Wednesday, November 19, 2008

Bend it Like Bedlam


Let's look at today. While volume was far from extreme, declining stocks bested advancing stocks on the NYSE by more than 11-1; Down-volume traded on the Nasdaq was an overwhelming 98%; the early CPI report highlighted a rising surge in deflating prices; not good. The Financials swooned another 10% as bellwether Citigroup choked on its own bile; the commercial real-estate woes came crashing homeward; Insurers continued their death spiral; the US auto sector...forget I mentioned it; Transports were down >8% as the supply chain there braces for a possible fail3er; GM's bonds are trading at 15 cents on the dollar; a single Nasdaq 100 stock was up 3 cents today (CA), while the 99 remaining Yahoo's declined; The S&P 500 posted 492 declines; grim.

Must be time to cover; must be time to buy.

But timing is everything. I don't know if we're going to breach 7800 and reverse immediately, or cough-up another 600, 800 or 1800 points in a couple of days before beginning a retracement. The only thing I feel confident of is that time-wise, we are close to beginning the retracement period. The levels will be what they will be; and again, that first retracement rally from the lows is going to be the best and most significant, assuming this market plays out like crashes of the past. Why? Because it will commence from the extreme-high in implied volatility (VIX, VXN), and the oscillations are at their most violent at the onset of the first trough. Thus, even if we're not going to see any economic recovery for quite some time, the upside of the initial retracement bounce won't realize this as it drives 20, 30, 40 or 50%. It will have plenty of time to drift into oblivion then later.

Of course, there is no rush to be early, no need to peg the exact bottom and no comfort yet should the Dow fail to break 7800 on this 48th re-test (since it may indeed need to break that level before a reversal will reign in any trading confidence).

But this is the belly of the beast. I can only imagine the newspaper covers being put together tonight. Yesterday (I kid you not) CNBC market cheerleader Maria Bartiromo said "There is no reason to buy this market - bottom line." She said this just prior to the 300-point surge higher in the last hour of trading yesterday. I'm not going to bash Maria (not with a seal-pup at least), but this women has gotten emotional at key turns in the past. Why else would I listen to that crap all day?

With a break of the 7800 level on the Dow, we should see if there are any buyers in the wings. Volume has been light and the market is (a tad) sold-out, so I'm not sure if we have what it takes to really break hard from here, even if the Big-3 Bailout fizzes (or perhaps - especially if that plan fizzles). The S&P, Nasdaq, NDX, Russell 2000, NYSE (all the majors other than the Dow) have already closed now lower than the October 10th lows. Only the Dow remains.

And yet at the same time, the volatility at highs and lows is extreme, so don't do what I do, don't try this at home, don't stay at your desk and pee in Vitamin Water bottles all day. This piece is for information purposes only - watch the guy trying to catch a falling knife. Watch when he momentarily removes the safety net (hedges) while high-wire walking back to Houston.

It's universal lemons out there right now. I'm just looking to make lemonade. Cases of it.

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