Daily Market Reports | Oct 17 2008
By Greg Peel
The Dow closed up 401 points or 4.7% while the S&P closed up 4.3% and the Nasdaq 5.5%.
So far, so good. I have been noting this week that “crashes” of the like we’ve seen are usually followed by a first capitulation bottom, then a sharp rally, the another bottom at a slightly higher level, and then a rally. That is exactly the way things have played out.
The Dow opened higher on the bell last night, but then the sellers jumped in and just after 11am we hit the day’s low, with the Dow down 380 points to 8197. In so doing, we well and truly closed the two close-to-open gaps on the intraday chart from last Thursday to Friday and Friday to Monday. We also thus had a look at that intraday low of 7773 but decided not to go there. The buyers came in to stabilise and we were back at square just after midday.
Then we see-sawed for a while before an eerie calm descended and the trading floor held its breath. The clock struck three. Which way would we break?
To the upside. It is quite noticeable that if the index is underwater ahead of the three o’clock wave then it will be a sell wave. This is because the mutual funds wait till as late as possible to square their books and raise more cash if necessary, and if the market is down the risk is they won’t get enough cash in the door. They must sell and sell aggressively. But if the index is in the green before three then they can afford to hold off. If the sell wave doesn’t arrive, then the buy wave takes over.
When the market hit its bottom in the morning the VIX volatility index traded to a new high over 80. Given Wednesday’s down-session was the worst in percentage terms since the Crash of ’87, and we were down again on Thursday morning, that’s no surprise. But the low we hit was not as low as the low we hit last Friday, when the VIX topped out for a new record in the 70s.
All this is good news. If – and this is a very big, don’t-put-your-house-on-it, “if” – history continues to repeat then we will now see a significant rally phase. It will be steep and it will be volatile. It will not be a straight line but a very ugly looking saw-tooth of strong up days punctuated by sharp and scary down days. We might see 20% or more in the next month or so. After that we could still slip back into a down-phase and dishearten everyone by giving a lot back. There will be Johnny-come-lately sellers all the way up. But if we don’t go back as far as this double bottom, then you could possibly ring the bell and put on the horns.
Or we could all just go to hell in a hand basket. But I’m trying to channel Eric Idle here.
That’s all about the esoteric world of charts and human behaviour. Now back to the real world.
The specific trigger for the early weakness last night was the September industrial production number, which showed an ugly 2.8% negative growth. This is right at the heart of the economy, and the worse these economic data get the more the market comes to believe the recession will be a deep and long one. So they sell again. (It should be noted there was a “hurricane effect” in that weak number.)
The IP number, and general recession concerns, have also provided us with an “everything must go” sale. That doesn’t just mean stocks, it means commodities and gold as well. If you can’t get anymore cash out of the stock market, then you’ll have to get cash out of anything else you own, including commodity funds and gold positions.
Stock markets in Europe had the misfortune of closing last night when the Dow was weak. They thus once again suffered 5-6% falls. This meant the London Metals Exchange also closed on weakness, and hence copper fell 4.5% and there were 2-8% falls in all metals bar aluminium, which was steady.
The oil market closed just before the Dow took off in the last hour. There was also bad news on the inventory front, with inventories of crude, gasoline and other products jumping markedly. This sent oil down US$4.69 to US$69.85/bbl.
Remember only a few months ago when oil was “going to 200”. And then a bit more recently when oil “could never break 100”. And now here we are under 70 as the market panics over a global recession that has apparently only come upon us in the last two weeks. Just as oil way overshot fundamentals on the upside to 147, it is now way overshooting on the downside in the deleveraging process, despite what those economists who all suddenly became bearish in unison this week will tell you. In fact all the recent economist panic is a very bullish sign.
OPEC has brought forward its previously announced production meeting to next Friday. Ya don’t reckon they might elect to cut? The market is talking a 1 million bpd drop in quota, for a “preferred” oil price in the US$70-90/bbl range.
Gold was slammed last night, and not because the stock market turned positive at the close. It was all part of the “everything must go” sale. This is a sign that weak influences still prevail, but all part of the game. Gold fell US$42.40 to US$802.40/oz, having had a look under 800 and deciding to retreat.
The SPI Overnight jumped 206 points or 5%. Yesterday the ASX 200 settled at the support level at 4000 (a support level only because of the three zeroes). Today we will push back towards the more technically significant 4300 level once more. A good break up over 4300 in the following session or two would be positive.
And there is another important indicator to consider – the “Rudi indicator”. Three weeks ago my esteemed Editor got on a plane for a long ago scheduled trip to Europe (his sister was to marry). The next day the world fell apart. We have since experienced a three week financial market storm of unprecedented magnitude with no more than a tenacious Senior Writer at the helm of the little ship FNArena. Rudi returns tomorrow. If that’s not an indicator he’ll be able to merely step back in to a relatively positive market, I don’t know what is.
On another note, Sydney readers will have a chance to meet Rudi and myself next week at the Trading & Investing Expo to be held at the Exhibition Centre, Darling Harbour, on Friday and Saturday October 24-25. We have various “show only” offers available. Tell your friends.
