Snapshot Notes - November 1, 2007

After the opening wretch, the major indices haven't gone much of anywhere, trading in a relatively wide band between the opening high and the early-morning low.

Bank stocks have gotten pummeled today, with the BKX index down more than 4%. If it closes at this level or below, it will be the index's worst single-day loss since October 9, 2002.

You may recall that October 9th of that year was the bear-market low. In looking back further, though, such large one-day losses were not always a precursor to such a powerful move higher. Sometimes they were, but they were not consistent enough to consider today to be a capitulation day.

Still, the returns going forward tended to be positive, and we should respect the fact that even though the sector is in a spiral downward, it can still temporarily rebound strongly from extreme moves.

The table below shows the returns in the BKX index the given number of days after it experienced the ingloriousness of a 4% down day (data from 1993 - present):

	1 Day	5 Days	10 Days	1 Month
% Positive	70%	63%	70%	80%
Avg Return	+1.1%	+2.8%	+5.3%	+7.2%
Avg Max Gain	+2.8%	+6.5%	+9.5%	+12.3%
Avg Max Loss	-2.3%	-4.6%	-5.9%	-7.4%

We can see that it had a tendency to rebound across all time frames up to a month later, though the max gain and max loss were quite wide - the index was very volatile. Kind of one of those things where it's tough to be long OR short.

As for the broader market, a rebound in financial shares would obviously be a boon to indices like the S&P 500, which have been floundering for the past week. Today we got the expected letdown from the post-Fed rally, though our short-term guides aren't yet suggesting that the decline has been "too much, too fast". We are in the midst of some positive seasonality during the next couple of days, but after that the really positive stuff goes away until around the Thanksgiving holiday.

So we have a market that is in a generally positive seasonal state, and still in a solid up-trend. That's the good news. The bad news is that we're still working off overbought conditions and the hangover from the Fed reaction, both of which tend to persist for a couple of sessions. So I'm still going to hang back here and let things sort out a bit until I can see a clearer edge emerge.

Good Wednesday morning...we begin the day with a large gap down open in the major indices and negative reactions in every sector I follow. Banks, Brokers and Housing stocks are bearing the brunt of the damage.

Back on October 19th, I went over the fact that the BKX Banking Index had declined for eight consecutive days, a rare phenomenon that should lead to a short-term bounce, but not necessarily any more than that. The group did manage to put together a string of positive days after that, but today they are giving it all back. As far as I'm concerned, this sector is in a bear market (with declining 50-day and 200-day moving averages) and that is a big drag on indices like the S&P 500.

That index had a great day yesterday, though as we discussed after the FOMC move, extreme reactions to economic events like that tend to lead to a reversal sometime during the next several sessions. We didn't have to wait long this time, as the reversal occurred overnight and we've even moved below yesterday's lows.

After yesterday afternoon, given our short-term overbought conditions and the "Fed reversal" pattern, I suspected it would be unlikely for us to see any kind of sustained bounce higher. Much more likely was a pattern of choppy trading for at least several sessions, and with a downside bias. This morning's shellacking helps to reinforce that view, and we've got a ways to go before any of our more sensitive indicators are going to be suggesting we're oversold. So I'm going to keep expecting more chop, and with an overall downward slant.

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