Option Volumes

Some observations on the implications of the current call option volumes.
Italicized text is from a December 23rd commentary by Richard Band

"... So far in December, the Standard & Poor's 500 index has dropped 3.7%.

Recall that, historically, December boasts one of the strongest records of any month of the year. Such counter-seasonal weakness is an ill omen in itself. "

Not quite, the market has been behaving in a non-historical way. When we say "December is one of the strongest months" we are speaking about statistical results, that the market is up in December 9 out of 10 times (whatever). This statistic says nothing about how much it is up, or anything about the time(s) it wasn't. Suppose we rally 4% Monday, the market will be "up for December", right? but so what?

In the current market is has proved incorrect to rely on past statistical assumptions. Levels which were historically "oversold" were meaningless over the last three or four months.

"The real poison in the cup, though, is the growing complacency with which speculators have greeted this sickly market action. According to my 10-day smoothed CBOE put/call ratio, speculators are betting as heavily on an advance as they did at the top of the abortive rally in May 2008."

If we interpret this information assuming we are in a normal market, then it might be cause for worry.

But, this is not a normal market. We should think about what might be behind the option trades and what they really signify.

Clearly the implication of the remark "To buy calls at an increasing clip in a declining market, however, is financial suicide." is suggesting the call buyers are bullish on the markets.

What other evidence do we have for this? I suggest there is none, that the aggregate perception of market participants is overwhelmingly bearish, not bullish as the call buying would suggest.

If we are willing to agree that market sentiment is, in fact bearish, then how can we explain the heavy call buying?

Trading volumes for the SPX have been running at a rate 450% greater than they were at the 2002-2003 lows. Regardless of the number of splits, new issues or etf's the current volume rates are unprecedented and indicate a substantial increase in selling. I want to suggest that this increase in volume is primarily being caused by short selling.

Short selling increases the float, where once there was one share, now there are two (The original owner and lender of the share, the new owner, who buys from the short seller, so now there are two "long" shares)

We do have evidence that the short interest is at record highs and while the short sellers are sophisticated and trade in the direction of the major trend, they also represent a considerable amount of pent up demand when the markets finally reverse.

I would like to suggest that, based upon the expansions of both trading volumes and the short interest itself, the short-covering demand potentially exceeds the available supply.

As a decline starts to abate, fear driven panic selling contracts and the short side has to decide how to manage their positions. Covering the short by buying the stock back reduces the float, reduces the supply and puts upward pressure on prices.

Covering the short sale also indicates the short seller is willing to close out the position by taking the accumulated profits. In other words, the short seller acts as if the stock has bottomed, whether it has or not.

However, the general market sentiment seems to be still bearish with some participants looking for a temporary rebound before a resumption of the decline. Since the direction of the market always has a degree of uncertainty, a strong rally can cut into the profits of existing short positions.

One way to hedge a short position is by buying calls.

Even as frightful as this decline has been, someone has been buying equities. The increase in volume can only be partially explained by a combination of short selling and short covering. We should assume that institutions with longer term horizons have been buying equities along with the short term traders. Since option premiums are high, covered call writing provides an income flow while the new long holders wait for a price recovery.

However, sophisticated option buyers, market makers etc, will hedge their positions as well, regardless of the direction of the market.

Now, if I am correct and the short sellers are initiating long call positions as a "hedge", along with all the other potential hedging activities which cause short-stock positions to be initiated, then these activities are translated into the market.

What this means is that prices are rising with no appreciable affect on the short interest, that the net effect of a so called "short covering rally" has been to raises prices without substantially reducing the short interest.

The call buying should be interpreted as bullish and that prices will continue to rise.

Gold

If we assume the deflationary trend abates during 2009, then GOLD has a ways higher to go. The chart is a graphic response to observations by Steven Rock on another message board. It should not be taken as a prediction of the direction for gold over the short term.

Original chart markup was by Steven Rock
Click to enlarge

Flatline

The McClellan Oscillator has managed to stay above +100 for the past two weeks. Considering the nastiness of the recent decline, this is positive behavior but does not signify the start of an impulse move higher. Rather what we are seeing is a rebound from a crash-oversold position which should last for another two or three months.

The chart below reflects the severity of the recent decline, almost all stocks on the NYSE are in major declines. Over the last three weeks we have begun to see some rebound activity as the Percent of Stocks Above the 50 Day MAVG has started to move up off the floor. Unfortunately the Percent of Stocks Above the 200 Day MAVG has barely budged and is flatlined in the 5% zone.

This is options expiration week and we can expect a choppy market, based on the high MCO reading we could expect a bias to the downside. I still expect the major averages to try to test the 200 day moving averages over the next few months. While I expect the trend to be moderately higher, IRA investors should remain in cash.

SPX with HiLo's and Percent Above
Click to enlarge

MCO update for Monday 12-9-08

The McClellan Oscillator is up in rarified territory again and it is unlikely it will go much higher. Over the next day or so we could see a pullback before resuming the upward move in the indexes. I cannot determine whether or not the correction will produce a sharp one day decline of just a day or so of choppy behavior.

The McClellan Oscillator for Monday 12/9/08
Click to expand

The 65 minute DJIA Chart - Fibonacci Time Cycles
Click to expand

Nothing special here, the DJIA continues to work it's way higher against a huge wall of worry. This chart updates the one in the previous posts to provide a check on how well the fibonacci time projections are working. The 610-233-89 nesting missed the low by 3 bars and was the start of the acceleration higher. The 60 is the nominal 10 trading day cycle which looks like it is inverting here or only strong enough to produce a minor correction. It's experimental enough to be fun to just watch but I wouldn't make bets on it.

Updated dialogue at 10:36
Waver said And note how price has broken above the various moving averages. They were resistance, but now the moving averages are support. At least, it reminds me of the charts of late 1929 to April 1, 1930.

Yes, that's what I think as well. It's option time coming up, plus any residual tax loss selling and an high MCO reading, so we could get a little pause here. It is very nice that the markets did not collapse 400 points right out of the chute today. Volatility is high so a 200 point correction is just a nervous jiggle (tell that to my stock george:-) but I'm encouraged here so far.

I really think this is a market one needs to step back, take a deep breath and look at closely to see what is really happening. Is it really the end of the world? Remembering that it always seems like the end of the world at the low, are we really seeing the total collapse of the capitalist system here, or just a major screw up and the pain that goes along with it?

If you look at individual stocks, a lot are down 50% to 80% from their highs of not just a year ago. I'm inclined to think that once again, the market is right and that it is doing what it needs to confuse the most people. The panic we have just experienced is enough to keep the majority waiting for a bottom 30% to 50% lower before they jump in and scoop up the bargains. This seems like a very obvious point of view to hold, how can it possibly be correct?

I think the momentum low has probably been established and that absolute price low may be in as well. If not, I seriously doubt we will make lower lows that are more than 10% lower than what we have just seen. There are some gaps and stuff, along with a need for a positive divergence in market breadth which keep me sanely cautious. But I think the superbears are going to be again proven really wrong.

DJIA Fibonacci Cycles

The fibonacci time harmonics for the next few days. There is a nesting occurring this coming Friday, give or take a day.

The DJIA 65 minute chart - 6 bars per day
Click to expand

Indigestion

After five up days in a row. I was probably remiss in not warning that Mondays correction could be severe but why ruin a holiday?

Most of us have never seen such an extreme market decline and there is something which can be learned from the current MCO behavior.

On the chart I've marked some price points P1 and P2 which correspond to the pullbacks which occurred when the MCO corrected from overbought levels above +200 (Points 1 & 2)

Generally speaking, in a 'normal' market a +200 reading on the MCO has bullish connotations. If the MCO moves above +200 WITH the 10% index rising from a corrective low above the -400 level, it is an indication that market breadth is very bullish and that prices are moving strongly higher.

In cases where the 10% Index repeatedly is going below the -500 level, especially in the very rare cases we are seeing now where the 10% Index has gone below -1000 it is clear that the market is very weak. In very week markets the MCO "correction" from the +200 level tends to be VERY SEVERE in terms of price loss and Mondays action proves the case. (Point 4)

In general the severity of the corrections can be inferred from the levels reached by the Summation index. Without sticking hard and fast numbers in the levels, I have generally found that when the SUM Index is "high" market rallies are strong, price movements in individual issues is exaggerated, a larger percentage move occurs. Conversely, when the SUM Index is "low" like it is now, market declines, including overbought corrections like Mondays, tend to be severe, individual issues make exaggerated high volatility moves to the downside. (Point 5)

Point 3 just points out that both the MCO and the 10% Index can stall at/near the zero line. Either this can reverse the trend, or just be a pause to refresh. In the current market, it's probably a good bet to assume the worst and that the markets will attempt to retest the lows again.

However, this nastiness is getting long in the tooth and yesterdays violent move to the downside might have been the bulk of the correction and that we could see an upward reversal sometime in the next few days.

The McClellan Oscillator for Monday 12/1/08
Click to expand

PS: (see chart in the previous post below) Gold decided that deflation was more likely than inflation and acted like a turkey Monday, so much for the 200 day test.

GLD - Fibonacci Cycles

One characteristic of Fibonacci series cycles is that the nest allowing one to determine a finer gain structure when the divisions become too large to encompass the period under observation. I set the start for the series near the lows in February of 2005, these are the magenta lines. Starting this far back the Fibonacci number 610 falls in July of 2006 with the next number 987 falling in early January of 2009. The other lines are set to increase the fineness of the divisions and their starting points are marker '0'.

It would be a good sign if gold can manage to sustain a price increase over the next year, this would imply the anticipation of increasing inflation in the future and therefore an end to the current deflationary environment. Offhand the chart looks like GLD will test the 200 day moving average. We will see what happens then.

GLD Daily with Fibonacci Cycles
Click to expand

Short Interest

It's only a "short covering" rally, but maybe that's good enough.

Click to enlarge.

Weekend Wrapup

It's not every week you see a 19% range in the SPX, it's a good thing too. This was one ugly week for the markets. Despite a strong rally on Friday afternoon the SPX finished down 12.7% from its high late in the day on 11/14. On a closing basis the weekly loss was a bit over 8%, any way you cut it, it was a lousy week.

SPX 65 minute chart
Click to enlarge

DJIA Daily Chart with Cycles
Click to enlarge

SPX Daily Chart with Elliot Wave Count
Click to enlarge
This is an extreme market, the psychology which is the basis for Elliot Wave Counts will be extreme. Therefore, I believe the simplest count will be the correct one. The last leg down may need one more yellow dot to complete, this could happen Monday or Tuesday as a result of option positions unwinding.

Obamarama

I think Friday was an important day in the markets. It is the first time we had a good look at how the Obama administration will use market timing to its own ends.

Team Obama's timing of the Friday news leak was no accident.

On Friday, the market technicals were both very oversold and exhibiting positive divergences with the October 10th low, a condition that under normal circumstances would signal a huge rebound rally.
The markets have been very skittish lately, and biased towards being very negative because of perceptions of both uncertainty and indecisiveness in the response to the current fiscal crisis.

In the cross currents of an option expiration Friday, always good for a bit of volatility, the markets were moderately positive but indecisive. They needed a bit of news as a catalyst to fuel the strong rally late in the day.

The news tidbit was the name of President Elect Obama's appointee for Secretary of the Treasury, Timothy Geithner and it was leaked to wall street on Friday afternoon.

Without getting into the pros and cons of Obama's choice, the more interesting issue is the timing of the leak.

In order to send a strong message to both Wall Street and Main Street, a message that Team Obama was on the ground and taking action to insure the continuity of the response to the current fiscal crisis.

I believe the leak was shrewdly disseminated with an acute awareness of how to engender the most positive response from the equity markets.

1. The market technicals were screaming for a reversal but needed a news spark.
2. They waited until the technical condition was extreme, this could have happened Tuesday or Wednesday, it didn't.
3. The 'leak' happened on a Friday leaving the whole weekend for the markets to consider the news, three days for the price of one.
4. Coincidentally or not, it was an option expiration Friday.
5. A strong Wall Street rally would generate positive news surrounding the appointment.

Regardless of what one may think of Obama, he is the boss for the next four years. What he does will affect the markets, and it makes sense for us to pay attention to his methods.

This was very well played. Put it in the play book.

Following up in his weekly radio address Obama Targets 2.5 Million Jobs With Stimulus Plan

By Edwin Chen and Jason Gale
Nov. 22 (Bloomberg) -- President-elect Barack Obama said he aims to save or create 2.5 million jobs in a two-year plan to simulate an economy facing a “crisis of historic proportions.”

“It’s likely to get worse before it gets better,” Obama said today in his weekly radio address. He said that this week “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs.

The economic slowdown has been exacerbated by the worst credit crisis in seven decades. More firings will weigh on the economy and consumer spending, putting pressure on Obama and Congress to agree on legislation that will stimulate growth.

Three days for the price of one.

Obamarama will be the heading for an ongoing series of observations of the Obama administration's interaction with the equity markets.

Enough Already

The market decline has been historic, losses of 52% are even worse than the first leg down in 1929, enough already.

With indicators like the MCO radically oversold, and positively diverging from the readings on the October low we have a technical setup for a reversal. This may be the absolute bottom for the next decade, or it may be a dip along the way, but for the moment we should see a strong rally.

As I'm writing this, the premarket futures are positive. As long as the difference between the Advancing issues and the Declining issues remains within striking distance of reversible (Adv-Dec > -1000) then the rally should continue.

Update on the MCO
The MCO is within the striking distance needed to stage a reversal. We are not there yet but this needs to hold up throughout the day, especially considering that it is a Friday. If the A-D difference goes to a negative 2000, then all bets for a rally today go out the window. It's been hard to turn the market when the breadth gets that negative.

Update @ 10:25AM adv 1835 dec 1545 A-D diff +290 <== holding the 10% -932.11 the 5% -697.62 the MCO -234.49 +83.81	Update @ 12:08PM adv 1538 dec 2079 A-D diff -541 <== just barely the 10% -1015.21 the 5% -739.17 the MCO -276.04	Update @ 12:58PM adv 1724 dec 1911 A-D diff -187 <== Improving the 10% -979.81 the 5% -721.47 the MCO -258.34
Update @ 2:25PM adv 1385 dec 2303 A-D diff -918 <= iffy for rally the 10% -1052.91 the 5% -758.02 the MCO -294.89	Update @ 3:08PM adv 1400 dec 2298 A-D diff -898 the 10% -1050.91 the 5% -757.02 the MCO -293.89	Update @ 3:35PM adv 1770 dec 1928 A-D diff -158 <== GOING UP the 10% -976.91 the 5% -720.02 the MCO -256.89
Update @3:48PM adv 1981 dec 1734 A-D diff 247 <== Positive the 10% -936.41 the 5% -699.77 the MCO -236.64	Update @ 3:54PM adv 2178 dec 1545 A-D diff 633<== Stout the 10% -897.81 the 5% -680.47 the MCO -217.34	Closing Figures adv 2380 dec 1384 A-D diff 996 <== nice the 10% -861.51 the 5% -662.32 the MCO -199.19

MCO for 11/21/08
Click to enlarge

New Highs - New Lows for 11/21/08
Click to enlarge

Count Dracula

Late update:
While breadth has been miserable for all of the month, the MCO and 10% Index are very very oversold. This coupled with the positive divergence in the SUM index can be interpreted bullishly.

Although I view the 10% Index as indicating the need for a retest of the lows, this does not need to occur for a few months.

It seemed like the volume today was soft until late in the day when it accelerated and this may indicate that the market may be sold out at this point. Any rally here could be potentially explosive since the initial overhead supply has been exhausted.

I've noticed that on the days when the market continued to exhibit weakness, after a moderately positive opening, that the advance-decline numbers become negative fairly rapidly (advances dropping below 800-900) So far when the AD numbers have become lopsided (700-3000) early in the day, the market seems to have a hard time reversing.

Any rally out of the hole we are in may start with fairly evenly balanced AD numbers something like 500-700 more one way or the other. In this case it doesn't seem to matter which way the bias is. A strong rally can rapidly turn the AD numbers positive (but hasn't been able to when they are +400 to -3000 like today.)

The SPX 65 minute chart for Nov 20,2008
Click to enlarge

I've marked in a generalized wave count for wave 3 or C, depending on the fates. We are getting close to something which looks like a complete pattern.

The 10% Index hit a -1065.8 today, still above the previous low near -1200. With the MCO at a -317.18 we could get a very strong bounce or one more nasty day, and another 500 points down the drain. Gotta be careful here.

The cycles are tentative, they haven't been working lately, but I've got to try something.

Market Breadth

Yes the patient is still breathing, but just barely.

The NYSE Advance-Decline Line vs. the SPX
Note the divergences back in 1998-2003 and currently.
It still looks like we have farther to go on the downside.
Click to enlarge.

Bounce or Die

Update after the close on Wed. 11/19.
Another miserable failure in breadth drove the 10% Index to -877 and the MCO to -235. Even though the markets are extremely oversold, the possibility of another nasty down day is still active.

When a market is this weak on the third retest of the low, no ensuing rally should be trusted, The FED has lost control of the markets and the economy. President George Bush is hiding under his bed wishing it would all go away. It is fairly clear that at this point there is no possibility for a durable bottom at these levels and that we should expect the DJIA to fall another 1200-1500 points towards the 6800 target in my previous post.

Please be aware that unless we crash in the next two days, my lower projections most likely will be achieved after an intrim rally. Any such rally should be sold.

McClellan Oscillator for Tue 11/18/08
Note the small daily change which indicates
Tomorrow is a big move day, but which way?
Click to enlarge.

Consumer Sentiment and Unemployment

For reference: I've drawn in a few projections going forward. It seems fairly clear that interest rates will remain in the range they are in now. There's not much question that unemployment will continue to rise, I'm more negative on this than most economists. I'm using their projections and making them worse because that seems to be what happens early in the projection game. Consumer sentiment should remain weak but improve as Obama takes control of the government. It's unlikely we will get a big rise in sentiment as long as unemployment stays bad.

Consumer Sentiment, Unemployment and Interest Rates
Click to enlarge

G20 and Beyond

Well, my bit of optimism was misplaced and after a one day wonder rally, the markets gave it all back. The g20 meeting is a non-event, what can they do?

We are oversold enough for another rally try which I believe will also fail. Some esoteric trendline calculations and a bit of fibonacci number fitting is indicating this market has a ways to go on the downside before any durable trend change is possible. Whether or not we hit my 6800 DJIA target zone this month or next year is a moot point, it's coming one way or the other. The potential for much lower prices exists. IRA investors should remain in cash.

The DJIA Monthly (not weekly as labeled)
Click to enlarge

MCO Update 11/11/08

No promises, but the MCO frequently will pause or bounce near the zero line. If the markets can rally here, the retest will be good with the 10% Index stopping above the -500 level. Positive divergences are occurring, giddyup

The McClellan Oscillator for 11/11/08
Click to enlarge.

SPX 65 minute cycles

I've taken a fresh look at the cycles for the 65 minute SPX chart. Frequently at major turning points, the time cycles invert, highs become lows and visa-versa. Also over time the cycle intervals may drift, as well as expand or contract a bit and I've found that major turns can provide a "reset" point. That's what I'm showing here, no guarantees, but the next few days look good for a turnaround (or a downside acceleration midpoint ;-( We'll see, what happens.

Time cycles on the SPX 65 Minute Chart
This is an updated chart, the previous one had missing data
Click to enlarge


Here is another set of charts with 15% and 30% bands on the 200 bar moving average, You have to back a ways over the last several years (2003) to find an instance where the lows are 12% below the 200 day moving average. The spike lows in 2001 were about 22% below the 200 day moving average. The worst of the bottoming low, in July 2002 was a bit less than 30% below the average. Most of the time, even when the SPX is trending strongly one way or the other, a 12% channel will contain most of the price behavior.

This is not to say we cannot make lower lows, either now or next year, but that we should expect the Index to move back above the 12% channel which, at this moment is roughly SPX 1100.

SPX 65min chart with 15% and 30% bands on the 200 Bar Average
Click to enlarge
SPX Daily chart with 15% and 30% bands on the 200 Day Average
Click to enlarge

1928-1976 SPX Weekly chart with 15% and 30% bands on the 40 Week Average
Click to enlarge - (Big Chart Warning)

MCO update for 11/07/08

A couple of observations on the behavior of the McClellan Oscillator during extreme market conditions like the ones which we have observed over the last month or so. When the market is as severely negative as it has been, the 10% Index plunged well below the -1000 level. Since the MCO is the difference between the 10% Index and the slower moving 5% Index, when the market finally turns higher and breadth improves temporarily, the distance between the two Indexes shrinks which quickly moves the MCO to "overbought" levels.

A +300 reading on the MCO occurring on a rise from a less severe correction would be extremely bullish, indicating that market breadth had rapidly become positive. Unfortunately this is not the case we are seeing today and the positive momentum, the +300 level on the MCO, is occurring with negative breadth. Under these circumstances we should view the rally as being "corrective" and NOT the start of a bull leg higher.

I continue to remain bearish on the market but expect the rally to continue long enough to work off the oversold condition before declining again to retest the October lows.

The NYSE MCO for 11/07/08
Click chart to enlarge

The Indexes Grind Higher

Well, yesterday I suggested that the odds favored a break lower but I also indicated the developing divergences in the MCO and 10% Index. The MCO and 10% turned up sharply from yesterdays lows and the markets opened higher and held a positive tone for most of the day. In spite of an astoundingly negative Consumer Confidence number of 38, the worst since 1967, the markets managed to hold their gains rallying into the close. Also it snowed in New Jersey. Closing prices on the day.

Dow 9,065.12 + 889.35 (10.88%)
Nasdaq 1,649.47 + 143.57 (9.53%)
S&P 500 940.51 + 91.59 (10.79%

Since the markets obviously didn't break lower, this part of the decline is finished and I would expect the major indexes to move back up inside of the 15% envelope on the 200 day moving average. Since at the lows the indexes were 35% below the 200 day, the rally now occurring should provide some excitement for those still holding short positions. See the chart below for a general idea of the initial price targets.

The SPX daily chart with 15% Bands on the 200 Day MAVG
Click to Enlarge

The SPX 65 minute chart with positive divergences on the MACD and RSI
Click to Enlarge

Monday 10-27-08

The McClellan Oscillator for Monday 10-27-2008
Click to enlarge

SPX Intraday cycles

Well, the MCO blew up, taking a two day zig to the downside. Here's the 65 minute chart with the cycles which seem to be working and the symmetrical triangle which is forming. It looks to me like we zig zag lower into the election.

SPX 65min. cycles

A high TRIN occurs near a low it's an indication of panic, wholesale selling. Todays numbers were very skewed to the sell side, the up/down volume ratio was in double digits (depending on the data source) -- all of this makes me think we should get a bounce tomorrow.

NYSE ARMS Index (TRIN)

The market remains dangerously vulnerable to the downside.

Historical DJIA 2008 vs 1970

Advisor sentiment hit similar lows during these periods. The disconcerting difference in 2008 is how far the DJIA fell below its 40 week (approx. 200 day) moving average, at it worst the difference was nearly 35%. As a result a snap back rally could take on the proportions of a bull market, climbing 20% to 25% without ever crossing above the plummeting 40 week average.

Until the DJIA trades and manages to stay above the 40 week moving average it must be considered in bear market territory. Certainly at some point it will move and stay above the long term benchmark and the preceeding rally will have to be considered part of the new bull market. For now that is not the case.

The DJIA 1970 low compared to the 2008 low.
Click to enlarge.

MCO turns positive - short term buy signal

The MCO finished the day at +109, it is now above zero and a short term buy signal. The 10% Index is still negative at -269 the 5% Index is at -378. The 5% and 10% Indexes just moved above -500 today for the first time since the START of October. Please note: It is very possible for a one or two day decline to occur here with the MCO pulling back towards the zero line. It's not a requirement, it can also just continue moving higher. The market will fluctuate.

This is both extremely oversold and huge negative breadth momentum. Since the MCO is calculated like a MACD, it behaves somewhat the same and what we should see is a declining bottoms pattern in the indexes with a rising bottoms pattern in the MCO. This would create the classical positive divergence. So far for the last YEAR this has failed at every low to produce a divergence of any sort.

At the present moment we have NO CONFIRMED bottom established, this will take time, months not days or weeks.

However, the October low readings were so extreme I doubt they will be equaled again in my lifetime. In other words, a rising bottoms pattern, in the MCO and 10% Index, is a lock (well never say never but...) That means we will get some kind of a positive divergence signal at the next major low.

Looking at the pattern over the last year, the retests have been about 3 months apart which puts us in January. It's as good a guess as any but I think the best way to gauge it is by using the other price based indicators on the indexes. Also the 50 and 200 day MAVGs will be major resistance. I seriously doubt the indexes will get above the 200 day on the first try.

It is very likely that certain issues made absolute lows recently and that they will not be exceeded on the downside. At the same time, everything will zig zag with the indexes and we all have to decide whether or not to try and hold through the valleys. There may be more risk to doing this than before, it's a hard call because so much will depend on what the financial wizards do to try and fix the markets. Exiting when the SPX nears its 200 day moving average is probably a good strategy until it becomes clearer what the longer term outlook may be.

The MCO for 10/20/08, Click to enlarge

The following weekly chart of the SPX is a little messy but what I've draw in here are two channels using fixed slopes 1 point per day (blue) and 2 points per day (orange). Several other timing cycles point to the spring of 2009 for what I would consider the first real chance of forming some sort of bottom. This market remains in a steep downtrend and it is very likely all rallies will fail below the 200 day moving average (roughly 40 weeks, not shown)

SPX Weekly, Click to enlarge

Obama for President

Without hesitation I'm endorsing Barack Obama for president.

The last eight years have been a political and economic disaster for this country I can see no reason why we should not expect more of the same under another Republican administration. How can I trust the judgment of Senator McCain if his best choice for vice president lacks any qualification for the job?

During the bush adminstration we experienced a zig-zag market with two downlegs wiping out 33% (1/00 - 9/02) and 40% (10/07 to the present) and a net loss so far of roughly 25% since he took office. Historically this fits the pattern, that markets underperform under Republican administrations when compared to Democratic administrations. President George W Bush has shown his party leadership, presiding over decling average returns for Republican administration stock markets. Why any investor would vote Republican is beyond me. What does all this squealing about "lower taxes" mean if your investment returns are cut by 40%? Oh, I get it, that's how a "free market" works? Gulp.

When I was a young boy growing up, we were shown, without choice, the horrors of the Nazi concentration camps, it's stuck with me over the years. America, we were the good guys, fight for justice and equality, the cowboys in the white hats.

Somewhere along the line we lost our way, believing it was our way or the highway. A belief that absolute force and intimidation could be used to sway world events in our favor. The world has grown up, shaken off the destruction of World War II, globalized, and we now find ourselves a member of a new global economy, we are all interlinked economically.

This has been been made forcefully clear by the recent financial crisis which I believe is directly the responsibility of the current administration. It is not as if this problem was hidden, people have been talking about it for over two years but without leadership nothing was done until a fatal crisis put us where we are now.

I am against terrorism and I am against torture. The good guys would have never stood up for torture as government policy. Why are we now?

But wait, don't just read me, here are links to other esteemed newspaper writers which also realize that Barack Obama is the best choice for this country and are publicly endorsing him for president.

Chicago Tribune endorsement: Barack Obama for president
"This endorsement makes some history for the Chicago Tribune. This is the first time the newspaper has endorsed the Democratic Party's nominee for president."

The L.A. Times: Barack Obama for president
"The Times without hesitation endorses Barack Obama for president"

The Washington Post: Barack Obama for President
"The choice is made easy in part by Mr. McCain's disappointing campaign, above all his irresponsible selection of a running mate who is not ready to be president"

The Boston Globe: Obama for president
"...The nation needs a chief executive who has the temperament and the nerves to shepherd Americans through what promises to be a grueling period - and who has the vision to restore this country to its place of leadership in the world.
Such a leader is at hand. With great enthusiasm, the Globe endorses Senator Barack Obama for president."

The Seattle Times Barack Obama for president
"At a time of huge challenge, the candidate with the intelligence, temperament and judgment to lead our nation to a better place is Sen. Barack Obama."

Christopher Buckley, the son of William F. Buckley has decided—shock!—to vote for a Democrat. endorses Obama
"Buckley, the son of famed conservative icon William F. Buckley Jr., this week lost his job as a columnist at the National Review, the magazine his father started, over a blog he posted on the Daily Beast endorsing Barack Obama." [Christian Science Monitor]

Surprisingly, the Huffington Post, the last bastion of conservative liberalism hasn't quite made up its mind and endorsed Obama, at least I couldn't find the editorial:-) They do say nice things about him though.

And finally from FUX News, Hip-Hop-Dancing Colin Powell Fuels Speculation He'll Endorse Obama
Colin Powell showed off his hip-hop moves at an 'Africa Rising' celebration in London Tuesday, fueling speculation that the former secretary of state is about to endorse Barack Obama for president.
Colin Powell will appear this Sunday on "Meet the Press" and since he isn't exactly an economics expert, speculation has it that he might give Obama the nod.

Really Chitty Markets

Starting off with the crash of 1929. The following charts are scaled approximately the same percentages to give a relative sense of the sizes of the declines. I've marked out the crashes. Readers should note that the 1929 crash was only the start of a market which eventually lost 90% of its value in a long extended decline. See the last chart for the whole horror story.

The Crash of 1929

In modern times, the bear market of 1973 to 1975 had two crash phases and just went down and down making a very wide chart.

The Oil Crisis Crashes of 1973-1975

In October of 1987, the markets staged probably the best kick ass crash ever.

The 1987 Crash

And here we are today, the bottom has fallen out of the bucket. In my personal opinion there is a 50-50 chance we could be entering an extended bear market similar to the 1930's or the 1970's. I really don't think anyone really knows one way or the other here. The fundamentals are mixed, with the general economy better than the news makes it look but with the financial sector on the brink of a total meltdown any recovery may take longer than a few months.

The 2008 Crash

And, just for fun, here's the MCO as of last Friday. I can't say any more than I have previously. it is so oversold we should rally, but a hiccup could mean another 600 points on the downside.

The 2008 MCO
Click to enlarge any chart.

Just in case you think the market cannot go lower, think again.

The whole ugly market between 1929 and 1933, one crash after another
Click to enlarge any chart.

Ugly Thursday - Set up for a reversal?

It might take another day or two but the current decline is very extended and will lead to a sharp rebound to correct the excesses on the downside.

The current market is just like 1987 except that the activity is being spread out over 6 days. It should be over in a day or two with a net 6 day, start to finish loss, of about 23%-25% (900-860 SPX ).

Unlike 1987, traders can get quotes and enter orders, everything seems to be functioning in an orderly manner and that is a big plus. Since orders are being taken, traders are taking shots at picking the low and their stops are being taken out fueling the start of each of the smaller legs of the decline.

Now for a second, let's consider the state of the supply and demand balance. On the demand side the market makers, specialists, short term traders and institutions are absorbing the selling.
* Some of the players will attempt to remain market neutral and unload positions on any tiny rally. This is what is keeping the various issues range-bound most of the trading day.
* Some of the traders are just scalping or trading with a tight stop, they provide liquidity and create froth.
* Some of the buyers are smart short sellers who are covering their earlier shorts, either in size or in pieces. Short covering decreases the float, hence it reduces the supply.
* Some of the buyers are mutual funds with a long term horizon, they are effectively removing supply from the market as they intend to hold the stock for more than a few days.

On the sell side:
* Institutions, ETF's, mutual funds, and individuals are liquidating positions and moving into cash. Their selling reduces the supply since most of it goes into strong hands.
* The churn, or all the daily trades caused by stop loss orders, forced margin liquidation scalping and other short term activities. This is primarily noise but adds liquidity.
* Late comers to the short side, especially the effects caused by hedges using ETF's or put options or futures, along with new shorts. The ETF's, short funds and options events are translated into the cash markets as sales. All of these trades represent latent buying power.

As the market declines, panicked sellers are removed from the supply side of the book as in the aggregate, the stock moves from a pessimistic holder into the hands of an optimistic holder.

When the move is extended over several days, each new low flushes out more of the weak holders who decide to throw in the towel and sell. As the market decline reaches fever pitch it becomes front page news, fueling the fear and inflaming the decline. This is about where we are at the moment. `

Now, at some point the world economic powers decide that this is one "free market" too many and that they will need to intervene. Doubters need only realize that, if they want to, the government can print enough money to buy all the stock being offered. In practice this will not be necessary, but it is possible.

Further, we should realize that the people in the government making these decisions are aware of the various methods for determining where a market is in its buy-sell cycle. In extreme conditions like we are experiencing they should know that all the indicators will deviate from the prior normal ranges and make new extremes. They should also be able to sense when the markets selling pressure is exhausting itself. Then when the rubber band is stretched out as far as it will go, they will act. This is exactly what happened in the days following 911.

If there is some sort of buy side ignition, we must remember that the "overhead supply" has been significantly reduced. When the market starts to rally the bargain hunters will jump in along with the shorts covering.

Remember, it was only 900 mostly banking stocks which had short restrictions. Further, there will be a massive unwinding of short side ETF's which will be translated into a market which has no available supply. Prices will skyrocket and unlike previous one day wonders, I believe the rally to come may go straight up with no significant corrections for the first few days. It's not a prediction,. but something to watch out for.

SPX Daily with some arbitrary trendlines.

Moving right along

Just a chart, it should be self explanatory.

Percentage of NYSE Stocks above their 50 and 200 day averages.

Prolonging the Panic

Todays market action is within the parameters I would expect under the current panic conditions. The markets are moving almost entirely on emotion and therefore somewhat unpredictable in their behavior.

While the technical indicators are oversold, they are also well outside of the normal ranges indicating that one should be careful about looking for a bottom too soon. The urge to sell, either just to escape or to scalp, is stopping any attempts to rally and work off the oversold condition.

Eventually the markets will turn higher here but it may take another day or two of behavior like we saw today before this occurs. No need to be a hero.

SPX 65 minute (6 bars per day) Click to enlarge

SPX Daily Click to enlarge

MCO for 10/7/08 Click to enlarge

Grrrrrasch

There was nothing nice about todays market except for the rebound near the close.

All the indicators are oversold enough for a bounce or more crashing. This makes prediction about as good as flipping a coin.

My gut reaction is that Monday Oct 6 was some kind of a significant low and that we could bounce Tuesday.

It is possible that on Tuesday we may start off going a bit lower intraday, but a number of my near term price targets have been met and a bounce could occur if there is no negative news overnight. The charts below are what an unstable market looks like, IRA investors should remain on the sidelines.

Click to enlarge.

Click to enlarge.

New low swamped everything else in what looks more and more like climatic behavior.
Click to enlarge.