Monday, September 15, 2008

State of the Market - 8/15/08

With all of the crazy headlines coming out this weekend, today promised to be quite volatile, and the markets didn't disappoint. Futures were down big pre-market (3% area) but when the market opened, only the Nasdaq was down big. After about ten minutes, the S&P and Dow caught up, and stocks hit their morning lows around 10:00. From there, stocks bounced a bit, particularly the Nasdaq. They faded into the lunch hour, bounced again, faded back to test their morning lows around 2:00, and moved sideways a little. Finally, around 3:00, the morning lows were broken and the selling intensified. Stocks tried one last time to bounce around 3:30 but couldn't and fell sharply from there into the close. Across the board, losses were at least 3.6% (Nasdaq) and went as high as 4.65% on the S&P 500. So as expected, a very volatile day overall and with all of the news events coming up (namely the Fed) I am expecting the volatility to continue if not even increase the next few days.

Technically, as bad as the selling was today, some important technical levels have still not been totally breached. The S&P 500 closed just below the July low around 1200, but the Dow and Nasdaq still have a little farther to fall before breaking these key levels. The 2160 area on the Nasdaq could act as temporary support and 10,820 on the Dow may act as support. I think we could get a technical bounce at some point soon but that would just be a chance to get short. To be honest, though, in this environment, technicals may not work like they normally would. The VIX did get up above 30 today (31.08) but if we are going to get some capitulation here over the next few weeks, we need much more fear than that. I don't think there is any doubt that there is more downside to come in the next few weeks.

From everything I observed today, I am glad I did not trade. Perhaps my quotes were just being weird, but for the first ten minutes of trading, things looked relatively calm. The Dow was only down around 100 points. Then out of nowhere my quotes started flipping out and the Dow and S&P dropped about 2%. It was crazy. I just thought to myself - what if I had money in the market right now? I would probably be going crazy myself. I can't even imagine what it was like to try and get orders placed. I also saw a lot of gaps that immediately bounced, probably trapping some late shorts that wanted to try shoring the open. I'll repeat myself again - it is just too tough out there right now. Stay away and wait for a better opportunity.

The one thing about trading that I know I tend to forget and I am guessing many traders do also is that there is nothing that says you have to trade all the time. If the market wants to act in a ridiculous, untradeable manner, that's fine. It doesn't mean I have to join in the party. Being in cash is a position, and a lot of times it is actually the best position to be in. (For instance, now!)

If I had to make a guess at what happens, I think the Fed gives in and lowers rates tomorrow, which may or may not cause a quick short-covering rally. If I was lucky enough to be short today, I probably would have covered a lot of my positions during the session. I don't think a bounce will last - I still think eventually we will strongly break these July lows (after perhaps several attempts) on all indices and move lower in hopefully the final leg of this bear market.

In terms of trading here, I will continue to do my scans but as I mentioned earlier am happy being in cash and I'm not in a rush to do anything. Sure, I would like to get short some financials, but not here. I will wait for a bounce, most likely up to their recent lows, where at least I will have a clear stop loss. I am looking at XLF around $19.60. If the Fed cuts and we get a reflex bounce from that, that's where I may look to add some small shorts. If they don't bounce, I will just miss the trade and stay in cash.

We are in an environment where capital protection is #1, #2, and #3 on the agenda. A better time will come (hopefully) and when it does, I want to be ready to jump on the opportunities that present themselves. I hope no one is considering buying these dips here - definitely not smart right now. We are nowhere near a panic-selling extreme. Instead, I think the smart play is simply sitting back, watching and observing this action, and being patient. If we happen to get a quick bounce, I would probably look at shorting, but in no way with a big portion of my portfolio. I will be back later to look at the indices and a few charts that I will watch for possible short entries if they bounce. Good luck out there.


Anonymous said...

VIX at 31.70, what do you think of that, should anybody long stock? or VIX 30 no longer being the holy grail, does it ever been?

Mac said...

Why would you even consider going long here? Just cause the VIX is at 30??? Sorry, no way. It's not like there is anything to buy anyway. Just sit on your hands. If you can't do that, you won't be successful as a trader anyway. In a few days, perhaps some shorts will present themselves.