Well they tried... as they say over at Minyanville.com, the cancer just might be larger than the system - this is what seems to be happening. As we wrote Tuesday [S&P 500 Looks Ready to Bow Out] we were anticipating this and unlike last Thursday we would actually not be anticipating any turnaround and in fact be riding this leg down...
I come from the school that the more times you test a level the more likely you are to break it (either up or down). The easier path as we constantly thrash against S&P 840s remains down - we're wearing down the defense. Unlike last Thursday when you had a very anticipated break of support, a "swooping" out of stop losses across the Street and then a huge intraday reversal I think this time around will be different if indeed we break S&P 835 again (same level in the sand we cited last week.)
In my infamous "day of technical difficulties" trades I was mentioning how I'd lighten shorts and go long into that stop loss trigger chain reaction sell off. This time around I will/would not. I'm actually adding short exposure once you get below S&P 830 as 800, and then 770s seems very clear this time around. I believe we have a great chance to break down once we fall through - we have yet to CLOSE below S&P 840 - that will be the next negative trigger. Again, if this plays out, S&P 800 will be a psychological stop - we'll see if that is cut through like a knife in hot butter or if there is at least some defense. If not, I think we could make a quick 10% downside move to our 2002 lows... S&P 770s.
So it is coming to pass. As bad as it sounds, I am a bit heartened by this behavior because in later September / early October things were so bad for 2-3 weeks that neither technical nor fundamental analysis was working. Fundamental analysis still does not work but now with this breakdown at least technical analysis seems to be working, so we have at least some sort of playbook to work off of.
I don't know how people operate in this environment without having both tools in their work belt (fundamental / technical) - I cannot imagine looking at this market without charts - it must be even more scary than it is to those of us who utilize the "witchcraft".
While it's not in a direction most would like, at least it makes sense. To hold at S&P 840 after repeated attempts to beat it down would of made little sense.... except for those who tout Kool Aid. So while it is cold comfort for market participants, it's actually better that something make sense around here, and the downside move was the more obvious.
I'm increasingly perturbed at the Marketocracy.com glitches last week since we are really outperforming the indexes the past month by a huge amount - but it's not reflected now in the darn numbers. Here is yesterday's performance for a snapshot view - 7% outperformance.
Frankly if I were in a hedge fund instead of a long biased mutual fund I would have been pressing the acceleration on the short side (50%+) with the chart set up we saw Monday...
I think going forward the best course of action is to plan to do normal trading and post when I exit, enter positions but we'll just lack the performance metrics since they don't reflect history anymore. [Bookkeeping: Performance Metrics Over] It's too bad - blah, it makes me peeved just thinking about it.
At this point we really don't even have that much short ETF exposure - only about 22%. I sold about a quarter as noted earlier yesterday afternoon as we held S&P 830 anticipating a potential reversal if those folks who marked us up in the last hour yesterday played the same games today. But when we fell to S&P 820 I got that quarter back. We still have 40%+ cash, and the rest are long positions in individual equities which I'm not really even touching since individual equities are toxic and harmful to your health right now.
Even on a rebound I'll be utilizing Ultra Russell 2000 (UWM) as the vehicle of choice - too much individual risk in equities right now. These Ultrashorts are doing such a nice job that just a 22% exposure more than offset nearly 40% long exposure. Just remember, when the market does its casino action and reverses 10% in 2 hours to the upside they can burn you so you don't want to stay at the short party too long with these guys....
The road ahead? As I wrote above - psychological support at S&P 800 (maybe), and then we go back 6 years to 2002 lows which we've been targeting for a while now - roughly S&P 770s. Market participants will put up another fight there and then we hope for a huge 6 year "double bottom" (technical term - meaning the same low hit twice).
Will it hold? I don't know. We'll assess when we get there but I always assume there is at least a fight put up at long term trend lines so we'll cut back short exposure as we get there anticipating a bounce. If there is no bounce we'll get back the short exposure. But I think we'll at least have a cursory bounce and when it happens CNBC pundits will be breathless that we finally found a bottom and a long term double bottom is in place - and we can all forget the worse fundamentals in the economy post World War II. Maybe they are right, maybe not - we'll adjust based on market action as we move along.
For now the "best" thing in terms of a washout is to stop this nonsense of being up in premarket (futures) that seems to happen 5 out of every 7 days even when the action during the day is horrid. Hope must end, people need to stop looking for a bounce (even I'm looking for a bounce at S&P 770, so I need to stop doing that too). If we open limit lock down this morning on futures I'd actually be more bullish for the intermediate term...
The important thing to remember is we remain in a bear market, and when we have those "student body left" moves up - don't get caught up in the hoopla. Even in a bear market we are allowed to have 6-8 week rallies, we had a lot of those in 2000-2002. This market is worse than 2000-2002 - back then there were at least some hiding spots. There are none now. We had those multi week / multi month rallies this spring and summer as well - but we have not had one in fall or as we enter winter.
Until the market proves it rewards capital on the long side better, there is no reason to jump in on the first countermove up. That has happened 3 times in the past 6 weeks (10% intraday moves from bottom to top) and destroyed anyone jumping on the Kool Aid Express believing those marked a reversal. Fool me once... etc. Again, a real move (even in a bear market) should last many weeks - dare I say months - missing day 1-3 of it will feel bad but when you realize you preserved your capital along the way you'll figure out you are way ahead of almost everyone else. We are down about 16% from August 2007, so I think I can make that up in the next year or two a lot easier than the people down 40-60%. Preserving capital is still the key.
As we've been saying week after week, we need to see improvement in a bevy of market conditions: Some of these would include: reduction in volatility, separation of "benign" sectors from "poor" sectors, separation of "solid" companies from not so solid within a sector, the end of "student body left" (sell everything!) and "student body right" (buy everything!) trading, the ability to invest in 98% of stocks with more than a 2-48 hour time frame, the emergence of any sort of sustained leadership, stocks that go up on bad news (bad news priced in) .... or at least stocks that respond to good news!
None of this has happened so we cannot get bullish other than for daytrades that need to timed perfectly. Too hard for 99.9% of market participants on the long side.
For now, I expect more downside and a return of angst - the more I see, the more bullish I can get. But for now, back to strapping on crash helmets it would appear. Keep your eye on this very scary Citigroup (C) action...