Unprecedented – Down Seven in a Row

Just time for a quick one tonight.

Wow is all I gotta say. No confirmation on yesterday’s possible reversal formation, that’s for sure. The “possible” was bolded there, too, as today was when the confirmation had to come (and it didn’t).

The chart above is a 10-year of the DIA (Dow Jones Industrial Average ETF), which appears to show a race for the 8000 level. The chart below shows…

…the continuing rise in the VIX.  No reversal sign yet.

Now we should start seeing some bottom pickers from earlier this week getting forced out. I closed out half of my “toe-in” trade at a small loss. It’s what you gotta do. I do still hold half of it — maybe bad idea, but it’s a small position with some margin built in (see below).  I wonder what Mark Cuban did with his short DIA puts (see his post from yesterday “I’m Going Long“)?

I would be ok with getting the EEMs put to me in November at close to $14 per share (38% below here and 75% off the high) and MSFT at less than $19 per share (15% below here and 49% off the high), but still, as I’ve mentioned before, buying before a confirmation (massive buying comes in) is not good (and should pretty much never been done in large size, if at all). MSFT did out perform the NASDAQ, dropping only 3% vs. 5% for the NASDAQ. The EEM underperformed, as the flight from risk is “game on.”

It’s seeming like my “Eye of the Storm” post was accurate so far. Margin calls are a coming, that’s for sure.  Distressed sales are going on and people are raising cash by selling pretty much everything, as evidenced by the summary stats.

UPDATE: Make sure you read my comments in the comment section (below), where I added some links to articles, images, and screenshots.  I also presented a trading hypothesis.  Cheers!

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9 thoughts on “Unprecedented – Down Seven in a Row

  1. From Paul Krugman’s New York Times article, “Moment of Truth”:
    http://www.nytimes.com/2008/10/10/opinion/10krugman.html

    What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

    But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.

    The question now is whether these moves are too little, too late. I don’t think so, but it will be very alarming if this weekend rolls by without a credible announcement of a new financial rescue plan, involving not just the United States but all the major players.

    Why do we need international cooperation? Because we have a globalized financial system in which a crisis that began with a bubble in Florida condos and California McMansions has caused monetary catastrophe in Iceland. We’re all in this together, and need a shared solution.

    Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan — if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation — a golden opportunity will have been missed, and the downward spiral could easily get even worse.

    What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

  2. A few more links:

    Nouriel Roubini’s latest article:
    http://tinyurl.com/4ht4wf

    The following two show two forms of sentiment extreme, mood and body.

    This screenshot — http://tinyurl.com/3o4fqt — of the http://marketwatch.com home page shows extreme negative sentiment, as does I imagine pretty much every other major newspaper and website in the world that ever covers such events. It will be the same for all the magazine covers this weekend. On Sunday, a coordinated international announcement is almost certain.

    The screenshot — http://tinyurl.com/4uo3pf — of Thursday’s most active stocks shows not a single gainer (except for one “short” ETF).

    Together, these show the extreme panic. It appears to be the vomit stage. Yes, even in this slow motion capitulation — http://tinyurl.com/46a278 — we are getting a “puke day.”

    Should an interesting day today. Most important, for me anyway, will be how the markets close. Regardless of where that might be, it could make a good entry point for anyone who wants to bet on an big coordinated announcement on Sunday (US markets are closed on Monday for a holiday, but other world markets will be open, and the announcement must come before they open for trading Monday morning.

  3. Another article with some interesting quotes and stats:

    “Panic on Street: Dow off almost 21% in 9 days”
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/09/MNOI13EEI4.DTL&type=business&tsp=1

    Much of the selling is believed to be coming from hedge funds and, to a lesser extent, mutual funds that need to sell stocks to pay off investors who want their money out. These funds are selling “whatever they can,” says Stewart Pillette of Pillette Investment Management. Big, blue-chips stocks are often easier to sell than smaller ones, so they are getting jettisoned to raise cash.

    During that bear market, which ended Oct. 9, 2002, the Dow fell 38 percent, the S&P 500 lost almost 50 percent and the Nasdaq composite tumbled 78 percent.

    Since the current bear market started a year ago, the Dow has lost 39 percent, the S&P is off 42 percent and the Nasdaq is down 41 percent.

    All three indexes, however, are still above where they were when the last bear market ended.

    Capitulation?

    Some analysts say the market appears to be going through capitulation, a period of heavy selling marked by pervasive gloom, when investors ignore good news and throw out the good with the bad. Many, but not all, bear markets end in a capitulation. When everyone who wants to sell has gotten out, a modest influx of buyers can lead to big gains.

    The past week’s sell-off “absolutely” felt like capitulation, says Ed Yardeni, president of Yardeni Research. “It’s total and complete revulsion. People are chucking out stocks, saying get me out of here. What we’re learning is that capitulation doesn’t have to happen in one day.”

    The problem with capitulations is that they are hard to identify, except in retrospect. A lot of selling that feels like a capitulation really isn’t, while a real capitulation is not always obvious. Sometimes, though, people get it right.

    Another problem with capitulations is that no two are alike.

    “This is slow-torture capitulation,” Pillette says. “It’s doing it in a way I’ve never seen before in my 45 years. Usually you get (days when the market is down 600 or 800) and then you get relief.”

    “What I know from my studies is that individual investors tend to extrapolate recent trends,” Statman says. If stocks are going down, they think stocks will continue to go down.

    “I also know that generally, those expectations turn out to be wrong. When people are most pessimistic, the likelihood is greater that the market will go up.” But he adds, the odds are not necessarily high. “It’s like saying there’s a 53 percent chance the market will go up and a 47 percent chance it will go down.”
    But sometimes …

    Sometimes, he warns, “people are pessimistic and the market still goes down.”

    The opposite is also true. Former Fed Chairman Alan Greenspan warned of “irrational exuberance” in the market in 1996. The market continued climbing until 2000.

    As John Maynard Keynes supposedly said, “Markets can stay irrational longer than you can stay liquid,” Statman says.

    The 10 darkest days

    Seven of the Dow’s 10 worst days have come in October. Thursday’s comes in at No. 9.
    Date Pct. Decline
    Oct. 19, 1987 -22.6%
    Oct. 28, 1929 -12.8
    Oct. 29, 1929 -11.7
    Nov. 6, 1929 -9.9
    Aug. 12, 1932 -8.4
    Oct. 26, 1987 -8.0
    July 21, 1933 -7.8
    Oct. 18, 1937 -7.7
    Oct. 9, 2008 -7.3
    Oct. 27, 1997 -7.1

    Black October

    The numbers bear witness to the saying that stocks fall during the fall – and October has been the cruelest month.

    Oct. 19, 1987: Black Monday. Starting in Hong Kong and spreading west to Europe and the United States, markets around the world crashed. The Dow lost 508 points to 1,739, or 22.6 percent of its value.

    Oct. 24, 1929: Black Thursday. Recognized as the beginning of the Great Crash of ’29. But it wasn’t until the following week, Black Monday and Black Tuesday, when the Dow lost nearly 25 percent of its value and widespread panic hit Wall Street.

    Oct. 9, 2008: A huge sell-off just before the closing bell sends the Dow down 679 points, or 7.3 percent, the ninth-largest percentage drop since the Great Crash of ’29.

  4. From: “Flight to quality as money funds rise, stocks dive”
    http://www.guardian.co.uk/business/feedarticle/7847687

    “It is extremely unusual to see this drawdown, not only in stock funds but bond funds,” Conrad Gann, TrimTabs’ president and chief operating officer, said in an interview. “Investors are putting their money in savings accounts, insured checking deposits and any fund that has a ‘Treasury sticker’ on it — anything else isn’t being considered,” he added.

    In September, investors pulled a record $72 billion from U.S.-listed stock and bond mutual funds, as shareholders took $43.5 billion from stock funds last month and $28.8 billion from bond funds, according TrimTabs.

  5. Yesterday’s NR article:

    “The world is at severe risk of a global systemic financial meltdown and a severe global depression”:

    http://tinyurl.com/4ht4wf

    I mainly post this one b/c of the list of suggested steps governments need to take, especially the USA, of course. See the bullet points at the end of the article and reprinted here:

    – another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

    – a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

    – a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

    – massive and unlimited provision of liquidity to solvent financial institutions;

    – public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

    – a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

    – a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

    – an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

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