Another Day Of Remarkable Moves

10/06/08 4:25 PM EST

As of: SPX 1075 HELP  ARCHIVE

Well, that session wasn't too much fun for pretty much anyone I've spoken to today.  The stress mid-day was palpable, with most traders frozen and simply watching the damage.

In a couple of notes intraday, we touched on some of the extremes that triggered during the day.  Here's a recap, updated with the closing figures:

*  New lows on the NYSE spiked to 1839 issues (that will vary by quote vendor), by far a new record.  On a relative basis, it equates to an incredible 49.8% of all securities trading on the exchange, the highest since Black Monday.  Since 1965, there were only three other dates matching this extreme:  08/29/66, 05/21/70 and 10/19/87.  All were at, or very near, a market low.

*  Our Stock/Bond Ratio moved to -3.1, beyond the -3 threshold that identifies a true historical extreme.  Since 1965, there were a total of 35 days registering a reading this extreme, and over the next three sessions the S&P was higher 69% of the time by an average of +1.0%.  Over the next month, it was up 75% of the time with an average of +2.7%.

*  Our shortest-term indicators, which are adjusted so that it becomes more and more difficult to become extreme in a bad market, stretched into "excessive pessimism" territory for the first time in a couple of weeks.  The Price Oscillator moved under 30%, a very rare reading that almost always signals that any further selling pressure over the next several hours will be temporary, even during the worst markets.  It proved out again today as stocks reversed their afternoon losses

*  Down volume on the NYSE was running at a 116-to-1 pace over up volume at its worst point during the afternoon.  It since settled down to only 7-to-1.  Using closing figures (which is cheating a little bit), the only other days since 1950 it was that high were 12/04/50, 09/26/55, 10/19/87, 10/26/87 and 10/27/97.  Over the next two days, the S&P was higher every time by at least +2%.

*  Implied volatility on the S&P 500 set a new all-time record high using the modern indices, but still well below the all-time spike on Black Monday in 1987.

*  At its worst today, the S&P was about 34% below its yearly high, and 22% below its 200-day moving average, both levels that have neared major lows in the past (6/22/62, 5/25/70, 8/27/74, 10/19/87, 7/19/02 and 10/4/02).  A month later the S&P was up 84% of the time by an average of +8.2%.

There will probably be other extremes we can point to, but you get the picture.  Like last Monday, we got a bevy of readings that have a strong historical bias for preceding short-term snapbacks.

Over the past week, we discussed the likelihood of last Monday's low being tested - and it wouldn't be at all unusual to see that low temporarily violated before the market rebounded.  As we saw in other post-crash precedents, the initial panic low wasn't usually the ideal time to be building investment positions.

Today's violation was more extreme than I was expecting, by a fairly wide margin.  I was looking for the 1050 - 1075 area on the S&P 500 cash index to put a temporary halt to the pressure, but we kept sliding significantly below that before closing within that general range.  So I'm a bit put off by just how much selling we've witnessed, and will need to see stocks hold in the coming days to have some confidence that the pattern will play out as we've discussed, with an expectation for generally rising prices through the end of the year.

A Couple More Notes

10/06/08 1:45 PM EST

As of: SPX 1075 HELP  ARCHIVE

The initial bounce off the early-morning low has petered out, and we're sinking back towards the lows of the day.

We already know that we're seeing extreme readings here, so this is just piling on from what we already looked at this morning, but some other notable developments that have triggered:

*  New lows on the NYSE have spiked to nearly 1700 issues, by far a new record.  On a relative basis, it equates to 45% of all securities trading on the exchange, the highest since Black Monday.  Since 1965, here are the other dates matching this extreme:  08/29/66, 07/28/69, 05/14/70, 05/21/70, 05/21/73 and 10/19/87.  Only one (May 1970) did not precede a short-term rebound.

*  Our Stock/Bond Ratio, assuming we close around these levels, would move to -3.3, the most-stretched reading since immediately after 9/11.  Since 1965, there were a total of 19 days registering a reading this extreme, and over the next three sessions the S&P was higher 16 times (84% of the time) by an average of +2.2%.

*  Our shortest-term indicators, which are adjusted so that it becomes more and more difficult to become extreme in a bad market, have stretched into "excessive pessimism" territory.  The Price Oscillator has moved under 30%, a very rare reading that almost always signals that any further selling pressure over the next several hours will be temporary, even during the worst markets.

Like last Monday, there are a multitude of measures here that show a strong historical precedent for at least a short-term rebound trade.  It's all the stronger considering the time of year this is occurring, and even the day of the week (markets have a consistent tendency to rebound during the middle of a week when they sell off on a Monday).

We've gone well beyond what I thought the worst-case scenario would be today, so I'm back on my heels a bit here.  I don't wish to keep trying to buy into a market that has exceeded historical precedent by such a wide margin.  I'm also a little put off by the large number of references I'm starting to see about traders wanting to wade back in for a trade, but that anecdotal sentiment may not be the best tell in this environment.

We continue to trigger more and more compelling extremes as the day wears on, but we must see large-size buyers willing to return and take risk.  Until we do, I don't have a lot of desire to add any additional long exposure.  We once again have all the hallmark signs of a trend day, which have a tendency to close at or near the day's low.  Without some kind of dramatic headline announcement, I'm not too encouraged that we'll be able to avoid the same fate today.

Stretching Further Than It Should

10/06/08 11:25 AM EST

As of: SPX 1075 HELP  ARCHIVE

Just a few quick observations:

*  Down volume on the NYSE was running at a 90-to-1 pace over up volume earlier this morning.  It has since settled down to "only" 35-to-1.  Using closing figures, the only other days since 1940 it has been this extreme were 5/21/40, 9/3/46, 9/9/46 and 10/19/87.  They were all good for short-term (one to three day) bounces, but not necessarily intermediate-term lows.

*  New lows on the NYSE have hit an all-time record high at 1499 (according to my quote vendor, yours is likely different).

*  Implied volatility has set a new all-time record high.

*  At its worst today, the S&P was about 34% below its yearly high, and 22% below its 200-day moving average, both levels that have neared major lows in the past (6/22/62, 5/25/70, 8/27/74, 10/19/87, 7/19/02 and 10/4/02).  A month later the S&P was up 84% of the time by an average of +8.2%.

This latest plunge has gone much further than I expected - I was looking at a worst-case stop of around 1050 - 1075 on the S&P and we've undercut that by a significant degree.

This is obviously troubling, unless we can reverse into the close today.  I suppose the only other potential saving grace would be further slippage into the close, then a coordinated international movement overnight or early tomorrow morning that helps shore up confidence and give us the "turnaround Tuesday" rally.

Either way, I scaled into some intermediate-term positions into today's gap down and don't wish to add much more without some signs of stabilization.  This has "forced liquidation" written all over it, and there's just no telling at this point when it may stop.  We've exceeded what "should" happen, and as far as I'm concerned we need to see a rebound by tomorrow morning in order to have any confidence that we're close to the exhaustion point that should have already been reached.

More Monday Morning Drama

10/06/08 8:15 AM EST

Good Monday morning...We begin the new week with what has become a pattern of high drama and big selling pressure.  The major indices are indicated to open about 2% below Friday's closing prices as overseas markets were exceptionally weak.

Since the crash one week ago, we've discussed several different signs of exceptonal pessimism in both the stock and credit markets.  There is no question that we've seen an historic extreme in credit market fear, but there are some missing pieces to the idea that we've seen enough of a sentiment extreme in stocks in order to reasonably expect a sustained rebound rally.  One is from the options pits, which we'll look at a bit closer later in this note, and another is the behavior of corporate insiders.

The latest data from InsiderScore.com and InsiderInsights.com shows little change in the buying and selling patterns of executives.  There is no evidence whatsoever of an increased interest in buying the market as a whole, or the stocks that make up the major indices.

Part of this may be due to when we saw the worst of the selling pressure in stocks, which was right at the end of the third quarter.  Many firms close trading windows for executives around those dates, as well as right before earnings announcements.  Unlike 1987, when there was a huge surge in insider and corporate buybacks, there could be structural reasons why we're not seeing it just yet.  Perhaps we will in the coming weeks, but right now it's a disturbing sign of a lack of confidence among those who should know best about corporate prospects.

As for trading in the options pits, that's probably the most conspicuous absence from our Indicators at Extremes.  Despite major price losses, we are not seeing a wholesale rush into protective put options.

Two possible mitigating factors are that options-market behavior may be less comparable to historical periods due to the ban on short sales.  Traders who sell short are also often very active in the options market, so the change in behavior in one activity (short selling) is impacting the other (options trading, particularly in puts).

Another aspect is that extremely high put/call ratios are most often seen a couple of weeks prior to a market low, not at the exact low.  And we did see a spike a while back.

But the very smallest of traders tend to not be big short-sellers, so we should not see their options activity impacted too much by the short sale ban.  That's why I was anxious to see this weekend's update on the options-market activity of small options traders, those taking positions of 10 contracts or less.

Unfortunately, despite the huge loss in stocks last week, these traders actually increased their purchases of speculative call options, to 38% of their total volume from 35% the previous week.  While they also increased their buying of protective put options, it still only amounted to 22% of total volume, well below the 25% - 30% seen at past market lows.  That's not exactly encouraging.

One bright spot among the options data is that focused on S&P 100 (OEX) options.  This is one of the very few "smart money" options gauges - stocks usually rally when the OEX Put/Call Ratio drops to a very low level, and fall when it becomes high.

Over the past couple of weeks, that ratio has dipped to a remarkably low level, the lowest in four years.  Since 1990, there have been 37 days when the 10-day average of this ratio has dropped to as low a level as it's at now and a month later the S&P was positive 84% of the time by an average of +4.2%.

Some are concerned about anecdotal evidence like a Wall Street Journal article over the weekend suggesting that the recent drop is nothing more than a buying opportunity.  We're always going to see that; I think it's more of a tell that some of the major news/business magazine covers showed pictures of the Great Depression, a Wooly Mammoth, and a guy about to leap off a cliff.

The concept of stress in the credit markets has certainly hit critical mass.  We noted on the Daily Overview page on Friday that according to Google data, the number of news articles containing the word "Libor" has surpassed the number containing "Britney Spears" for the first time in history.  That's gotta say something.

Most of the classic signs are here that we've reached an inflection point, or are exceptionally close to it.  We got the crash last week, and so far the market has played out almost exactly in line with other post-crash scenarios.  We have many of the typical sentiment extremes lined up, and we have the big Monday morning gap down opening after a wave of huge selling pressure in overseas markets.

This would be only the third time since 1982 that the S&P gapped down 2% or more after having lost 5% or more the prior week.  The others were October 19, 1987 (the Black Monday crash), and the other was October 28, 1997 (the "Asian contagion" mini-crash).  In 1987, the S&P lost another 20%+ during the day before bouncing over the next several sessions, while in 1997 it jumped almost from the open and ended up gaining about 9% on the day.

Opening prices for the cash S&P 500 index aren’t reliable, but the cash index is what has the most history.  Anyway, using closing prices, if we assume the S&P closes down around 20 pts or more today it would be a 7% loss since Wednesday.  There were 7 times the index lost 7% or more in the three days through a Monday.  On Tuesday, it was up 6 of the 7 times by an average of +3.1%.  By Friday, it was up all 7 times by an average of +6.2%.  Two weeks later, it was still 7 for 7 by an average of +7.3%, and three months later 7 of 7 for an average of +11.0%.

If the markets do not turn around early today, I will be looking for some kind of dramatic, coordinated step from governments around the world.  Traders are demanding the FOMC cut short-term rates, which would likely be one response (the futures markets are now pricing in a 40% probability of a 50bps cut, and 60% chance of a 75bps cut by the end of the month).  The concept of a "turnaround Tuesday" looms large if we sell off hard today.

Given everything we've gone over during the past several weeks, it's evident that either we're on the doorstep of what should be the best buying opportunity of the fourth quarter as the S&P approaches the 1050 - 1075 area (and the Nasdaq 100 the 1400 area and DJIA the 10,000 level), or like the latest cover of The Economist we're on the verge of a cliff that nobody has really seen before.  I continue to think the former is much more likely, and am moving our short-term and intermediate-term biases to modest bullish positions because of it.  As always, those are not trading signals, only quick reflections of what the models, indicators and studies on the site are suggesting.  And they're almost always early.