Still Focused On Tomorrow

10/09/08 3:20 PM EST

As of: SPX 1075 HELP  ARCHIVE

This morning, we went over some of the records, or near records, that we've witnessed lately.  There's little point in continuing to go over any more - we all know we're "oversold" to an historic degree, we should be on the cusp of at least another short-term snapback, and we're just waiting for a catalyst.

Based on what we've gone over during the past two weeks, and again this morning, my thought is that it should come tomorrow.  The auction of Lehman's derivatives is due to be completed tomorrow, which is something that large traders have been focused on but has gotten surprisingly little media attention.

Until then, I'm doing nothing.  We're seeing stuff we've never seen before - assuming we close poorly, this would be the first time since 1897 that the Dow Jones Industrial Average lost 1% or more for six straight days.  The S&P 500 has already eclipsed its previous record.

There are all kinds of similar stats - worst start to a month, worst year-to-date returns, largest mutual fund outflows ever, etc..  After everything this country has been through over the past century, the fact that we've never seen this before is almost unbelievable, and more than a little disconcerting.

I don't think this has much, if anything to do with the expiration of the no-short rule.  The BKX Banking Index is down 8.7%, but the stocks that couldn't be shorted before are down "only" 6.9%.  If traders were rushing to re-establish shorts they couldn't before, then one would think the no-short index would be down significantly more than average.

At this point it looks to be a toss-up into tomorrow morning's Lehman results.  Maybe I'm reading too much into that event, but I doubt it.  Tomorrow should be the last day of this kind of pressure.

Could Tomorrow...Finally..Be "It"?

10/09/08 8:05 AM EST

Good Thursday morning...We begin the day with another volatile morning of pre-market trading.  The futures are indicating another gap up opening, but they were yesterday too and collapsed before the open of regular trading hours.  The credit markets are not showing much improvement this morning, which is brewing consternation among those who expected at least a temporary fix from the coordinated government intervention.

On Wednesday, we looked at the Investor's Intelligence sentiment survey, which showed those respondents with one of the lowest bullish outlooks since 1969 (in the bottom 2% of all readings).

It isn't just newsletter writers - the latest poll of individual investors via the American Association of Individual Investors showed that group having the highest expectations of further stock market losses since 1990, and the 2nd-highest all-time.  The only other higher reading was 67% during the week of October 19, 1990 as stocks were hammering out a bottom.

A real-money depiction of angst among mostly individual investors is evident in the flow of assets among the Rydex family of mutual funds.  The Rydex Ratio, which computes the total assets in the S&P long fund as a percentage of the total in the long and short fund, sank to 15% yesterday.

Over the past decade, it was as depressed as this only for a few days in mid-February and mid-March 2003 as the market was going through its last throes of the prior bear market.  Similar ratios that look at flows among all the bullish versus bearish funds (not just for the S&P 500) and also the leveraged funds, are back down near the lows set during the trough of the last bear market.

It's no wonder investors are caving.  With Jim Cramer jumping up and down about another 20% loss ahead, a continual bombardment of bombastic proclamations on newscasts, and even increasing reports of deadly money-related violence, it's hard to have any hope at all.

Few stocks have escaped damage with the latest assault, and we could trot out any number of extremes related to market breadth (e.g. the lowest 5-day Up Issues Ratio in 20 years, multi-year highs in Down Pressure, fewer than 4% of stocks in the S&P 500 trading above their 200-day average...the lowest in a decade, just a hair more extreme than the previous decade-low on July 23, 2002).

One of the more unusual ones is the McClellan Oscillator.  I've written about this measure a few times, as it's a bit of a twist on the typical breadth indicator.  Basically, the Oscillator a measure of the momentum in breadth (the number of advancing versus declining stocks each day).

With the downdraft this week, the Oscillator has dropped to -106, one of the lowest readings in six decades.  There have been 9 other days in the history of the S&P 500 that showed similarly stretched readings when the S&P traded at a yearly low at the time, and two days later the index was up all 9 times by an average of +4.2%.  It lost a maximum of -1.8% on average over those sessions, compared to an average maximum gain of +5.3%.

We've also been writing about the tremendous number of securities on the NYSE that have been trading at new 52-week lows.  It has continued to expand all week, hitting new records along the way.

As a percentage of total issues traded, however, the number of lows has not quite been setting records...until yesterday.  An astounding 58% of all stocks on that exchange hit a new low mark on Wednesday, a record going back to at least 1965.

The previous records are shown below, on 08/29/66 (when it hit 55%) and 05/26/70 (when it reached 58%, just a tad underneath yesterday's reading).  While both instances saw a short-term upside reaction immediately, they also saw some back-and-forth testing of the low over the next couple of weeks, before embarking on major intermediate-term rallies.

Lest you think it's just all the preferred stocks and other effluvia that trades on the NYSE that's setting new lows, the "real stocks" on the Nasdaq exchange aren't exactly escaping unscathed.  With 41% of the issues there setting new 52-week floors, we've seen a level of selling only eclipsed by October 20th, 1987.

Granted, October 20th wasn't a major low.  The Nasdaq Composite did jump more than 7% the next day, but then it went on to lose 17% over the next week before bottoming.

There are a bevy of factors coming into play over the next couple of days.  We have Yom Kippur, the Jewish holiday that traditionally signals the start of bullish seasonality, we have a lifting of the ban on short sales (which I think is a major positive factor) and we have all kinds of "squared" dates coming due for those into that kind of thing (October 9th marked the 2002 low).

And then there's the biggie...tomorrow's auction for Lehman's CDS derivatives, where firms will find out for how much they may be liable.  It could prove to be a non-event (similar auctions for FNM and FRE seemed to go OK on Monday), or it could be the "dam breaker" that finally gives some kind of cathartic release to the tension that has coiled.  Nobody really knows, and maybe that's the problem.

My thought has been that if we're on the cusp of forming an intermediate-term low and the best opportunity for all of the fourth quarter, then it was going to happen this week.  We've gone further than I thought probable, but I'm sticking to that outlook.  Based on everything we've looked at this week, and the confluence of events hitting over the next two days, we should be at the very verge of the recovery stage - like within a day.

I, along with many others, am anxious to see the reaction to tomorrow's auction.  The results are to be published at 10:30am EST, with the sh*t to hit the fan shortly thereafter, if it's going to hit at all.