Thursday, October 9, 2008

Capitulation or Decapitation?

I'll be honest right here - blog readers are not going to get my conclusions after today's huge percentage loss (number 11 all-time) and point loss (number 3 all-time). This is where the rubber meets the road for paid subscribers. I will apologize to those reading this now but I am sure you can understand.

Just some observations:
  • Fox business news anchors (who have been around) were visibly shaken and panicky
  • Interviewed guests - the "pros" - were citing how we should ride it out if we don't need the money right away
  • Volume was heavy but not panicky at all. The tape seemed rather orderly.
  • VIX at 64
  • Dow dropped 100 points AFTER the closing bell (order imbalances)
  • Comparisons to 1929 are coming out the wazoo
  • Predictions that hedge funds will blow up and junk bonds will default have started
  • Every find company has sent out "letters from the manager (or CEO) trying to soothe frayed nerves
Some of these are capitulation. Some are bulls just licking their chops to buy bargains.

But as I wrote in Barron's Online yesterday, no analyses are working the way that we expect them to be working. A reader wrote in to chastise me for saying they don't work but that is not what I said. What I said was they don't work the way we expect in this environment. It is that reason that I am sitting it out and not because I have lost my way.

Would you put real money to work - long or short - if your tools were acting weird?

Would you drive your car on the freeway if the engine light were on, your gas gauge read more than full and the speedometer were reading negative?

15 comments:

Doug said...

Coward....come on in long, the water is fine...

PD Quig said...

Yes, I feel rudderless right now. I did a VIX play on Sept 18 and bought a load of QLD, riding it up to the 50 day SMA on Friday. Boy, how fast that disappeared on Monday, leaving me shaken enough to go to cash early Tuesday--where I still sit, through the deluge. I'd be retiring sooner if I still had my QID position working, but this is all just too crazy. Cash and gold...and sleep at night.

TradeDog said...

Great irony here. I, too have been mostly on the sidelines this week. Problem is I am hearing more and more people sitting this out, making me believe that the decline could be exaggerated because more and more participants are sitting it out.
This could also explain why volume is lighter than it was on the first big break on that glorious Monday when we dropped 777....most people have already forgotten that shock wave. Funny way markets work. Happy trading.
I should note that I am seeing way too many people calling a bottom...well everyday in fact...and I recall in the last few BIG bottoms, everyone was saying "look out below"...I think the bulls are too early. I also believe based on the damage this decline has caused, we will not see a V bottom, but rather a period of sideways action. This is what will confuse the most amount of people most of the time. That, after all is what markets do best.

patrick neid said...

So far, despite the reports, we have been here before. October 73 to Oct 74. In fact Oct 07 -Oct 08 is getting close to a dead ringer. From the world ending to the new depression.

These two charts are offered as evidence, the first with news headlines

http://www.djindexes.com/mdsidx/downloads/1970-1979.pdf

the second a weekly

http://www.paradigmbook.com/assets/DowHistory1970to1974.jpg

If we are tracking we should be near "Nixon resigns".

I won't bore you with the trading range analysis 1966-82 vs 2000-? but in both cases we are eight years in. You can figure out the rest. What I would point out is that we rally back near the old highs within 1 1/2 years which would fit this time also as it did after the banking panic of 1907.

If I'm wrong and we blow through 700 on the spooz I'll join the panic!

patrick neid said...

Here's the chart links again in a shorter form

http://tinyurl.com/48vncn

http://tinyurl.com/4nyo98

Quick Takes Pro said...

Doug,

Believe me, I am looking for that buying opportunity! It SHOULD have been this morning when the Dow was down nearly 700 and then rallied into the black. But now that is it sagging again, the capitulation watchers have been fooled big-time.

Just what did Dubya say, anyway?

Quick Takes Pro said...

pd,

Take the K.A.S.H
- Wreckless Eric

Quick Takes Pro said...

Tradedog,

I said back then that the 2000-2002 bear market ended in July 2002 - even though prices went on to undercut that low three months later. A very likely scenario today.

Cable news talking heads were indeed saying this morning to watch out below. One of them actually spelled the word - F.E.A.R.

Quick Takes Pro said...

Patrick,

I actually ran a side by side comparison of 1974 to 2008 in today's newsletter. Can't say more here, unfortunately.

As for where we are in the comparison, I think we are past "Nixon Resigns." That tipping point may have been when Obama really expanded his lead over McCain. (Please, no politics here. This is a reference to a possible changing of the guard in the white house. I will delete any comments bashing either candidate or pushing any political agenda)

patrick neid said...

Quick,

If I had my daily bar charts, sitting back in SF, I would have even been more exact. You can see why I said Nixon resigns as my indicator.

That said assuming our analysis is correct, including the Panic of 1907, the bottom is extremely close and within two years we will be back near the old highs as the trading range continues.

patrick neid said...

One last remark if you would. I think it is very important that one of the indexes break the 2002 lows--candidate of choice the spooz. Admittedly it further complies with the 74 bottom taking out the 70 by 10%. It is from that panic I think we get the wash out. It could happen today, as crazy as that may sound, if we were to break the low near the close. In this environment with a three day weekend anything is possible.

If it does I'll buy the close.

TradeDog said...

I see the equity market as dead money for a few years. This decline is a symptom of "real" panic which will come later. Too may people will be discouraged to jump back in. Corporate earnings are about to go over the cliff. Without earnings growth, there will be little growth to propel stocks. Wait until the masses see their 401K, retirement statements. The market has become way too popular in the last decade....time to trim the fat on Wall Street, just like we are doing in our lifestyles going forward. Too much excess in this country. We need to get back to basics. It will be painful for many, but we will all be better off down the road.

Doug said...

Thanks Patrick for input and charts, appreciate it my friend.

patrick neid said...

Doug,

Hopefully I'm hand grenade close in my analysis and it ends up being useful.

If I get my price and it keeps on going I do get out however. We shall see.

I'm a big believer in pattern recognition. Price and time equal psychology. That said when charts line up it's because the human drama is contextually the same even though the events are different. blah, blah, blah...

Doug said...

I agree with you 100% Patrick, I'm trying to walk this line of being educated on what's going on in the market/economy from the fox business channel/squawk boxes of the world, but yet at the same time try not to buy into "its the end of the world" message and have emotion take over trading decisions. I get angry with the media/congress because I'm convinced that they worsened the move down in price and time. I do think we would have gotten to these levels or pretty close without the panic and fear being spread on tv and the media, I just wasn't looking for it until next year. If the bear usually lasts for 30% of the previous bull then that puts it ending not until the beginning of April next year. My guess is we don't launch into a full fledge bull here but we go sideways and retest fridays lows once, maybe two more times before kicking off the next bull. I don't believe we breach fridays levels, if so it won't be by much I don't think. I'm long in options and have been for several weeks, so i'm going to be taking a loss on one of these rallies here soon. I'm concerned about some manipulating going on in the markets. I saw on squawk box that the day before gm got "downgraded" there was a large spike in puts, what's up with that, oh yeah, I own gm calls for december, so that's not looking too good based on where I got in. I vowed a few months ago to stick only to the indexes(qqqq,spy), should have stuck to it, I have a position in q's and gm long, each day since purchasing I said to myself, today is the day we bottom, blah,blah,blah