Will the July Lows Hold?

The market sold off with a vengeance on Thursday. I have to say it continues to feel like forced margin selling and liquidations among big hedge funds. We already know that $4B Osparie blew up, and today, an even bigger hedge fund (Atticus) had to publicly deny rumors that it was liquidating.

Thursday's sell-off puts us very close to the July lows. The question is: Will the July lows hold? The answer is a tough one. The bulls point to the fact that the July lows coincided with total panic in the financials, and that the sector has been acting much better since. I can't argue there.

However, the bears will say that the rest of the market is now rolling over also, and that the September-October time frame is a notoriously difficult time period in the market, and one where market bottoms are often made. This argument also holds a lot of water, and I would currently have to say that I think that ultimately, the July lows will be broken.

Today is Friday, and if the sellers emerge again ahead of the weekend, we could see the lows tested again. If not, I think there is a good change we bounce first, as today saw some panic selling. To wit:

• 90% of Thursday's volume was on the downside.
• The volatility index (VIX) spiked +12% to 24.03.
• The ARMS Index hit 2.89, an extreme level.
• Volume rose for a third straight session, signaling heavy distribution.

I am still holding lots of cash as well as my SPX hedges. I do not anticipate putting that cash to work in a meaningful way until I see the typical signs of capitulation witnesses at prior trading bottoms. If we bounce in the short-term, I would consider adding to my downside hedges. Risk management is an active process, but every little bit helps.

Disclosure: The author is long SDS.

Comments

[investor88:]

Jordan has written a useful article with keen observation of market behavior. In the light of the weak market action as described in the article above, I would take the side of Jordan that the July market low would not hold. Meanwhile, holding cash with some shorts seems a sensible stance.

2008 Sep 05 05:12 AM

[buyitcheap:]

volumes were lighter yesterday than the July lows so a short term bounce is a good probability, but ultimately I agree with you - the July lows will get broken this year.

2008 Sep 05 07:13 AM

[Jimmy Lathrop:]

I am holding some SDS but they have just now come back into the money since July. David Fry and his ETF digest gives a great overview that we're in a sideways trading range and most of the air has been taken out of the market. There may be a bad September and October but I would see bounces and trades within a box range for the foreseeable future.

2008 Sep 05 08:09 AM

[mkttrdr:]

July low will not hold!
Reasons-funds selling-workers laid off need funds. Retired folks are fed up losing will sell too. Next!

2008 Sep 05 11:32 AM