THURSDAY, OCTOBER 16, 2008
10/16/08 4:25 PM EST
In the last Long-Term Summary from September 29th, we looked at some of the extremes that triggered on an historic day. It had been a long, long time since we'd seen selling pressure that heavy.
In fact, the losses on the 29th were so great that it could only be considered a market crash, something we hadn't experienced for 20 years. In a Data Brief that evening, we looked at other market plunges over the past century, and they pointed to a consistent pattern.
Namely, it was common to see the indices bounce back violently over the next one to three days, then suffer the uncertainty of a "retest" of the panic low. It was not at all unusual to see that panic low violated, with a better intermediate-term bottom formed within 5 to 10 days after the initial panic.
The next few sessions played out that pattern very closely, and over the past week we've seen the indices dive, triggering yet more crash-type comparisons. It has been extremely rare to see this kind of persistent selling pressure, and in fact it is unprecedented on many levels.
Before the past week, the Dow had never before suffered through six straight 1% or more daily declines in its 100+ years of history, it had never before lost as much as it did in one week last week, and we had never before seen 75% of all issues on the NYSE hit a 52-week low at the same time.
That kind of activity will trigger many extremes in the guides that we watch, and we haven't been disappointed in that regard. Here are just a few that we discussed in the comments over the past couple of weeks:
Heading into this past Monday, we were looking for the indices we post a possible 25% gain from Friday's lows in a very short period of time. That didn't take long, as we hit that target in most of the senior indices like the S&P 500 in the early hours of Tuesday.
At that time, our shortest-term guides hit overbought levels, which often gives us a good test of nascent recoveries. Markets trying to emerge out of intermediate-term lows almost always trigger short-term overbought conditions, then roll right over them as they score further gains. Weak markets roll over almost immediately.
We saw the latter situation again, a common theme over the past year. That led to a re-test of Friday's lows, with the Nasdaq 100 touching its worst level from Friday almost to the point. We saw another upside reversal today, but it remains to be seen whether this one can finally stick.
There has been some improvement in the credit market indicators that have been so much of a focus, which is a good start. Now we need to see traders react less to the potential for even more government intervention, and more on the merits of individual earnings and economic reports. That would be a welcome change in character.
While the past few days have been a challenge in terms of the indices dropping further than they "should" have given what we discussed early in the week, so far they've been able to hold above the worst levels from Friday and we're sticking with the outlook that last Friday marked the end of the vast bulk of the selling pressure, leading to what should be a decent fourth quarter. If we cannot hold Friday's lows, or at least quickly regain them after a violation, then we will be in truly uncharted territory - something no trader has witnessed in more than a century of market history.
All the best,
President and CEO
Sundial Capital Research, Inc.
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