Are More Big Falls Ahead?

Justin Fox is worried about today's rally, and whether it portends future falls:

We can learn very little about the future direction of the market from which direction stocks moved in today. But we can learn a lot about the future volatility of the market from the volatility today. Today's big jump presages more big moves. Which could just as easily be down as up.

Except I look at an intraday chart of the Dow and I don't see a huge amount of volatility -- not by recent standards, anyway. The lowest tradeable point was around that 10:10 timestamp, with the Dow at 8,750; the high point so far is 9,350. That's a range of 600 points -- compared to a range of 1,000+ points on Friday. In other words, volatility might be high, but it's coming down.

My point is that when the world changes over the weekend, and stocks open higher on Monday morning and stay there, that's not volatility: That's just a rational response to new information. Volatility is what we saw on Friday, when there was no news and stocks whipsawed all over the place.

Of course, there's still downside risk. I was disappointed by the lack of specificity in Neel Kashkari's speech this morning; if Paulson fails to change his scorpion-like nature, there's a real risk that the world's capital will simply move en masse from the US to the much safer government-guaranteed shores of Europe. On the other hand, John Hempton points out that if you're a client of a broker-dealer, you're much better off in the US than in the UK. But at this point I think it's inconceivable that Paulson will let any household name fail, not between now and January, when his successor takes over.

And over the course of the coming recession, there's no knowing the degree to which stocks could grind lower. No one has any confidence in GDP forecasts any more, we'll just have to wait and see what happens to corporate profits.

But I do have some hope that the big 700-point down days are behind us. Big drops happen in bull markets; big rallies, like today's, are much more common in bear markets. That doesn't help much in terms of overall direction, but it does mean that the worst of the chaos might be over.

Comments

[phdinsuntan...:]

thank you for one more shorting opportunity.
This time I am picking SDS QID SIJ and SMN,
is soo easy...

2008 Oct 13 05:31 PM

[Smarty_Pants:]

Ummm ... States 'discovering' budget shortfalls ... cities likewise ... 1 or 2 more years of mortgage resets ... housing still dropping ... earnings revisions ... spreading unemployment ... etc. etc

I'd guess the odds of further downward moves cannot be ignored just yet. Might even be prudent to sell into rallies.

My cash is holding nicely.

2008 Oct 13 06:03 PM

[Socialism c...:]

Depends...I think we'll see earnings determine the direction from here. We expect them to be lower due to what is going on. But if they are just somewhat lower, and not catastrophically lower...we continue going up, because we're sooo cheap still.

2008 Oct 13 06:24 PM

[Jackson Cash:]

Short answer - yep.

I'd advise all the bulls to go to their local Wal-XYZ and watch people spending, or complaining -- technicals and commentary are terrific entertainment, but nothing is better than the human barometers.

Inflation was 8% last MONTH from my local Wal's prices and food shelves are empty.... who knows what uncle sam will pitch us, but I'd wager another lie.

Can I please have my bailout??!

2008 Oct 13 06:27 PM

[Moral Hazar...:]

I take it that no one here is playing this little bear market rally? You’re leaving money on the table.

Can’t you just hear the drum beat of clueless commentators stating that the market in undervalued, there’s an incredible amount of cash sitting on the sidelines just waiting to get in, that the Fed’s printing presses are running red hot and so we’re now set up for the biggest bull run ever, etc, etc, …

All this should make for quite a significant bounce. After it sucks in the masses and tops out, then go short.

2008 Oct 13 06:48 PM

[Nikola:]

There might not be big drops. But I think we are going to "recover" from this rally over a period of a few weeks. Little by little....

2008 Oct 13 10:49 PM

[playback guy:]

Our compnay just had a layoff, Gas price are still high, yes still high. The crooks are getting more money and people are jumping into the market. Are they on Crack? Helloooooo. Oh whats this I hear a second stimulus?

This thing is going to last for years. Wake up, oh did you all forget about the two wars. Let's just print more money and that should take care of everything.

2008 Oct 14 01:05 AM

[Philly Jim:]

We are in a new dimension, the digital money dimension. There is so much money in the world right now and it's all digital! The world can't continue like this, more consolidation of financial institutions and even currencies need to take place and eventually, the world will have very few currencies and eventually a single global currency.

2008 Oct 14 02:31 AM

[punk_ash:]

what a waste of storage space this discussion is. Unless, some one can decisively move the market, no one knows the answer to that question. Sure, there is a 5% probability of the market going to 14000 in another 6 months. But, there is also a small probability of the market going further down...

2008 Oct 14 03:27 AM

[punk_ash:]

This rally will last and burn a lot and lot of shorts...

2008 Oct 14 03:27 AM

[Wefwef:]

SPX fair value is around 1050 which is still ahead, I believe we will rally to MA50 territory 1150-1200, even a peek through is very possible as SPX yields double the fed rate (3% vs 1,5%). Anything higher than SPX 1300 and it's time to consider selling.

However the yield is great (even factoring in possible slowdown in the next 9 months) and I doubt we're going to ever drop much below last friday's lows, so those few lucky ones who had the cojones to buy then might consider holding for life.

2008 Oct 14 03:33 AM

[Socialism c...:]

@smarty pants, et al, re. cash: get ready for hyper-inflation. that means don't sit on cash. buy gold. and maybe guns. the latter sounds goofy? not so much. we've started hearing the stories of suicides last week...i'm sure there must also have been a ramp-up in numbers of robberies, etc. we are headed for civil unrest. i'm buying canned goods, looking at a rifle purchase, and gold. for equities, concentrating on the usual defensives, those with good divvies.

2008 Oct 14 11:56 AM