Devastation

Oct 9, 2008: 6:17 PM CST

Just when you thought it was safe to enter the market.  Also, “what a difference a year makes.”  Exactly one year ago, the S&P 500 and Dow Jones made all-time highs… one year later, we’re making fresh and significant five year lows.  Let’s look at the S&P and the XLF Financial Sector on weekly charts.

S&P 500 Weekly Chart (compressed):

To say the ferociousness of the recent price swing down was unexpected (in its magnitude) is perhaps an understatement.  Many of us – myself included – did have price targets beneath S&P Index value 1,000 (some even down to the 2002 lows near 750) but I don’t know of anyone who had the targets being achieved this quickly – it was stunning and remarkable.

Notice how the market was making lower swing lows and lower swing highs in an orderly fashion – that is the ‘rules of the game’ and normal conditions.  The trajectory (trend) is clearly down but it is peppered with stable, salient retracements (usually to key Fibonacci levels such as 50% of the prior decline).  In this current swing (which – as of this writing – is not over yet), there wasn’t a pause or breath – it fell like a rock, blinding many fundamental, technical, and quantitative analysts.  “This isn’t normal.”

But it is what it is – Mark Douglas said it best:  “Anything can happen [in the market]” and “Every moment in the market is unique.”  I thought of his quotes immediately when the government banned short-selling on Financial stocks – did anyone see that coming… or even as a conceivable possibility?  Even if you did, could you have foreseen the ramifications of that decision?

So we’re in a new world with perhaps new rules – what worked in the past doesn’t seem to be working (in terms of long-term investing or short-term/position trading when it comes to ‘buying what’s overextended’ for a ‘reversion to the mean’ style trade).  It is what it is.

Anyway, let’s look at today’s 7% index decline as distributed across the AMEX select Sector SPDRs.

The intraday Sector Performance:

The Energy and Financial sector were hit hardest, with – surprisingly – the Technology sector holding its own (Apple – AAPL – though it closed slightly lower, did well for the day and could be starting a counter-retracement up along with RIMM – but that’s another story).

Let’s zero-in on the Financial Sector.

XLF Financial Sector:

The major culprit behind the recent ‘crisis’ stems from past practices with Financial related companies.  The financial sector – and investors in it unfortunately – have suffered dearly for those mistakes.  Banks are in serious trouble and are seizing up – credit is no longer lubricating the US Economy as freely as it had in the past – banks are afraid to lend and no one’s exactly sure when the next shoe will drop or how much ‘toxic debt’ is still on the books.

So what is the expected play now?

You’ve heard it 100 times now – the market is so overextended that a rally is due.  But the next day brings more selling, so the sentiment grows more urgent:  “Well, we’re certainly due for one now.”

My response?  Absolutely, and it’s probably going to be a quick rally – but it seems like the government is doing everything it can to start that rally (cutting rates, giving speeches, passing the Bail-out bill, etc).

But it hasn’t happened.

Let the professionals play in this market.  Let them catch the falling knives – somewhere (perhaps here), price will hit valuations that fundamental (and even technical) traders will find unbelievably attractive and they will begin buying – perhaps aggressively.  But as long as fear and panic rules the day, it’s uncertain when that time will come.

Whatever you choose to do, your #1 goal should be capital preservation – be it taking smaller positions, trading more selectively (not just jumping at anything that moves), going away from stocks temporarily and only trading ETFs (perhaps even Index ETFs), or even just sitting in cash while avoiding the market altogether – it’s your choice.

But don’t think you’re going to make a killing when everyone is getting killed.

6 Comments

6 Responses to “Devastation”

  1. Anonymous Says:

    Hi Corey, Haven’t commented for a while but still a daily visitor – the site and content has grown significantly since last summer , well done, great read. Agree with your final comment totally – always the temptation to jump in for the big pay back but I can only assume these are market conditions very, very few people have seen let alone trading in. I’ve sat in cash for the last two weeks and although having gained very little from the big drop I am up ~12% since last summer so count myself very lucky. The time will come when re-entry is right but I fear any bounce now, although sharp, may also be short lived – I think Dow 7000 is in the near future and I fear we may see that fall also. As you say – preserve captial…

  2. Anonymous Says:

    Sorry Corey – it thought I was logged in with previous comment but it shows as anonymous – should have read jacksoo

  3. kim Says:

    Really? Couldn’t expect this decline?

    come on, look at your SPX chart posted above, its screaming negative divergence from the mid april 07 high and then at the april 08 high it screams so loud its blown out its lungs!

    Not to mention fundamentals!

  4. Corey Rosenbloom Says:

    Kim,

    I’m with you and I have been discussing plenty of downside targets on the blog (not including the ones I have privately) but I didn’t expect these to be achieved so quickly – especially how quickly the S&P plunged through the 50% and 61.8% Fibonacci retracements.

    I figured we’d stair-step our way down, finding tradable support rallies like we’d been seeing but that we’d ultimately reach lower prices over time – not violently with one fell swoop.

    I’m getting deep into Elliott Wave and there are some even more bearish objectives forecast by it.

    I’ve gotten good at actual price projections over time – I just need to get better at time confluence projections. I believe Gann and Elliott can help with that – any suggestions would be very welcome.

  5. Corey Rosenbloom Says:

    Hey Jacksoo,

    Thank you for the compliment – I’m trying to put more into the daily posts and am working up to producing a newsletter soon that will take it even deeper. The CMT program has really helped with my depth of knowledge and I’m hoping it’s showing through – there’s so much I want to share but I have to hold back due to space and time requirements – remember I produce the blog for free 🙂

    I could certainly see the Dow 7,000 target being realized in time and am proud of you remaining in cash and avoiding this beast of a market recently – very good going. We’ll have a bounce, but it’s for the professionals to take rather than most at-home/retail traders. This is a difficult market even for professionals – it’s brutal for those who are starting out or had just gotten a little experience in trading from those I’ve spoken with.

    Be safe and yes we’ll emerge from this environment… at some point.

  6. Anonymous Says:

    anyone know any good gann analysis books/software programs?