Sunday, October 12, 2008

Finally, A Bottom?????

What a wild day for the stock market on Friday. The Dow was down 600 pts in the first half hour and broke below 8000. This was followed by a massive rally, all the way to the area of the closing of the previous day's close. However, the bears stepped in again and produced a slow and steady decline again throughout the day back to below 8000. It would have been very ominous for Monday if we fell below that opening low. Then, around 3 PM, like like the Phoenix rising out of the ashes, the market started a 1000 point rally in a matter of less than an hour. At 3:45 the rally fizzled, and prices fell back 300 points, producing a negative close (-128 points). If one only saw the closing prices, one would conclude that it was a quiet day for the market. WRONG! An analogy for football fans out there, it was the equivalent of one of Barry Sanders famous criss-crossing spinning backcutting runs that netted a 1 yard loss. Check out the intraday chart below to see this volatility.

Thus, the major question is whether we saw the "bottom" on Friday. Some have remarked that it is very rare to make a "bottom" in the market on a Friday. However, data from the last 68 intermediate-term lows (at least 3 month low), shows that although Mondays and Tuesdays are the most likely days for the low to occur, Friday surprisingly, is the not the least common day, but instead the 3rd most common day to create an intermediate term low.

Day of Week # %
Monday 16 24%
Tuesday 20 29%
Wednesday 11 16%
Thursday 8 12%
Friday 13 19%

Check out this article from Jason Geopart at He provides data and accompanying charts from all previous market crashes. As you can see from history, the "low" after the crash was always challenged again. Things are not going to go straight up from here. "V" bottoms are very very rare. There is often a period of backing and filling.

Furthermore, I did some 'word on the street' investigation this weekend at the mall. I asked almost everyone I saw about the volume of customers and actual spending. Nearly every employee/worker noted a decrease in both volume of shoppers and actual spending, including those at the car wash, Bloomingdales, the men's shoes department at Nordstrom, and college students trying to raise money for kids with cancer. The only place where things were mobbed and the employees reported no decline in shopping and spending over the past several months was the women's shoe department.

So, in summary, we may have a tradable low in the market. Conditions are extremely ripe for a good relief rally given extremely oversold conditions (only 1% of stocks are above 40 day moving averag). But, let price action in the early week confirm that we saw the low on Friday. Is it going to be a final low in the bear market? Probably not. Look at this longer term chart of the Dow. It would be very unlikely to just abruptly stop the decline here and not retest the lows at around 7500 from the 2001-2003 bear market.

And, caution from an excellent technical analyst, Brian Shannon, who gives some historical bear market perspective on his blog

Dow Jones October 1929: Over a 23 day period, the Dow lost 49% of its value,
but that was just the start of the bear market during which the Dow would
eventually lose 89% of its value (386.10 to 40.56). How many people do you think
called the October 1929 low of 195 "the bottom" only to get decimated by the
continued weakness over the next 3 years? We remain in a bear market and ALL
rallies should be treated as guilty until proven innocent, meaning you need to
maintain a super strong defense. Do not be too quick to call Friday's low "the
bottom", there are serious flaws in our economic system and a lot of closets
with ugly contents are still being opened.

If you're quick and have some guts, it may be profitable to risk some capital now on the long-side, but don't go all in just yet.

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