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Saturday, November 29, 2008


rally aftermath

i tend to think (along with many others) that some sort of intermediate market low was put in last week. but i'm also extremely wary -- for it seems to me that the proper analogue for what we are now observing is neither 1929 nor 1987 (20th c stock market collapses of comparable volatility) but 1931-1933, the period of prolonged banking sector delevering and liquidation which made the great depression great.

what we've seen from february 2007 through september 2008 (a stretch of some 19 months) is, it seems to me, similar to the suspenseful period between the collapse of the investment trust stock ponzi scheme in september 1929 and the initiation of the bank liquidation spiral in late 1930. as then, most every effort rendered conceivable by the current philosophical paradigm has been made in the interlude to support the failing capital structure of the economy and key financial sector components -- and, as then, those efforts have resulted in what might charitably be termed "ambiguous" results. things might be worse had nothing been done; but they are bad now and getting worse, with the net effect of intervention perhaps being nothing more than a delay in the reckoning.

in any case -- from a trading perspective, the issue of the moment is to try to contextualize the strong price rally which has proceeded from recent lows. i used the dow industrials because the data stretches back to 1915; the DJIA has rallied 18.1% from the intraday low to the close of the fourth day following, which is one of the twenty strongest such rallies in the dataset.

grouping all rallies of 13% or more by date is somewhat instructive. shaded groups are separated by more than 20 days. the table lists the high tick and low tick from today's close over the next 10, 20 and 50 sessions.

what can we say on this data? most likely, there will be a close below where we are today.

however, this second table shows the low tick of the forward 10, 20 or 50 day period from the low-tick initiation of the rally. as you can see, it's quite rare that, over the next 50 days, we would see a new low.

one could surmise, then, that we'll probably see retracement -- but are very unlikely to see a collapse over the next 50 days.

UPDATE: via barry ritholtz, some excellent perspective from doug short.


I'm curious as to your personal assessement of the likelihood of a US stock market stagnation and ongoing decline similar to Japan's over the last 19 years. I know you are aware of the many similarities (and differences) based on links you have commented on such as Koo's balance sheet recession PDF.

I ask in part because the implication I read [perhaps incorrectly] into many of your stock market posts is the assumption of later lows perhaps coming eventually but generally an uptrend ahead of us.

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i think economic stagnation and therefore stock market doldrums (at least in real terms) are just about inevitable, and the stage is certainly set for years of delevering.

but i also think, hbl, from an asset-ownership POV, that it is important to remember that even these sociological debt-repudiation watersheds contain big bull runs within the downtrend. just as secular bulls have cyclical bears entrained, so the opposite is true. such was certainly the case in japan's delevering.

and i further think we might be on the cusp of such an entrained cyclical bull. it may not last long (months?) but it could be very powerful.

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