Monday, January 21, 2008
an absolute crushing
Share prices have now fallen far enough that European indices are in bear market territory having dropped 20% from their peaks. Indices for smaller stocks in Britain have fallen by a similar amount. However, it takes more than just a big percentage fall for a bear market to be officially under way; the decline also needs to be long-lasting (the 2000-02 decline was a classic example).
The markets have had short-term 20% declines in the past (1998, for instance) only to rebound quickly. Indeed, what was remarkable about the long bull run from March 2003 to June 2007 was that it occurred without any such corrections.
Share prices have fallen so far and so fast that an attempt at a rally seems almost inevitable. What may determine if this is a correction or a bear market is whether that rally can be sustained for more than a day or two.
waiting for that inevitable rally has been an expensive proposition. american futures figure to open down about 4.5% tomorrow morning, with the s&p near 1260. this from slope of hope about sums it up for me -- nothing is more frustrating than being a habitual bear who has seen trouble coming for a long time and managing to be long this mess anyway. fine, fine trading there.
the silver lining -- if there is one -- is that something unusual often has to happen. there have been entirely too many folks (myself included) willing to cast about for a bottom. maybe we all need the shit scared out of us to put in a floor, and maybe this is it. (did i just call another bottom? sigh....)
if the fed brains are ever going to offer an emergency intermeeting cut, it's very probably going to come tomorrow before the open. this is exactly the situation such cuts are designed for. their ruminative dithering may be calculated to be so, but it is the worst thing for the markets. to be sure, the psychology has gone so far around the bend now that a 100bp cut may not assuage but inflame.
one has to begin to suspect that, this time, things really are different -- or at least as they've not been in a long time. putting in huge numbers of new 250-day lows has always stopped market declines in the recent past dating back to 1984, but the s&p will (if current levels are held until tuesday morning) open down ~11% from january 9.
the percentage of issues trading below their 150-day moving average is sure to blast lower in tuesday's opening minutes, getting well under any standard level that marks oversold. is that where it stops? i'd have to submit that no one knows now. we might see a big bounce -- but (as mish notes) we could easily see a black tuesday for the history books, one that might very well be prelude to a rapid global levered asset unwind and worldwide depression.