Not Seeing A Reason To Act

10/23/08 3:10 PM EST

As of: SPX 1045 HELP  ARCHIVE

The morning's early rebound attempt has failed - again - and taken us to new intraday lows.  In the case of the tech-laden Nasdaq 100, new October lows.  Given that index's decent tendency to be a leading indicator, that's not a particularly encouraging sign for the broader market unless we can reverse into the close and trigger a possible "false breakdown" in the NDX.

There is a positive divergence with only 470 stocks on the Nasdaq trading at a new 52-week low today (compared to 1600 on October 10th), but I'm not a big fan of divergences for timing purposes.

The heavy pressure has been consistent, but not overly rushed.  Our short-term guides still aren't oversold in spite of the past three days.  That's because of how they are constructed - it's more difficult to become oversold in "bad" markets, to help avoid constantly trying to buy in a market that's not responding.  In contrast, it becomes easier to see overbought readings, of which we got two in the past week and a half.  Like a poor market does, it rolled over both times within hours of becoming overbought.

This morning we looked at the latest sentiment survey of individual investors from AAII, which showed a surprising lack of concern among the respondents.  Combined with the small-trader options data we discussed on Monday, it's an odd sign of almost complacency in the face of an historic sell-off, and I don't see many signs of that changing today.  Maybe those folks have already sold so much that they see little point in becoming even more bearish, but that's a stretch.

With the indices below technical support (the S&P under 900 and the NDX under 1200), I have little interest in trying to buy, particularly with few signs of oversold conditions.  The obvious target at this point is the October 10th low on the S&P around 840, and beyond that...who knows.  Many folks seem to be targeting 775 - 800, the approximate 2002 lows, while others are pressing for 700 or even 500 based on their favorite methodology.

All I know is that we should be rallying, and we're not.  I'm still operating under the expectation that the events of the past two weeks have carved out an intermediate-term low.  But if the October 10th low doesn't hold, then we will be seeing something far beyond what we've seen in the past century, so any downside target would be as reasonable as the next.  Perhaps we need to see a break of the recent low to trigger yet another round of panicky extremes, perhaps not, but until we get a better setup, I am standing aside for trading accounts.  Unlike yesterday, I don't see too many of the hallmark signs of a trend day today, so I'm not heavily counting on a close at or near the day's low.  I don't really see any reason to expect a major reversal either, all the more reason to stand aside.  This is a very choppy, dangerous market and trying to wade in without a strong edge isn't my cup of tea.

The Rolling Wave Of Panic Continues To Flow

10/23/08 8:50 AM EST

Good Thursday morning...We begin the day with yet another exceptionally volatile overnight session.  The S&P futures were up nearly 20 points early this morning before another wave of selling pressure moved them 40 points lower and we're currently indicated to open fairly close to yesterday's lows.

On Monday, I showed a chart that highlighted the behavior of the smallest of options traders.  Despite the massive decline in the equity indices, we're still not seeing these folks give up the ghost and panic.  While other put/call ratios are showing some extremes, these normally reliable contrary indicators are one missing piece of the "sentiment is too negative" puzzle.

Another is the attitudes expressed by individual investors in the AAII sentiment survey.  The four-week average of this poll remains mired at one of the lowest levels of bullishness in its 20+ years of history, and the respondents' allocations to the stock market is at one of its lowest levels ever.

But despite the massive losses lately, the past two weekly readings in that survey have shown about as many bulls as bears - certainly no signs of panic, just apathy either way.  As the chart below shows, that's unlike what we've seen at prior market extremes this year, or during prior years for that matter.

Every moment in the market is unique, so we can never expect history to exactly repeat, but trader behavior usually doesn't change very much, and we often see similar reactions to extreme events.  Whatever the reason for past stock market crashes, the recovery phases have been fairly consistent.

That's why the number one concern I have about this market is the sheer number of "never seen before" developments, especially in terms of the price losses.  Leading up to the low on October 10th, the Dow Jones Industrial Average suffered through seven straight daily losses of 1% or more, something that hadn't happened in the 110 years of history I have for that index.  It also suffered its worst weekly loss ever.

Now yesterday the S&P 500 dropped more than 6% to a new five-year low.  The only other time that index accomplished such a feat since 1950 was...October 9th of this year.

The Dow didn't quite close at a new low, but if we fudge a bit and say that it did, then there were five other times in the past century that it dropped as much as it did yesterday to close at a new five-year low.  Those were 12/12/14 (the first trading day after a four-month halt due to WWI), 9/24/31, 10/5/31, 5/31/32 and 10/9/08.  All of them were good for a one- to three-day bounce of 1% or more, though none of them marked the end of a major decline.

Based on the sheer number of extremes we've witnessed over the past couple of weeks, and the consistent behavior of traders after other crashes, my thought has been that October 10th would likely be the low for the fourth quarter, with decent gains heading into the end of the year.

I haven't seen a need to change that outlook, meaning I still want to buy into short-term oversold conditions (which we're still not seeing yet), but I have no desire to chase prices higher - we've had two overbought readings in our shortest-term indicators over the past two weeks, and the market has rolled over both times.

A big part of the problem seems to be the rolling wave of macro concerns that shows no signs of abating.  While the coordinated government interventions helped put a floor under the panic a couple of weeks ago, now we're dealing with even larger concerns about defaults on sovereign debt and massive losses on foreign currency bets due to the Dollar's continued rise.  Horrid economic reports aren't helping matters, and stocks reporting positive earnings surprises haven't been able to show much relative strength.

With such volatility, I'm being very conservative with trades and have not been doing much.  Marginal setups are too risky when the tape swings 5% in a single day, so I want to wait for better pitches.  If that means missing the next move, so be it...the risk of being wrong (or too early) is simply too great.  So I'm sitting and waiting on a trading basis and looking for some signs of oversold conditions, particularly among our shortest-term indicators, but am less inclined to buy into them with the S&P in such vulnerable technical shape.  Technical levels don't mean a whole lot in this kind of environment, but the obvious levels are the 900 area and the October intraday low of 840.  Below that level, all bets are off since we'd be seeing a magnitude of price destruction - in such a compressed space - never seen before.