Smells Like a Bottom, But Confirmation Will Be Required Today

Another fireworks day.  The crash update from Sunday was unfortunately the correct call.  However, we did see some interesting action yesterday.  The market gapped down pretty heavily yesterday morning and was down from the jump nearly 200 on the Dow.  This acceleration continued all day until about 3pm when the Dow was down nearly 800 points.  Mind you, this was the largest intraday move down ever.  From this low, the Dow rallied 500 points before pulling back a few on the close.  There were massive reversals in the daily charts yesterday.  We will need some confirmation in the next day or two to confirm what we saw on yesterday's close; we are not out of the woods yet but it's looking better. 

There was something different about yesterday, I smelled the fear, there was quite a bit of blood in the streets.  At one point, there were 1600 new lows on the NYSE, there was a volume ratio of 100:1 down/up volume, and the VIX climbed up near 60. 

If you watch the news channels, it literally feels like the world is coming to an end.  There is severe panic out there.  CNBC brought a level of fear out yesterday that I have never seen from it before.

When I look through some of the sectors out there, it is clear to see that there was massive deleveraging going on to shore up liquidity for some of these strapped hedge funds.  Just take a look at some of the darlings from a couple months ago:  ANR, MOS, POT, CHK, RIMM, AAPL, etc.  The list goes on.  Absolute capitulation in many of these stocks.

The best case scenario for the bulls today would be for a gap higher, thereby creating a morningstar candle formation.  This is an extremely powerful reversal signal, especially when it comes at support.  We have been watching UYG very closely all the way down here.  It has held up extremely well in the face of this madness and its single leveraged counterpart, XLF has held up even better.  The chart on UYG is set up for a bear trap.  The bulls could break the back of the bear, at least for the short term, if they stage a strong gap on the open. 

The S&P 500 & Dow Jones printed similar candles but I like the banking sector the best at this point.  UYG is holding up at critical support levels with shrinkage in volume and price support.  Let's see if they can push it out of here today.

Disclosure: Long UYG.

Comments

[haydete:]

UYG is 2X IYG, not XLF. XLF contains insurance companies (AIG, MET, PRU, HIG...) that IYG does not.

2008 Oct 07 07:02 AM

[notsosmart:]

who wants to smell a bottom? even one wiped clean with all that valueless paper.

2008 Oct 07 11:32 AM

[disaster2008:]

There will be more blood.

2008 Oct 07 11:49 AM

[disaster2008:]

No confidence, pervasive fear, massive distrust, and a impotent fed. The US Gov't has led us to believe that things are not that bad and just now they are changing their tune. There will be more blood. How about the rule of thumb that the bottom will be tested three times - at most we have had one.

2008 Oct 07 11:52 AM

[carey_jim:]

Drea-ea-ea-ea-eam, dream, dream, dream
Drea-ea-ea-ea-eam, dream, dream, dream
When I want you in my arms
When I want you and all your charms
Whenever I want you, all I have to do is
Drea-ea-ea-ea-eam, dream, dream, dream ...

Everly Brothers, 1958

2008 Oct 07 12:27 PM

[daphne does...:]

Garbage in, garbage out...

2008 Oct 08 01:53 PM

[Fitz919:]

From long experience we all know that the Government always lies to us. That's one thing we can always count on. So, if the Govenment is saying this is a crisis....and the worst is still ahead of us. Why would you believe them, I certainly wouldn't. In just a few days, reverse auctions will be held, and everybody holding their toxic mortgage backed securities will get a chance to sell some of it. At the same time, some of those Credit Default Swaps circling above our heads somewhere in the stratosphere like B-52s will simply vanish, because those securities sold to the government won't need to be backed up by insurance policies any longer. That means the banks can stop paying the premiums. Citigroup for example has been selling everything that isn't bolted down. Why? Because they have to keep paying those premiums. As soon as those toxic securities are gone, so are those enormous premiums. I'm telling you, it's time to think about going long, especially in the financials. When the really big players jump in, they'll probably push the entire sector 25% in a single day. You won't see any real retracement, so you won't get another chance to buy the sector this cheap. In a few months everyone will look back and see the bottom was in early October.

2008 Oct 08 07:25 PM

[caballer:]

Still long on UYG, huh Kunal? Just went back to check your post from 22nd of Sept when you were long UYG. Down almost 50% in about 2 weeks. Great track record.

2008 Oct 09 03:53 PM