Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

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Equity Indicators - Updates and Extremes

Shock Value

Yesterday's trading can best be looked at in terms of shock value.  And the best way to look at shock value is to determine just how unusual the move was in comparison to what we've become accustomed.

The range (highest intraday high minus the lowest intraday low) in the S&P 500 yesterday was over 100 points.  The Average True Range over the past 3 months is just under 14 points.  So yesterday, we saw a move that was more than 7 times beyond what has been "normal".

There has only been two days in the past 30 years that can match that kind of shock value:  October 19, 1987 and October 13, 1989.

Both are instructive, but it's hard to rely on just two precedents.  So let's go back to 1962 and look for any time we saw a move that was at least 4x the range of the past three months.  We're talking about intraday moves here, and not closing ones, so we can only go back as far as we have that data.  I have it to 1962, though it is less reliable prior to 1982.

Tables and numbers aren't a lot of help at times like this, so instead let's look at each of the charts that qualify.  The "shock" day is highlighted in red and has an arrow pointing to it.  The yellow box on each chart equates to the high and low from the shock day.

Conclusions:

*  There might be 1-3 days more selling pressure after the shock, especially intraday the following day...but that was more typical when stocks ended near their low on the shock day, unlike yesterday.

*  After the initial low, there was typically a 2-5 day vicious rally.

*  Every time, that initial rally failed and we ended up re-testing the panic low.

*  The intraday range during the shock day (the yellow highlights) contained most of the trading for the next 1-3 months - any probe above or below was usually beaten back quickly.

*  All of these occurrences precipitated fairly major intermediate-term market bottoms.

I have no reason to suspect we're going to see anything different this time.  When we get historic declines on an intraday basis, it is almost automatic that we see a quick relief rally.

It sometimes takes a few days for the "bodies to get carried out" - funds that were caught wrong-footed during the day and that will be forced to liquidate.  It happens every time, even when it doesn't make the headlines.  That's what often causes the second wave of selling pressure.

I'll be looking for any 1-5 day rally (back towards 1150?) to ultimately fail, and carry us back down towards the lower end of yesterday's range.  I see no hurry in doing any longer-term buying, as the precedents were clear that a re-test of some sort was in the cards.

The afternoon recovery was very dramatic and doesn't fit well with many of the precedents, so I suppose this could be an exception, especially if it comes out that the trading was triggered by a massive trading error.    But the only real way that would convince me that the above precedents won't hold is if we see more than a week-long rally, that takes us above and holds yesterday's highs.

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