Thursday, October 9, 2008

State of the Market - 10/9/08

The destruction of our financial system continues. Things started well for stocks as they opened higher and stayed that way for first half hour or so of trading. However, the bears once again gained the upper hand intraday, and stocks sold off through the morning. They went basically sideways in the afternoon, but at no point did a strong upside bounce present itself. Around 2:00 (which has been the trend recently) stocks broke their morning lows and just collapsed from there. I was away from my computer for the last hour of the day and was very surprised to see how bad the selling was to end the day. A late bounce took stocks a little off their lows, but that doesn't mean much when you have another 7% loss for the overall market. Surprisingly, volume was lighter than yesterday and still not very climactic. That is scary.

When we are as oversold as we are right now, you really can't short here. Yeah, we might crash, but I think everyone is expecting that, so maybe it won't happen. On the other hand, if you're not expecting a crash, then you are probably expecting a major bounce, and that does make sense. Problem is, when will it actually happen? Why hasn't it happened yet? I read a lot of people buying this morning and yesterday and the day before. How do you think they are feeling right now? Do we have to get some capitulation in order for it to occur?

These are all questions that are difficult to answer right now. Common sense tells me that a crash with a huge bounce is the outcome that makes the most sense here. This market isn't necessarily acting on common sense however - it is acting on fear of the unknown. With every day that passes, it becomes more obvious that we are dealing with a situation that may not have any historical precedence to reference. Since we don't know just how bad things will get, how can we know where we are going?

If you are trading right now, more power to you and I wish you good luck. I remain in cash and will continue to do so until we get a clear sign that the market is ready to bounce. I am a little disappointed I didn't catch any of the last two weeks from the short side, but am also not naive enough to think I would have ridden my shorts all the way down here. I am sure I would have covered long ago. I don't see much point trying to short right now - a bounce will kill you quickly, and the only reason to short is to play the "end of the world" scenario. If that's what you think is going to happen, does it really matter how much money you have? I still thinking being patient and not exposing yourself to these daily swings is the best plan of action. The long side is the only play right now, but you must wait. It's tough and boring, but sometimes that's what trading is. I will continue to look for a rally attempt and a follow-through day, and hopefully we will get one eventually. As I look at the carnage of the past few days, including today's close, I am glad I have been disciplined enough to not try and catch this falling knife.

I hope we are getting close to that clear moment when the market will show us it is OK to wade back into this market and play what should be a major bounce off these historical lows. If it doesn't happen soon, then all of this analysis probably doesn't matter at all, because we will have much more to worry about than catching a bottom in the stock market. If you remain patient, remain disciplined, and keep your emotions out of this market, you will be much better prepared to successfully navigate the bounce we get, rather than be so frazzled with losses to ride an uptrend higher or so behind in your account that a bounce really doesn't matter. Good luck Friday - as always, it should be interesting. I am glad I am sitting on the sidelines.

1 comment:

Anonymous said...

Dude, I don't understand your phrase "I am glad sitting on the sideline" since short sale ban, RUSSELL2000 has plunge 34%. If you do what your chart told you, would have enough money to buy a new house.

It has been a smooth down without short cover interruption.