Tuesday, September 30, 2008

State of the Market - 9/30/08

Another interesting and volatile day today in the markets, as stocks gapped higher at the open following yesterday's historic sell-off and were able to move their way higher throughout the session, only pausing at points to consolidate. Stocks finished at their highs for the day and made up a good chunk of what they lost yesterday. Considering how bad yesterday was, today was good to see but also not surprising. We were quite oversold after yesterday's selling. Volume today however appears to be much lighter than yesterday so the bounce was not that strong and probably was more due to slight short-covering (on whatever stocks can still be sold short) and the short-term oversold conditions. Today was also the end of the quarter so that could be a reason for stocks to be pushed higher as well.

I don't have a whole lot to say tonight because I don't think things have changed that much. As I watched the action yesterday I thought that it was possible the capitulation bottom I have been waiting for was in progress. However, after today, I don't know if I still feel that way for a few reasons.

First, volume yesterday, although higher than the day before, was nowhere near the climactic volume of September 17-19. That was somewhat surprising to me and in a real capitulation move, I think volume would approach those recent levels or perhaps even be higher.

Secondly, the put/call ratio was only around 1.2 yesterday, which is high but again not nearly as high as it has been at various points in September. If we were really experiencing a climax in selling pressure, I think it would be much higher, spiking to 1.7 or even higher yesterday.

Third, I think a real panicky-type selling situation would have had a big gap down this morning as panic built overnight which would possibly set up for a huge upside reversal. We saw none of that today. I am not an expert at market bottoms but I would expect a major reversal to be put in during one, and the way it looks now, we would have to get more selling in the coming days in order for that to occur.

In a real capitulation move, people just want to get out of stocks at all costs. There is massive selling with huge moves lower on individual stocks. The markets were obviously down a huge amount yesterday, but I didn't get the sense that people were just giving up and throwing in the towel. Perhaps this bottom, if we get one soon, will be different than others. There is certainly a lot of negativity and fear out there, and all you have to do is walk in any area with a lot of people and I am sure you will hear someone complaining about the market and asking whether it is too late to sell (I've heard those things at work myself). However, I think today was the opposite of what longer-term bulls should have hoped for. A day like today just postpones a true washout from occurring, and when it does occur it will likely be stronger and swifter than it would have been if it occurred already.

Those are all reasons I am expecting more selling at some point in the next week or so. Again, we could bottom around here, but I just don't think we will. Technically, I would expect any bounce to be capped around 1180 on the S&P 500 and 2130 on the Nasdaq for the very short-term. Really, anything could happen the rest of this week and because of that I have no plans on doing much of anything. Perhaps I will look at a few shorts if we bounce again tomorrow, but then the possibility of a new bailout plan getting passed comes back into play so we would have that to worry about once again.

Sometimes there are just periods of time where making a lot of money trading is hard to do. For my style of trading and my temperament, now is one of those times. I know that this current environment would do nothing but chop my account to bits if I tried to trade it, so I am and will continue to just sit things out. If you are out there trading right now, best of luck. If you're sitting out like me, take solace in the fact that at some point, things will get better, and when they do, you will be primed and ready to jump on a new uptrend. We just don't know when that will be, so we have to wait. Good luck Wednesday.


Anonymous said...

Thanks so much for all your posts on the blog. I like hearing your thoughts! I'm certainly not getting in there and trying to trade this. It is crazy out there!

Mac said...

Thanks. Things will get better in time - it is hard to wait though and do nothing - I agree.

Alen said...

everyone is expecting a capitulation with every indicator going to spectacular levels.

if you check the October 2002 lows you'll see the VIX topped out in July 2002 along with the Put/Call ratio. The October low was more of an exhaustion and a complete abandonment of hope than a final selling capitulation.

I don't think this bear market is over and I think we are at a post 9/11 time if you compare this to 2000-2002. expect a rally into next year and then it fizzles out and next year we'll get our spectacular end to this.

My prediction is Citi or US Bank will go belly up with US Bank being the favorite. Very little about CRE troubles so far.

and the whole IBD chart thing to watch for, it's a little fuzzy. I looked up Apple, RIMM, SanDisk and a few other poster kids at 2002. all hit their lows and there was no chart until early 2003 to break out of. And Apples 2003 earnings stunk.

best indicator i've found of seeing a bottom is a bullish divergence on the MACD compared to the price trend.