Historic Plunge Takes Market To Unseen Territory
The market was killed again. I would like to say that I have never seen this intense selling pressure before, but I have, in 2008. Is this 2008?
I can hardly say the economy "feels" any better. And I am sure the millions of unemployed (some of who have been without work since 2008) would agree.
But folks, this is not 2008, or 2009. I am not going to argue with those who think the market goes lower; I do too. But the economy is not worse than 2008, corporate profits are not worse than 2008, and we do not have deflation.
The market was in hysteria yesterday. The lunacy was a direct result of S&Ps downgrade of the U.S. credit rating to AA+. The U.S. has always been AAA, and the bulk of the world's financial quantitative models use that rating as a constant. So institutional investors are now trying to figure out how much that change will impact projected valuations of current holdings.
The uncertainty and fear drove the market into an extreme oversold condition not witnessed in three years. Additionally, long term and intermediate term support levels were split by sellers like a hot knife through butter.
Also, the VIX, which is commonly referred to as the fear index because it spikes when the market acts irrationally, rose to levels above the May 2010 crash. And only a few times in history has that index been higher.
Also, the advance to decline ratio was unheard of: decliners to advancers (stocks) was 19 to 1, while declining volume to advancing volume (volume that causes an up move) was 98.5 to 1, which is literally off the scale - except that it happened on Thursday too.
Finally, bank stocks were hammered with Bank of America, Citi, JPMorgan and Wells Fargo down 10% on average. A decline like that has not happened to BAC, C, JPM, or WFC in a few years.
While a new bear trend is very likely underway, the market already declined by more than 15% in the past two weeks. The descent has left the indices trading in oversold extreme areas not seen since the bear market of 2008. And the indices are currently more oversold than they were in the flash crash of 2010 and the March low of 2009. The indices can trade at extreme levels for a time, but I think the large move to the downside has passed and as mentioned yesterday there remains only a few percentage points left to go - we got those extra few percentage point yesterday afternoon; now it's time to rally.
The real beast the stock market needs to overcome is not fundamental weakness, but a lack of confidence. The decline over the past session had little to do with a credit rating and more to do with a lack of confidence in the market by investors. Surely, the selling over the past few sessions was strong. But the market has also declined because no one wants to buy.
Much like in February, or March of 2010, when no one wanted to sell, the market continued to move in only one direction; higher. The attitude now seems to be the same, but the direction is the opposite. The decline in the market over the past two weeks was more severe, and less orderly, than the increase to the market in February 2011 or March 2010, but the result will be the same. At some point, buyers will step in and reverse the current downward trajectory. And after that countertrend move, we can decide if the bears are for real this time (likely), or if this formed a major swing low.
