Stopped Out Longs, Possible Shorts
Dow is at 7997.28; S&P500 is at 806.58. Our cash position is back to 75%, we are still 25% long (including inverse funds). On this break, we could see (technically) a low of 681 on the SPX, Dow 7,100, and Nasdaq 1070. (There are deeper levels, but its too ugly to write now).
Last week, I was encouraged by the retest Thursday on lighter volume than Oct 10th -- but lacking a high volume follow through meant we could not become complacent.
Trading Markets Interview
I did a fairly comprehensive interview with the guys over at TradingMarkets.com. We discussed a lot of issues not usually covered in most interviews -- quant analysis, probablity theory, uncertainty as the standard condition regarding the future.
Some of you might find it kinda interesting:
Revulsion or Lack of Interest?
Andrew Lees of UBS writes:
Yesterday’s equity rally was fascinating; not because of the excitement it has caused but because of the sheer lack of interest and belief. Having spoken to half a dozen people this morning about it, without exception no one either bothered to try and explain it or thought anything of it, and certainly no one even remotely suggested that it may be the start of something bigger. This is very understandable; business risk has removed any interest in the business of making money.
Everybody Back in the Pool
From Thursday's Yahoo:
At their intraday lows, the Dow was below 8000, while the S&P and Nasdaq were below their respective October lows of 840 and 1,504.
"We are buyers as markets approach those levels again," Barry Ritholtz CEO of Fusion IQ wrote on his Big Picture blog, noting markets typically move in a pattern of "bottom, rally, retest, rally."
Since major averages subsequently rallied about 18% from their October lows the first time, traders are hoping for a repeat performance.
Retest of the October Lows
Markets have come increasingly close to their October 10th lows. Contrary to what you may have read or heard on TV, this is precisely as it should be.
Why? Major lows get retested. That is a basic tenet of market behavior, and crowd psychology. This has been verified by a variety of studies by different technicians, economists and traders.
There are a variety of different ways to define the terms, yielding some variations, but the basic outline remains the same: All major sell offs hit a point where markets become so deeply oversold, that a rally ensues. Depending upon how deep the prior sell off is, this rally typically lasts anywhere from 3 to 6 weeks. Our work at FusionIQ shows that these snap-backs typically go for about 4 weeks and average ~24%.
Others have come up with some variations of these findings: David Rosenberg of Merrill Lynch looked at the 12 biggest market bottoms of the past century; he found that 35 days is a good rule of thumb for the length of time for the rally and retest (today is day 32). Justin Mamis developed a variation on this theme of bottom, rally, retest, rally. Ned Davis Research has also written on the subject.
Open Thread: What Now?
Ok, we have the Presidential election behind us, and ugly NFP yesterday (more to come) even more Bailouts soon (more AIG, more GM, who knows what else).
Market volatility still remains crazed, and we are nearing key levels of support. Earnings have been punk. The consumer is MIA. Credit is improving, Housing still stinks, and the deleveraging seems to be never ending. The Eliot Wave folks are waiting for a nasty wave 4 (or is it 5?) and
Does the 1970’s Dow 1000 = 2000’s SPX 1000 ?
With 15 minutes left in today's trading, let's take a quick technical look at the past month's market action:
SPX 30 Days
My perspective: This 2 day pullback after the sharp 20% rally from the October 10th lows in the SPX is about a ~50% retracement of the inital rally, as well as the Electin Day revisit to those highs.
It appears that forays above the level 1,000 have twice brought out the sellers.
I wonder if SPX 1,000 will become the modern equivalent of the 1970s Dow 1,000 . . .
3X Exchange-Traded Funds
When we made our buy 'em call on October 10th, we wanted to avoid single stock risk. And, we wanted to have prudent exposure, while still maintaining some cash levels. Our solution was to deploy enough cash into 2 to 1 leveraged funds on the S&P (SSO) and the Nasdaq 100 (QLD) so that our managed accounts were 50% cash, and 100% effective market exposure. That worked out well.
Now, along comes an even more aggressive ETF: Triple upside and downside exposure. I have no opinion of these, as I have not really worked out the usages of this. It does seem a but excessive, and my friend Paul absolutely hates them.
Here is the full run of triple leverage ETFs. I wonder if Rydex will come out with a competitive product or not.
Fund Name . . . Symbol . . . Benchmark . . . Leverage
Direxion Bull Funds
• Large Cap Bull 3x
(BGU) Russell 1000 Index 300%
• Small Cap Bull 3x
(TNA) Russell 2000 Index 300%
• Russell 1000® Energy
(ERX) Energy Bull 3x Shares Index 300%
• Financial Bull 3x Russell 1000 Financial Services Index
Direxion Bear Funds
• Large Cap Bear 3x
(BGZ) Russell 1000 Index -300%
• Small Cap Bear 3x
(TZA) Russell 2000 Index -300%
• Russell 1000 Energy
(ERY) Energy Bear 3x Shares Index -300%
• Financial Bear 3x Russell 1000 Financial Services Index
Paul Disses the Triple Leverage ETF (Video)
10 Bullish Charts, Signals, Indicators (October 10, 2008)
Innovative Funds Benchmarked to Help Advisors and Investors Seeking to Outperform
Nov 03, 2008 11:41 ET
Novembers in the Market
Dan Greenhaus is with the Equity Strategy Group of Miller Tabak + Co. He put out this fascinating analysis of what "Novembers" typically hold in store for us after nasty "Octobers"
Okay, so we all know October was down a fantastically ugly 16.94%, the steepest decline since 1987 when that October declined 21.76%. Going back to 1950, there have been 23 years in which October has been down by *any* amount from the prior September for an average decline of 3.15%. Subsequent to those 23 years, the following November saw an average gain of exactly 1%, while the following two months, at the end of December, saw gains of a much more substantial variety; up 3.54%. But of course the decline in this past October was outsized in comparison to the average October decline, so let’s narrow this down a bit. Using only instances in which October saw a decline of 3% or more (eight such instances), the average gain at the end of November was 1.67% while the average gain at the end of December was 3.70%. To a degree, this is not entirely surprising as one would assume that the steeper decline would lead to a steeper rebound. But in most of those instances, the decline was relatively modest. As I said, those 23 declines averaged about 3.15%, a far cry from October 2008. The only analogous decline was the drop in October in 1987 which led to a subsequent 8.53% drop in November 1987.
As I noted, the depth of the decline we just went through in October has only one parallel in the post 1950 time frame, which is 1987. So the next logical step is to head back to the 20s and 30s to get a handle on what occurred in that time period. Unfortunately, the Octobers of that time didn’t fare too much better. October 1929 was down 19.93%, October 1930 was down 8.88%, October 1932 was down 13.86%, October 1933 was down 7.82% and October 1937 was down 10.25%. In the first three instances I noted, the subsequent November was actually down an additional 13.37%, 3.31% and 5.89% respectively and November 1937 was down another 10.25%. Only November 1933 saw a gain, moving higher 10.27%.
The point is that while we would be inclined to think that a drop of the magnitude we just witnessed would, at the very least, produce a dead cat bounce, that assertion is not entirely supported by history.
Did October 2008 Panic Exceed the 1987 VIX Levels ?
In all of the end of month mayhem last week, you may have missed the above Bloomberg chart-of-the-day on Friday. It showed something that was rather fascinating: Option traders have been at a more elevated level of fear for a longer period of time than during the 1987 crash.
The comparison is one between short and sharp (1987) versus high and protracted (2008). Its between a brief peak and a prolonged elevation.
Here's the Ubiq-cerpt:™
"U.S. stock investors have been more fearful for longer than they were in the weeks before the October 1987 market crash, according to a gauge known as the old VIX.
The CHART OF THE DAY shows the closing values for this indicator, the Chicago Board Options Exchange S&P 100 Volatility Index, in the past two months (the white line) and the same period 21 years ago (the red line).
This year, the old VIX climbed from the start of September through Oct. 11, when it surpassed 100 in intraday trading for the first time since the month of the crash. Back in 1987, the index stayed below 30 until the Friday before stocks tumbled.
The indicator is derived from prices of options on the S&P 100, as its name suggests. The current version, introduced five years ago, uses S&P 500 options and includes more contracts in the calculations. Their readings tend to be similar. The VIX closed yesterday at 62.90."
Good stuff . . .
'Old VIX' Shows More Sustained Fear Than in 1987: Chart of Day
Bloomberg, October 31 2008