Thursday Outlook: Where's the Big Fall?

One of the most vexing things about this market has been that it hasn’t declined as much as one would think intuitively. Looking back on the LTCM disaster in 1998 the S&P 500 declined over 22% from top to bottom over a relatively short three month period.

That crisis involved just one institution whereas today’s troubles afflict many dozens of financial services companies involving a still untold amount of losses. Yet the S&P 500, heavily weighted by financials, has only declined about 20% from its high. By this measure we’re not even in bear market territory although that could change in a heartbeat.

I recovered an August 2007 post I made featuring SPY from the 1998 period showing the sharp fall in the index, a sharp rally, a retest of the lows and the subsequent rally as the crisis was solved with the help of the Fed. The current situation is not yet solved:

Okay enough history, let’s focus on today.

Volume was heavy, at least based on unreliable Yahoo/Finance data [they still can’t add columns it seems] while breadth was the mirror image of yesterday:

Was this déjà vu action from last week? Seems eerily that way as last week’s 400 point rally was met with subsequent intensified selling and now we have the same thing today.

The market hasn’t crashed, but is just grinding lower with sharp rally bursts based on hope. Is there something different in the character and/or structure of things that makes 1998 much different than today? I’ll leave it to those more knowledgeable than me to sort that out since I’m just a chartist -- perhaps one with an attitude.

Here’s the fun part of all this - the week’s not over. We get option/futures settlements tomorrow and that can always cause some weird activity. I still think Monday should provide a better read of things.

Have a pleasant and safe holiday weekend.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: SH, SDS, MYY, MZZ, IWM, RWM, TWM, QID, PSQ, IEF, DBC, UDN, GLD, USO, GDX, DBB, DBA, EFA, EEM and FXI.

Comments

[fxtrader07]

Looking at the indexes might cause you to miss the real carnage in the market that has been going on and already happened! Most stocks are already off some 30+ % from their highs, many of them 40% and more. So yes, the index might drop another 10 or 20 or 30% from here - what do i know? but to pretend that it has to occur because no serious stock price decline has happened yet in the face of bad economic developments looks a bit superficial

[john the bear]

It is amazing that the author did not comment on the fact that ALL of the world stock market indexes are already below their 200 day moving average. This is easy to follow if you use Yahoo Finance, Day Watch chart with the indexes and the 200 day moving average listed, as well as the decline today and the change from the high, etc.

With all the exchanges below their 200 day moving average and making new lows.... How can anyone be positive on this market? All of the emerging markets are included in this statement. In my opinion the market is in total denial when it continues to make a big case for a bottom here. More "dead cat bounces" are ahead!

[hugoh]

The primary difference between 1998 and today is the approach the Fed is taking to handling the markets. Currently the moves seem to be an attempt to moderate the overall rate of change.

[David Fry]

All good points to be sure.

[mongoose]

OH , for a crystal ball.

[clue me in]

Everytime I read a good analysis, I wonder why that person doesn't have all the money.

[interd0g]

'Clue me in' , you have it. This is the proper question to ask all gurus, bloggers and analysts. If these insights are any good ,what are you doing behind a desk giving the info away?
By now you should be an a beach down islands.
Reminds me of the famaous notice outside the Physcics Association.
"Meeting postponed due to unforeseen circumstances"

[poet1]

Please define: THE FRY LINE : _____________________ thanks!

[poet1]

PS- So what does on do now? Hold cash? Buy more gold on the low? Sell off all stocks? Go bottom fishing?

[buyitcheap]

poet1 - if we're really heading even lower, 90% cash + 10% ultrashort ETFs? Just a thought... I don't believe we're are, I think we're at a short term bottom and we're going to move higher here. If you look at the S&P cash (SPX) the volume supports a move 10-15% higher. (and no I'm not smoking anything.)

[poet1]

buyitcheap- short term bottom? whats short? 6 months. and a 10-15% move up isnt really squat, since everything has dropped soooo low. i say, CYA. do nothing until after june's mortgage rates kick in/up & until citi's quarterly comes out. nothing crazy will happen before april 15.

[VennData]

Quant funds make money in very short term swings, make up half the volume day-to-day. They can continue to step in and make money on the way up and down. Even in days with 100 point hourly, three hundred point daily swings. No human can do these sorts of trades. Two-hundred-factor models running on servers in Weekawken can.


To quote Ted Nugent, "I got you in a stranglehold, Baby. You best get out of the way."

[KRANKY]

Thank you for the informative article, with accompanying charts.
What these portend, along with the volatility, is that the markets are schizophrenic...and that a true bottom with a capitulation sell-off has not been accomplished so far. This is a rotational bear market, and sector switching is trading dollars looking for what is "safe". I expect another sucker rally next week, and then...the big kahuna. DOW will be propped somewhat by flight to safety and size, but secondary markets of smallcaps and midcaps will suffer
most.
This will be precipitated by late filers not getting the refunds they anticipated and/or their having to pay more in realized cap gains caused by creating events last year. This will then create another wave of selling to raise cash to pay the IRS.

I could be wrong, but this has happened before. Too many people panic at the same time. ( They could always file for an extension, and raise cash systematically over a period of months, but they are too human for that...most of them anyway. )

No crystal ball, just a rear view mirror.

[David Fry]

Clue me in: The beach deal sounds good to me but I lived on one for 35 years and I'm "fryed" so... As to having "all the money" well...

Poet1: I'll contemplate the "fry line" and thanks.

[WILLTK41255]

Mr Fry.
Yours is one of my most veiwed daily posts on Seeking Alpha . I really like your use of charts , and it saves me lots of time as well , getting an overview of things . Your Mar 20th post outdoes them all, great job!!
thank you
Bill

[abcv]

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