Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched – if it gets pulled too far, eventually it will snap back. As a short term trader, I try to wait until the rubber band is strecthed to its extreme point.
– Linda Bradford Raschke, quoted in The New Market Wizards (1992) by Jack Schwager, pg. 300
I think that’s enough for now. I bought SPY at the very end of the day at $116.40 and I added to my Goldman position at $100 midday. I think a bounce is coming and here are some reasons why:
- The Dow has dropped 812 points (-7.11%) and the S&P 95 points (-7.59%) so far this week.
- Volume has been really high on the NYSE and in major ETFs like the SPY and XLF. In fact, I believe the SPY set an all time record today with 624 million shares trading hands.
- Both Monday and today (Wednesday) were 90% down days where more than 90% of the volume traded on the NYSE was on a downtick. These types of days, on the up or downside, are thought to be climactic. Two this week suggests to me the selling has reached a climax.
- The Fear Index (VIX) spiked to 36 today and closed there – the highest closing level since 2002.
- The selling in Goldman (GS) and Morgan (MS) has just been insane. In spite of releasing a pretty solid earnings report before the open yesterday, Goldman is down 26% on the week. It was down 14% today on volume of 112 million shares – out of 394 million outstanding. That is BY FAR the biggest volume day in Goldman’s entire history as a public company dating back to 1999. Same story at Morgan Stanley which is down 42% on the week and 24% today with 330 million shares trading hands – out of 1,109 million oustanding. Again that’s BY FAR the highest volume day for Morgan Stanley in the last 10 years.
- In another sign of complete panic, according to the WSJ Markets Data Center the 3-month T-Bill closed today yielding 0.036% – down from 1.475% at the close on Friday. That compares with a low of 0.518% on March 20th in the wake of the Bear Stearns bail out. To be clear this means that investors are willing to lend money to the Treasury for 3 months without being paid ANY interest just for the security of knowing that their principal is safe. It’s a sign of capitulation because it shows that everything else is being sold, nothing is trusted.
- The SEC came out today outlawing “naked shortselling” on ALL public companies. If you recall, they did the same thing back on July 15th except for it just applied to the largest financial stocks – and it worked as that day marked the bottom for financials. In other words, the government is sort of making it illegal for stocks to go down. Socialism anybody?
For all these reasons, I think stocks might have bottomed today, or at least they’re real close, and a bounce should be coming. I don’t think the bear market is over by any means but for the short term it might take a little break.
Disclosure: Top Gun is long the S&P 500 ETF (SPY) and Goldman Sachs (GS).