This Bear Market is Worse Than I Thought

So here goes. 

The stock market has been crashing day after day and the Dow Jones is now at 8579 on yesterday's close, down over 2300 points in seven trading days.  For the third day in a row, the market has attempted a morning gap and failed miserably. 

The Fed is throwing the kitchen sink at this market and the market is speaking loudly; the Fed is too late.  The market is truly setting a new precedent.  Volume, breadth, and the speed of this move down are all alarming; important support areas are being violated with ease.  The S&P 500 had major support at 1165 to 1175, 1060, and 960, the market didn't even think twice about holding these levels. 

In reviewing our charts below, We may see 800 to 767 on the S&P before this leg is over.  If 800 provides good support, it may be that this market will trade within a gigantic trading range over the next few years.

Take a look at the Dow.  It has blasted through its bull market uptrend line and is in danger of challenging the 7500 area very soon.  That is the 2003 lows in this index.  Even if we eventually go lower, this level should hold it for at least a couple months. 

The fact of the matter is that this market is not like 1987, the fundamentals and technicals are much worse.  We have seen many important indicators that we track hit all time extremes and no buying is stepping in.  For example, the $VIX has hit 64 yesterday and continues to break to new highs, the AAII bull/bear ratio is over 60% bears, and we have seen a historic up/down volume ratio in the market of 100:1 down to up volume. 

For those of you who are not familiar with AAII, it is a poll of bulls versus bears among market advisors and is recording a record bearish sentiment.  This SHOULD be extremely bullish for the market, but the market refuses to rally.

It continues to trade with extremely oversold conditions until it doesn't.  Japan's Nikkei were down tremendously, another 10% as I wrote this, and it appears that our markets will have a similar fate today.  It should open down huge and basically put the final stamp on this leg down.  We could be down 10% today at some point, if not more.  Look for a gigantic reversal to signal a low is in.

Using history as a guide, we can compare this move to the move that preceded the bottom on Sept 21, 2001.  There are some similarities with the exception of the event that drove the price.  The descent into the July 2002 lows was similar, it took nearly 2 months for the market to drop almost 3000 points.  We *should* see a rally here and I use that word with caution as technical indicators are basically thrown out the door here.  There is a mass exodus and panic is flooding the streets(looking like blood tomorrow), and for good reason.  The Dow Jones has broken down through important monthly support. 

As Al mentioned in his update yestesrday, the market should be nearing a bottom of some sort, 8000 to 7500 should be a good support level.  A ferocious, multi-month rally should erupt out of this low and I will be selling into this strength.  Structurally, its broken on a bigger picture.  This means that it will not form a V bottom and when the market finds it bottom, it will test the eventual low a couple times before moving higher, similar to what we saw in 2002 - 2003 lows.  We are far from that happening at this point.

Trade very safely out there and don't even bother day trading unless you are a professional.  Many stocks are swinging 10% intraday with ease.  One bad move can remove ten good ones.

What will I do with my long position?  Well, I was obviously dead wrong with my purchase at 1200 on the S&P and I am currently sitting in a major drawdown.  I was caught in the wave of massive liquidation which caught me off guard;  I never expected this move to get as viscous as it did. 

Things have changed from my original plan; I am not going to sell on this panic.  I will wait for a counter-trend rally and get out when I see fit.  I will update my position on this blog.  Getting out now is probably not the smartest move.

Disclosure: none

Comments

[you_can_cal...:]

Don't feel too badly about getting caught unawares. NOBODY could have expected this kind of move downward. There are few precedents, and none of them were predictable.

Good luck with holding.

2008 Oct 10 06:59 AM

[kowalski:]

Buy more and go for broke; it is a rational thing to do in this market.

2008 Oct 10 07:30 AM

[Jim Hawthorne:]

You say, "The Fed is throwing the kitchen sink at this market and the market is speaking loudly; the Fed is too late." It seems that many of us simply take it for granted that it is the Fed's job to "save" the market. This is not quite the case.

Today, the Fed's stated mission and mandate is: "The purpose of the Federal Reserve System originally focused on lending banks money to ensure that they would have sufficient cash in times of seasonal shortages and incipient panics as well as to provide currency to the banking system. The Fed also was to supervise state-chartered banks to maintain their stability and compliance with the federal banking laws. But, as the financial industry and the economy evolved and developed, the scope of the Federal Reserve's mission also expanded. Today, the Federal Reserve System has three distinct functions: supervising banks, including bank holding companies, many state-chartered banks, and international banks; running huge payments systems that involve processing checks and transferring funds electronically; and monitoring and adjusting monetary policy to guard the economy against high inflation and recession."

It is true that the policies of the Greenspan Fed encouraged us to feed the bubble that has just burst like a super nova through the cheap supply of money coupled with loose lending standards, shoddy oversight of the banks and keeping interest rates too low for too long. It is not true that the Fed has a mandate to save us from ourselves.

What is happening is the deflation of a truly financialised system built on paper debt with precious little real support, and we were all too willing to belly up to the bar and play the game.

While historical looks backward at the 2000 through 2002 bear market are useful (see the bottoming process that went of from July 2002 through March 2003, for example), conditions then were quite different in terms of inflation, consumption, overvaluation and growth.

While we will see series of "pop and drop" rallies, these will be opportunities for only the most disciplined, flexible and nimble traders. We are witnessing the destruction of markets, and I agree that the consolidation, healing and recovery of those markets will be a long, slow bottoming process, and that there is still more pain to come.

2008 Oct 10 07:31 AM

[Jimmy Lathrop:]

Unless your Bloomberg Terminal contains market data calculating the number of redemption calls from investors in hedge funds and mutual funds, the technical analysis will be useless. Throw the charts out the window. The market decline will stop when the big institutions and the little investor stops selling. Period. Don't make it more complex than it is.

2008 Oct 10 07:38 AM

[User 223247:]

I have been buying on the way down. I am now in the cellar, today I am digging a tunnel

2008 Oct 10 09:15 AM

[kurt walter:]

Dow: 6260

2008 Oct 10 10:47 AM

[Donulvi Dolam:]

Thank God I didn't listen to you the first time. Your advice is as useless as teats on a bull. With people like you changing their minds on a constant basis, no wonder the markets are screwed.
Take my advice, the internet is not the place where people like you should give this type of advice.
By this I mean people like you who have somehow convinced themselves that they are experts at something when in reality they're just fools playing games that make them feel important.
People can loose their money here, you know.
Now grow up a bit and the next time you print something try printing your credentials

If you have any.

2008 Oct 10 11:22 AM

[venividivici:]

"This Bear Market is Worse That I thought". Gee Kunal that certainly doesn't surprise me because I actually did read one of your other offerings. And it was just as dopey as this one.
My advice to you is to go and find something else to do with your life because without wanting to be rude, you haven't got a clue.

2008 Oct 10 11:41 AM

[Blair:]

Looking at point & figure charts to do a count as to where one perhaps find a stopping point, based on Friday's trading, we are in a general support area.

This area is interesting because it represents the 2002 bear market low for the major indices: Dow, S&P 500 and QQQ.

So, my assessment is that this area represents a 'clean up' price area based only on the S&P 500. Sad to say, the next down count projects to a level I don't even want to think about. Likewise, the QQQ appears to be in a support area (count and 2002 bear market low).

Regarding the Dow, here the next level down from the 2002 low is in the 4,000 area. There is no obvious pick point, however.

2008 Oct 10 08:29 PM

[Kunal Vakil:]

Donulvi, credentials? Have you read my previous posts? I am one of the few who nailed the market up until the last 2 weeks where I challenge you to find me someone who predicted this.

Venividivici....."I actually read one of your other offerings. Anid it was just as dopey as this one" You clearly need to go back to grade school and learn how to read again. Are you sure your reading the right language? Anyone that reviews my previous posts can easily see how I nailed the top in this market a couple months ago, predicted the many banking failures, called a short term bottom at 1200 and predicted that the rally ensuing would not last and that we would set new lows down to 1160. Again, I obviously was wrong about the ferocity of this bear. If you want to persecute me for not seeing the most viscious decline in the history of the stock market, go ahead, if that makes you feel better for your losses. The fact of the matter is that you are a child.

2008 Oct 10 08:36 PM

[Jimmy Lathrop:]

Gentlemen, gentlemen, please!

I believe it was Yoda who said that when you are angry, the Dark Side has won. Many people on television are telling us we should be angry, It has been boosting ratings.

I did not get angry when I went into Staples and I saw that an Acer laptop was selling for $500 when I bought the same model last year from Wal-Mart from $750. I was not enraged at my purchase of a Toshiba laptop in 2003 at $1300, nor is my wife crestfallen at her purchase of a Dell at $1300 in 2003 either. How can you get upset at the law of supply and demand?

If I am running Staples and I see my profit margins are shrinking and the computers are getting cheaper, then yes, I should be concerned, but its a low margin business anyway. But as a consumer, if I see a sale, that's a buy signal. And that is what we are experiencing, a buy signal.

The only poster I am concerned with is User 223247. You are not digging into the cellar. Your elevator is stuck between floors. And when it does get unstuck, it will go up.

Do not let CNBC frighten you. The images of government officials working through the weekend to keep their cronies afloat does not concern 99 percent of Americans who need credit to live on a day to day business. There are some Americans who need credit to live on a day to day business. Those are the Americans who wear Rolex watches to their own bankruptcy hearings. They are not reading these posts because they are ignorant.

For the rest of us who aren't money managers or speculators, I feel like Steve Carell in the final musical number of the 40 year old Virgin. Don't let Charlie Still 40 year old Virgin Gasparino tell you otherwise.

2008 Oct 12 11:34 AM

[squawk:]

"The fact of the matter is that this market is not like 1987, the fundamentals and technicals are much worse. "

Please backup your assertion that fundamentals are "much worse" than 1987. Valuations today are much more reasonable, historically, then then they were in 1987, when I believe stocks were trading about 25X earnings.

As for technicals, duh! We don't need anyone to state the obvious.

2008 Oct 13 05:41 AM