The Morning's Failure Was All We Needed To See

11/19/08 4:25 PM EST

As of: SPX 1045 HELP  ARCHIVE

This morning, we touched briefly on a study and a couple of indicators that were suggesting higher prices ahead.  They were strictly "for what it's worth", and that hasn't been much.

We've had many occasions to go over similar items during the past month, and they simply haven't mattered.  We hit an extreme, got the buying thrust then the re-test of the low, and we should now be in the midst of an intermediate-term rally.

That is obviously not the case, and the writing was on the wall early today.  Before the open today I noted that if we broke the low set during the first hour of trading, then I suspected we would be moving to a new yearly low by today's close.  With the large gap down open, the only scenario that would save the bulls would be a quick reversal.  When we set a lower low, our fate seemed pretty much sealed, and it was a trend day down ever since.

That has left us with staggering price losses over the past days, weeks and months, and a complete violation of a multitude of bullish precedents from any number of different disciplines.  Now we're twisting in a no-man's land technically, with essentially no comparisons in 110 years of market history.  Even during the very worst markets in the past century, we'd been able to stage a multi-month rally from the conditions generated in October and earlier this month.

I've noted numerous times that if these lows could not hold, then I had no downside targets.  Any reliance on history would be nearly impossible, and so one guess would be as good as another.  I could say 775ish, the 2002 low in the S&P 500.  Or 600, the approximate measured move from today's breakdown out of the triangle pattern we've formed over the past month.  Or 500, the approximate "fair value" of future earnings depending on what you want to guess we'll see for earnings and their associated multiple.  Personally, under these conditions I don't think any technical or fundamental metric will define the low, it will rather be generated from some momentous news event.

I don't care to guess.  I only care to take calculated risks based on setups upon which I can define probabilities for success and the likely penalties for being wrong.  With where we are now, I have little confidence in the idea of the intermediate-term rally that had been teasing us like a siren's song.

It's entirely possible that this is exactly the type of give-up we've needed to see all along from all walks of the investment community - the whole idea that bear markets end not in panic, but in apathy.  Anything is possible at this point, and that's the problem.  I can't define a risk/reward now, and that means I have to be in cash.

It would be just like this perverse market to reverse back up immediately from these excessively-oversold-yet-again conditions and not look back, but risk control has to be at the absolute fore here.  If we are able to manage a rebound back over 850, then I'll be looking to perhaps get in with a token position once again, with tighter stop loss parameters, but for now I have no desire to do any buying with stocks at multi-year lows.

Have a good evening and we'll see you tomorrow. 

Repetition

11/19/08 8:50 AM EST

Good Wednesday morning...We begin the day with selling pressure in the pre-market futures (again) after an upside reversal yesterday afternoon (again) and a dip below the 850 level on the S&P 500 (again).  Commodities are getting hit (again), overseas markets are down a couple of percent on average (again), money is flowing into Treasury notes and bonds (again) and the latest economic data is as bleak as it gets (again).

Yesterday afternoon we took a brief look at the few times in history when the indices had been down 2.5% or more for three days in a row.  With the late spurt into the close, that study went by the wayside but it brought up another one.

If we check for any time the S&P lost 2% or more for two straight days, then lost at least 2% intraday the next day but reversed to close up by more than +0.75%, we only get four precedents - and two of them occurred in the past month.  The others were 10/20/87 (in the wake of the Black Monday crash) and 07/24/02 (the day of that bear-market low).  We also saw it this year on 10/23 and 11/13 when the S&P closed around the 900 level, so obviously those reversal signals are taking some time to work.

If we relax the parameters a bit and just look for any time the S&P dipped below the lowest close of the past year, dropping at least 2% intraday and rallying to close up by 0.75% or more, then it adds a few dates:  05/29/62, 09/28/81 and 01/23/08, in addition to the ones noted above.  Those all also marked intermediate-term market lows.

I mentioned yesterday morning that if we had another down day, we'd be getting another round of oversold readings from the likes of the 10-day Up Issues Ratio, the 10-day Equity-only Put/Call Ratio and the shorter-term Down Pressure indicator.  Those all triggered despite the late-day rally.

These are all strictly "for what it's worth", which hasn't been much lately.  For the past couple of weeks, I've been repeating the same points over and over, because they're still valid and they are the underpinning for why I keep looking on the long side instead of just shorting everything in sight.

*  Last Thursday's session was a "key reversal day" which has a historical tendency to precede intermediate-term advances.

*  Seasonality is positive into the end of the year, particularly following a bad October and bad start to November.

*  The multitude of historic oversold readings in mid-October.

*  The subsequent signs of explosive buying interest - two 7% rallies within a month of each other, an exceptionally low Arms Index reading and the quick flip in breadth.

Those positives have not worked, at least in terms of resulting in a generally rising market.  But the several times that we have broken down, we quickly reversed, forming several reversal days in the process.  Perhaps that's just a clear sign that too many folks believe in the idea that we are, indeed, bottoming, and we need to wash them out before we can truly see a sustained push higher.

That may be so, but unless we see a breakdown that sticks, I'm adhering to the evidence pointing higher.  I'm currently (uncomfortably) holding about a 15% long position in the S&P taken as the index went back down to test that 850 level that has been such a magnet, and will be forced to jettison it should we not be able to hold the recent lows.  I think we have a decent shot at making some progress, otherwise I wouldn't have risked any capital at all, but based on the volatility and the lack of follow-through I'm keeping positions exceedingly small and I don't see that changing any time soon.

As per usual with such a large gap down open, I'll be watching any low formed during the first hour of trading carefully.  Bulls still have a chance if we recover quickly from the gap down, but if we go on to make a lower intraday low after that first hour, then my suspicion is that we will be moving to new yearly lows by the close.