Friday, October 10, 2008

10.10.08 - Red Sky at Dawn

I want to believe in a potential bounce as much as anyone, but right now the adjusted tick and advance-decline lines remain negatively sloped and price is below the declining daily VWAP just above S1 (SPY $87.20). These have been terrific predictors throughout this period, though it is still early in the day. VIX broke 70 and remains high.

On the other hand, volume at the open was huge, commercial paper markets are supposedly improving, and now we have some CDS pricing (albeit awful). I can't emphasize enough how important these elements are.

9:00AM PST: VIX 73+ and climbing -- but oil and gold are both down -5.9% and -2.2% respectively. Here is an interesting article from Macroblog. Restesting opening lows.

How Low Can We Go?

This is for my father in-law, who emailed me this photo with the suggested caption "How Low Can We Go?" Maybe it should rather be captioned "Institutions Afraid to Get Burned on a Bounce?" VIX ticking down a tad after exceeding 74+. Quantifiable Edges looks at past intraday plunge reversals here: Two Outcomes...

Seven Sources of Selling

It's incredibly unusual to see selling due to all seven of these self-reinforcing causes at once. This is what has made this "event" different, prolonged and cascading in nature.

1. Global Deleveraging
2. Mutual & Hedge Fund Redemptions
3. Margin Call Cash Raises
4. Operating Liquidity/[Add: CDS Counterparty] Cash Raises
5. Valuation Reset on Earnings Reductions
6. Valuation Rest on Higher Risk Hurdles
7. Individual Fears

10:10AM PST: Again, I want to be proven wrong, but this isn't holding and momentum remains downward. We really will need a massive buying effort to overwhelm the supply we will see on any drive higher. Plus, there is a "you first" phenom. Looking at tick, it is once again hugely negative, even more than price belies.

Note that next week is holiday shortened on top of the G7 meeting outcome and options expiration.

10:45AM PST: Third go at the lows after multiple attempts to bust the VWAP. One of them will break before the day is over. Oil and Gold are now both down nearly -8%. Demand destruction for Oil plus rotation/ cash raising for Gold, which you'd otherwise expect to have gone up. SPY re-approaching S2 ($83.50) and VIX is back on the rise at 75+.

11:30AM PST: SPY volume is on pace to exceed records set on September 18th when we saw the TARP reversal (that lasted a day). Volume has certainly been a missing component of the recent pull-back. The temptation has been to view that as a cumulative exhaustion proxy for the desired "capitulation" event. VIX is on the rise again. Quite a battle playing out -- Art Cashion has been asked to predict the close. I won't do it!

12:40PM PST: Technicians will like this on so many levels. Still, there will be a lot of supply above. Thousand point range and we end down, what 110 Dow points? Enjoy your long weekend [my mistake, banking holiday only]. ["Cramer" says Dow 6,000 on Monday. Brilliant... Well, he's probably right minimally in the sense that we need a news flow turn anyhow.]

No comments: