Wednesday, September 17, 2008

Tipping Point

I came in today long and not without a certain egg on my face. The internals were so ugly however I managed an about-face by mid-day and scratched-back most of the early losses.

Today was exceptional and opportunity is blistering right now. But you've got to get the direction right. If you're wobbling senseless, you cannot afford to play; as it tends to just get worse before you finally give up. This is a lot of why I change on the dime as much as I do - I cannot afford to lose my crazy mind.

To the point, Wednesday's high-volume turnaround was violated today and with further violations in a distressed market, accelerating declines become common (the psychology of fear takes hold, whereas hope and greed had until then stayed illuminated). I cannot measure the size of a move, but there is a certain power building at the moment that is undeniable. And if you ascribe to the notion that there is no floor when the floor is removed, then you have to acknowledge that the worst-case scenario is as likely as anything else.

It's not a comfortable market to just hang-out and hope right now.

So for the moment, the evident fear and emotion (notice the VIX has risen to important levels) cannot be considered a positive UNTIL the market defines a new floor. That could end up being today's close or that could be 30% lower by Monday, I don't know. All I know is that you must respect the possibilities if you want not to blow-up.

Naturally, then - any hour now may again mark an incredible long-side opportunity (shorts get trampled as well, eh?). Don't do what I do, but I'm keeping very keen on the internals before sweating the long side. Today's internals were resolutely negative, and remained so throughout every rally attempt on the day. Subsequently, every rally attempt ultimately failed.

If you read this regularly you know I cannot shut up about internals (breadth and relative strength between the various indices, industry groups, etc.). The Advance/Decline line was so fantastically negative today there was little doubt as to whether or not we would close on the lows (there were no more than 300 advancers on the NYSE virtually throughout the session, out of a possible 3549 issues). Additionally, the price of gold made the biggest 1-day percentage gain in history, while treasury notes were trading below zero (meaning you had to pay to trade into a T-bill - as opposed to the typical business of receiving interest when depositing money. This deposit costs you a fee until you sell your money back...to yourself!).

There was a continued run on the investment banks today and GS and MS were woodshedded in the most primal sense. Reportedly, their borrowing costs (and they borrow a lot of capital in their business) doubled overnight last night; that amounts to something ridiculous like $8B/yr in additional fees for Goldman, so it's not just walking around money.

So, around the globe the markets are sucking-up capital faster than the Federal banks can inflate it. Our Fed is so far picking and choosing what to "bail-out" and at fat, favorable terms. This could end up making the US taxpayers hearty capital gains, once the Fed unloads these in times of less panic. But if too much of the chowder comes out of the pot, the Fed will have accumulated too much wet chowder on their face to look very good with all these blow-ups on the books.

The Fed writes a lot of the rules and as they see fit. They do not like to lose either, as their credibility is of tantamount importance, so the stakes are very, very high right now for the Fed. This begs the question: Is now really the time to fight the Fed?

I've been having fun being short, but I still say that outside of the select casualties, the overall environment is not that negative. Professionals everywhere are chiming that they have never seen anything like this in their 20 and 30 and infinite year careers - fine. Technically, I've been trading the market since the day it opened and I can tell you this is certainly different (it always is) but it is not yet extraordinary by historical terms. They have seen the market drop much further en-mass than anything like what we've seen so far on this move. They just feel awfully wiggy at the moment. So don't miss that point. As bad as everything is, this market as a whole as so far managed to hold its en-mass entrails, in-check.

The next few sessions might be the tipping point, where the cascade does indeed show folks something they've never seen. However, in the strong possibility that this turns out not to be the case, then I'm keeping very keen on the internals and firing long with abandon to take advantage of the sling-shot which will instead occur in the other direction.

I really doubt this will end with malaise and boredom - in my view the market is either on the cusp of its lows right now (don't forget the inevitable re-test of sorts however, so there is no rush for widows and orphans to buy membership cards for the next rally) or the air-pocket beneath us is going to spill en-trails, ala GS today.

Good day sir.

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