S&P Closes at Two-Month Low, NYSE Volume Over Upper Bollinger Band

One of the key takeaways from the past six sessions, in which the S&P has
plunged a staggering 250 points, is that normally reliable counter-trend
trading setups have been absolutely crushed. Yet when we look at the daily
chart of the S&P500, we still have not seen a real 'range expansion' bar - a
down day that really stands out - despite the flurry of 3%+ down days (eight
in the past month). Anecdotally, I'm surprised that so few reporters and/or
bloggers are discussing the potential for a crash from current levels. Most
reiterate common investment themes such as "don't panic", "it's too late to
sell", "almost certain to see a bounce soon", etc. I've been looking for a
bounce as well, but I've been repeatedly stopped out when our intraday
TrendCatcher strategy has triggered sells on Tuesday, Wednesday & Thursday.
Institutional investors are not bottom fishing - quite the contrary in fact,
they're selling and then selling again. As I noted in today's intraday
updates, "the S&P is down over 20% in a month, yet the lower prices are
failing to attract institutional buyers. This implies we'll need to see
significantly lower prices to attract any real interest, which could happen
fairly quickly given the lack of underlying support."

The early NYSE TICK action on Friday should tell the story. Our TICKscore
indicator has been trading in negative territory since October 2nd, closing at
its lowest level of the year (again) on Thursday at -101. This reflects
aggressive selling by institutional investors, and there's little chance of a
sustainable bottom until this patterns shifts. Given the extreme conditions,
it should be quite obvious when this shift occurs.

Up until now, the relatively light volume has prevented me from considering an
all-out crash, but this week's price action has me reconsidering the
possibility. Of course, the S&P is down 20%+ in a month, which certainly
qualifies as a crash in its own right, but the sharply lower prices have so
far failed to ignite even a glimmer of institutional buying. It's been a
brutal and unforgiving decline with barely a single rally day in which to
unload longs and shift to the sidelines. I would imagine that's how previous
crashes felt. In the midst of a crash, there is no opportunity to exit
gracefully.

As I noted in today's intraday updates, it was unnerving to see the BKX down
another 3%+ Thursday afternoon even as bond futures sold off sharply. This
identical pattern occurred Tuesday and Wednesday as well, which marks the
first time on record that we've seen this generally bearish market pattern
occur on back-to-back-to-back sessions. This suggests the potential for
another lower close in the Friday-Monday time frame...

Bank Index -2%, Bonds Down (TNX +1%)
10/09/08... ???
10/08/08... Lower SPX close one session later
10/07/08... Lower SPX close one session later
09/22/08... Lower SPX close one session later
07/11/08... Lower SPX close one session later
06/09/08... Lower SPX close one session later
05/21/08... Lower SPX close two sessions later
05/13/08... No lower SPX close within two sessions
03/27/08... Lower SPX close one session later
02/14/08... Lower SPX close two sessions later
02/04/08... Lower SPX close one session later
12/14/07... Lower SPX close one session later
05/07/04... Lower SPX close one session later
04/13/04... Lower SPX close one session later
06/20/02... Lower SPX close one session later
09/20/01... Lower SPX close one session later
01/12/01... No lower SPX close within two sessions
06/21/00... Lower SPX close one session later
04/27/00... Lower SPX close one session later
02/09/00... Lower SPX close two sessions later
01/18/00... Lower SPX close two sessions later
01/03/00... Lower SPX close one session later
11/29/99... Lower SPX close one session later
11/17/99... No lower SPX close within two sessions
09/27/99... Lower SPX close one session later
08/30/99... Lower SPX close one session later
08/06/99... Lower SPX close one session later
07/29/99... Lower SPX close one session later
05/27/99... No lower SPX close within two sessions
05/14/99... Lower SPX close two sessions later
05/06/99... No lower SPX close within two sessions

The value of credit default swaps backed by Lehman Brothers bonds will be set
on Friday. Here is the timeline as reported by Reuters...

9:45 a.m.-10 a.m. (ET) Auction participants will submit bids and offers for
the debt backing the credit default swaps, which will be used to determine the
initial recovery rate of the swaps.

10:30 a.m. Auction administrators Creditex and Markit will publish the initial
recovery price and the open interest for the contracts will be published. The
open interest reflects the amount of bids and offers that have been made, and
will show if there are more buyers than sellers, or vice versa.

12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt
on behalf of themselves and their clients to fill the open interest

2 p.m. The final price of the auction will be published.

That 10:30am time frame will be particularly interesting, for if sellers
outweigh buyers, it could be the trigger for an all-out rout.

Categories : Archived EOD Commentary, End-of-Day Commentary

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