A Big Intraday Reversal Sends Stocks Well Off Their Lows Of The Session; The VIX Hits A 21-Year High

October 11, 2008

Wow. That perfectly explains the action the past week in the stock market. There is no doubt that the past week was the weakest week any of us have seen in our lifetimes. That can best be seen in the SP 500 which fell 18.2% this week easily beating its old record in the week of the crash in 1987 when it lost 12.2%. So as can be seen this was easily one of the worst weeks any of us have ever seen.

The worst index this week of major importance was the NYSE which lost a whopping 19.5% in one week! That is by far the worst drop, as the Nasdaq only fell 15.3%. These kind of huge drops did nothing to convince anyone that the bailout bill was a good idea and proof of that fear was easily registered in the VIX.

The VIX hit a shocking 76.94 intraday on Friday. That was the highest level since 10/20/1987 when the VIX hit 172. This extremely high level on the VIX is something most of us have never seen as most of us were not investing full-time or doing this for income back in 1987. This extremely high level has a lot of people believing that Friday must have been the volume. Especially since volume came in the heaviest ever on the Nasdaq expanding by 41% from Thursday’s levels. Volume expanded around 50% on the NYSE. Even though my charting service Telechart does not show record volume, IBD shows that volume on the NYSE was a new high for at least 2008.

While the extremely big volume, along with the very bullish reversal from the Nassy being down 6% to closing up .3%, was very bullish on a day that saw some extreme fear intraday, there was still a slight problem. The fear that showed up in the VIX just has not showed up in the put/call ratio. The shocking and almost unbelievable fact is that the put/call ratio actually fell on Friday to 1.16 from 1.20 on Thursday. This is still off the recent highs of 1.3 which is still below the 1.5-1.6 put/call ratio that showed up in March when BSC was the first of the bad eggs to knock the financials lower. I don’t know how this is happening, with all the fear being driven up by the news media, but it is happening.

Despite this bad news, the other good news that is showing market participants are getting too bearish is the investors intelligence survey which shows bears hitting a five-year high of 53% and bulls hitting a five-year low of 25.3%. With professionals this bearish, it is a good sign that most of those that are going to sell have sold. This very weak reading can get weaker so don’t think just because these are five year highs and lows that this means this is a bottom. The put/call and lack of a follow-through day should keep anyone from declaring the worst over yet.

Even if it is not over, we are so oversold that I think with the comeback intraday today, along with some other data, show that a bounce must be expected sometime soon.

Two things that clearly show me that we are extended to the downside and poised for at least a bounce soon is that out of 7050 stocks in my Telechart system ONLY 261 are above the 50 day moving average. That is a number I do not believe I have ever seen in my Telechart above the 50 DMA scan. It is shockingly low. But what makes it worse is that the majority of the stocks in an uptrend and above the 50 DMA are all ETFs. Most of the regular stocks are in downtrends.

The last thing that really shows an extended market to the downside is the new 52-week highs to new 52-week lows. Leaving out the AMEX, there were 3 new 52-week highs to an outrageous 3,398 new 52-week lows. A number so high that I believe I have never seen that before. I do not keep data on 52-week highs and lows going back to when I started in 1996 but I am sure I have never seen that many stocks making new lows at once. Adding to this, the AMEX had 45 new 52-week highs (all ETFs) and 649 new 52-week lows. If your keeping track that is 48 new 52-week highs to 4,047 new 52-week lows! Stunning!

I believe that we could see a bounce however I don’t know how anyone with a sane mind would play this, minus looking to short a low volume rally. There are zero good looking charts out there setting up in my CANSLIM scans or in my “perfect setup” scans. This lack of quality stocks setting up, along with poor leadership, shows that it is going to be a rough move higher if we do move up off the lows here. However, nobody said that this all can not be part of a long bottoming process. We have been in a bear market for almost a full 12 months now. This is not something new. A lot of people act like we just started moving lower and nothing could be further from the truth.

If this is not part of a bottoming process we will know soon enough. We will not see any new stocks setup in nice patterns, IPOs will not come to the market, low volume will be on the indexes, and the rally will, obviously, fail and we will hit new lows on higher volume. That would be the worst scenario, in my opinion, because the government has their hands in the market.

I am not sure if we are about ready to enter a new world of Socialism but I am praying that my worst fears do not come true. If they do, I believe that the USA can still produce some exciting innovative companies. I like to believe that we have not dumbed-down our culture enough that the entrepreneurial spirit is dead. I like to believe it is alive and well and still kicking and even if we have to go through four years of Socialism we will come out ahead because we are hard working Americans. God help us all, if I am wrong.

For now, it would be smart to take profits in any shorts that you have a 20% or higher return on your investment. We have come down a lot the past couple of months and the past week was one of the worst drops ever. To not cover SOME (not all) of your shorts into this environment would be foolish. If you are not going to take any profits, don’t come crying to me if you get a big fat short-squeeze that takes you out of your position. There is a difference between being smart and being greedy. In bull markets you can get the big 1,000% gain. In bear markets, you must take profits along the way from 20% to 99%, depending on the chart pattern and price descent.

I hope everyone has a nice weekend. Relax, enjoy your company with family and loved ones. The truth is that is the most important thing in our lives. Not money, but family. As long as you cut your losses, which I have ALWAYS preached, you can always wait for the proper bull market to make a LOT of money. There is always a bull market from a bear market. This too shall pass. Aloha!!

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A Big Intraday Reversal Sends Stocks Well Off Their Lows Of The Session; The VIX Hits A 21-Year High

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