomorrow is also the 1-year anniversary of the Dow Jones Industrial Average’s record close of 14,164 (today’s close was 9258, 35% off the high).

Besides it being an interesting factoid, it is conceivable that this six down days in a row represents a slow motion capitulation, although that is just me tossing around ideas in my head.

Regarding capitulation, a friend of mine who manages money here in Sweden said that today was the day (so far) that the most clients called in and said “fuck it, sell it all, I’m out.” The Swedish market is down around 60% from its highs, so for many towels to get thrown in now is interesting to me.

Together, all these things were enough for me to stick a toe in the water today.  I probably shouldn’t have, as it’s usually best to wait for a follow-through day, but like I said, I only put a toe in and I have effectively been on the sidelines for the entire bear market except for some quick hit trades.

My toe-in trades were long the Swedish ETF (EWD) and short some November $20 Microsoft puts at about $1.00. That second trade basically means that if MSFT is trading below $20 on the third Friday of November, I will get shares “put” to me at $20 per share. MSFT is currently at $23, so it’d have to decline another 15%, which is possible.

One reason I did the puts is because implied option volatility is so high right now (see chart below).  If/when we get a rally, that volatility will collapse, along with the time value.  If there is a big rally, of course, it would have been better for me to buy the stock.  If there is a big decline, I can:

  1. go delta neutral by shorting MSFT,
  2. close the position, or
  3. Let the stock get put to me.

Regarding MSFT, it is a cash machine with no debt and is trading at low levels based and fundamental metrics.

One comment on this VIX chart: The two most recent candles are “reversal” type candles (but they don’t mean anything unless/until they are confirmed.

Other stocks on my watch list are GOOG and RIMM.  Others too, but I gotta wrap up now.  And I may not be doing updates so often, as pretty busy with BuzzPal stuff and a real estate transaction.

Comment regarding bear markets:

The average bear market lasts 16 months (S&P data), so by “average” standards, current downturn is 75% done.

Two of the most severe multiyear bear markets in U.S. history, the 2000-02 dot-com bust and the 1929-32 depression bear, lasted 31 and 33 months, respectively. In 1942, a 5-year bear market ended.

Since 1940, nearly half of all bear markets have ended in 12 months or less. The 1987 one was only three months long, so would not be crazy to see possible market bottom before the end of the year.

Cheers!

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2 thoughts on “Quick Market Update – Interesting Stuff Today

  1. Alongthe lines of what I mentioned above:

    “Nervous investors bombard advisers”
    globeinvestor.com
    Wednesday, October 08, 2008
    http://www.globeinvestor.com/servlet/story/RTGAM.20081008.wretailmood1008/GIStory/

    ““You have all these retail investors who just want to get out of the market,” said Andrew Pyle, a Peterborough, Ont.-based wealth adviser for Scotia McLeod. “They look at what’s happening, and they see bailouts that aren’t working, nothing seems to help. They don’t see evidence of recovery in the markets, and they are just literally asking to get out.””

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