Thursday, May 20, 2010

State of the Market - 5/20/10

Interesting day on Wall Street as stocks just keep falling and falling with no support in sight now that the 200 day moving averages were sliced through.   The market started the day with a large gap down and although it wasn't a massive slide from there (mainly they chopped sideways in a large range), they did finish near their lows for the session in what can only be described as nasty action.   The Nasdaq and S&P 500 have not yet broken their Thursday crash intraday lows, but perhaps that is just a matter of time.

As I look at some indicators and numbers I keep track of, I am seeing levels from which the market should really bounce soon.   We are hitting extremes on quite a few levels here - for instance, the McClellan Oscillator hit -467 near the close today - it may end up lower than that.   I've never seen it lower.   The VIX has almost doubled in little more than a week (looking very September 2008 there by the way).  There are other numbers I follow dealing with breadth that have really tumbled so sharply that again, you expect a bounce back soon because they are getting extreme as well.   The question is will that bounce come, or are we looking at the real potential for a real crash here soon, something perhaps worse than we saw that Thursday two weeks ago?

I don't know the answer to that question - maybe I kind of fear the answer in actuality.  With the weekend ahead (would you want to hold stocks over a weekend right now?), I do think it is probably 50-50 that we really tank hard soon and get a complete washout - a real capitulation.  I don't know what comes next if that occurs.  Perhaps cooler heads will prevail and dip buyers will come into the market when things look their worst as has happened in the past, but all we have to do is look at the Thursday crash to see what can happen if computers are shut off and no one else is around.   Do you really have enough confidence in the "system" right now to go out and buy tomorrow or perhaps Monday if the market is down another 500 points or so and tanking intraday?  

That's a really tough question for me to answer - I think my answer would be no but I have to think about it more.   Let me emphasize this - a lot of data points to this being a situation where fear and breadth are so stretched that we could turn on a dime very soon and put in a very nice bounce.  Timing it would be hard but it would likely happen intraday.  Will history repeat itself is the question, or are we really in a new market run by new forces and therefore the textbooks should be thrown out the window?  Perhaps the fact that it (a potential crash) is staring us right in the face will allow history to repeat itself and we turn soon - maybe part of the Thursday crash was the swiftness and surprise of it - no one saw that coming.  Maybe again I am just reaching for straws though.  It's a tough call - trying to play a panic bottom always is.  

I am just fine being in cash right now - completely fine.  I will watch the action closely over the next few days if for no other reason than who knows, I might see history again.   Remember that options expiration is tomorrow as well so that should make things even more interesting.   Fun times we live in.   Take care and be very careful. 

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