As it has now been several weeks since the August 9th low in the US equity markets, it is appropriate to take stock and reassess. Our determination that the market would rally for days or weeks off of the August 9th low turned out to be a good one, as the market remains over 8% higher. The NASDAQ100 did test its August 9th low on August 19th, but it never went below and has rallied quite strongly five of the past six days since then. So the crash is over and the market has spent the past few weeks chopping up and down in very high volatility, trying to find a level of value.
While it is heartening that buyers have returned and halted the early-August cascade down, the major indices have, nonetheless, entered into a long-term downtrend. While this new long-term downtrend can only be ‘confirmed’ upon the market breaching the August 9th lows, the general mode hereafter will likely be rallies that fail after a few weeks to a month or two, then lower lows. Strong rallies like the one(s) we have seen since the August 9th lows are typical of bear markets, as they indicate instability. Sustainable rallies are associated with declining volatility as well as intermediate-term moving averages pointing up, neither of which has occurred the past few weeks.
So far, the two scenarios we believed were most likely in our last post are both still in play, while the two outliers have, indeed, failed to materialize. From this point in time and price, the market may or may not continue going higher before testing the August 9th lows. The choppy rally higher is perhaps the more likely continuation for the short term. Regardless, the further in time we progress without a test of the August 9th lows, the greater the likelihood that, when tested, it will fail.
Monday, August 29, 2011
Wednesday, August 10, 2011
A Clear Vision of the Markets
The price action in US equities on August 9th strongly suggests that a short-term bottom is in place. After buyers appeared at the open, the market drifted around into the FOMC announcement at 2:15pm. Then sellers tore the market down to a new 11-month low in the S&P. From 2:45pm-4pm, the market then rallied over 6% (!!), finishing the day up 4.7%. While there is no magical formula that reliably catches market bottoms 100% of the time, the most important factor is the activity of buyers. In the downtrend that began in late July, there have been buyers, sometimes very aggressive buyers, at several levels. They appeared for several hours on August 3rd, 5th, and yesterday, August 9th.
The reason that the August 9th buying was significant was due to the aggressiveness, the fierceness of the buyers. There was an all-out rush back into equities for the final 75 minutes of the day, immediately on the heels of a new low for 2011. The market closed at the exact high of the day and had managed to close above the August 8th low as well. This buyers’ rush put an end to the cascading move down in the market. While it is possible that an even larger, scarier move lower is near, the more likely scenario is a continuation to the upside for days, possibly weeks.
Pick your asset class of choice and you can probably make the argument that its price movement in 2011 indicates that the world is imploding. While the markets are trying to keep up with major rapid-fire news (US debt downgrade; FOMC declaration of easy money through mid-2013; Europe backstopping Italian and Spanish debt; etc.), markets tend to overshoot both to the upside and the downside. Since there is an anomalously high level of uncertainty right now across many different strata of market influences (politics, economy, sovereign debt loads, banking system), deleveraging of risk has been the primary reaction by market participants. Because of the existential nature of the problems at hand, the move away from perceived risk and towards perceived security has been extreme. There are now two likely scenarios for equity markets in the upcoming months:
1. Market trades in choppy fashion generally higher, fails to breach the 2011 highs, then heads back down for a test of the August 9th low
2. Market trades in choppy fashion higher for a few days to weeks, then heads back down for a test of the August 9th low
Two outlier scenarios must also be considered.
1. Market rallies in ‘V’ formation back up near the 2011 highs and then goes higher with no test of August 9th low
2. Market continues to drop vertically below the August 9th low
In summary, the short-term looks bullish for equities, the intermediate-term looks bearish, and the long-term is murky but increasingly bearish. One caveat: if the market closes below the August 9th lows, all bets are off and a reassessment is necessary.
The reason that the August 9th buying was significant was due to the aggressiveness, the fierceness of the buyers. There was an all-out rush back into equities for the final 75 minutes of the day, immediately on the heels of a new low for 2011. The market closed at the exact high of the day and had managed to close above the August 8th low as well. This buyers’ rush put an end to the cascading move down in the market. While it is possible that an even larger, scarier move lower is near, the more likely scenario is a continuation to the upside for days, possibly weeks.
Pick your asset class of choice and you can probably make the argument that its price movement in 2011 indicates that the world is imploding. While the markets are trying to keep up with major rapid-fire news (US debt downgrade; FOMC declaration of easy money through mid-2013; Europe backstopping Italian and Spanish debt; etc.), markets tend to overshoot both to the upside and the downside. Since there is an anomalously high level of uncertainty right now across many different strata of market influences (politics, economy, sovereign debt loads, banking system), deleveraging of risk has been the primary reaction by market participants. Because of the existential nature of the problems at hand, the move away from perceived risk and towards perceived security has been extreme. There are now two likely scenarios for equity markets in the upcoming months:
1. Market trades in choppy fashion generally higher, fails to breach the 2011 highs, then heads back down for a test of the August 9th low
2. Market trades in choppy fashion higher for a few days to weeks, then heads back down for a test of the August 9th low
Two outlier scenarios must also be considered.
1. Market rallies in ‘V’ formation back up near the 2011 highs and then goes higher with no test of August 9th low
2. Market continues to drop vertically below the August 9th low
In summary, the short-term looks bullish for equities, the intermediate-term looks bearish, and the long-term is murky but increasingly bearish. One caveat: if the market closes below the August 9th lows, all bets are off and a reassessment is necessary.
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