Another Entry For The History Books

11/18/08 3:25 PM EST

As of: SPX 1045 HELP  ARCHIVE

Since noon, the indices had been stuck in another wicked trend situation, where selling pressure came in every time the NYSE TICK had the nerve to scramble above the zero line.  We were on the verge of challenging last Thursday's lows when some news about GE Capital came across the wires and lifted the entire tape.

If we fall back again and close near the day's lows, then it will be only the second time the S&P 500 has dropped at least 2.5% for three straight days since 1950.  The other was July 22nd / 23rd in 2002, a day before that bear market low.

Using the Dow Jones Industrial Average's history of 110 years, there were six such occasions.  The Dow was higher a week later every time by an average of +8.2%.  Only one of them had a maximum loss of greater than -1% during that week (on a closing basis).

Like we've seen so many times with these kinds of studies since late September, every one of the instances in the above test occurred between 1928 - 1933.  We have to go back at least 75 years to find any kind of price comparisons to the price destruction we've witnessed over the past year, or the volatility since September.  And in many cases, even 110 years isn't enough history to find a precedent.

This morning I went over the reasons why I was giving the idea of a bottoming process another chance, and I liked the odds.  It actually looked pretty good this morning, but the index that should have led us this morning, the Nasdaq 100, couldn't make a new intraday high along with the S&P and Dow, and we've seen nothing but selling ever since.  If we close poorly, we'll get another round of oversold readings among a number of different guides we follow, but "oversold" hasn't meant a whole lot lately.

I put on another (small) long position as the S&P came down to test that 850 area that it broke above last Thursday, but I'm not going to have infinite patience with it, not in this never-seen-before kind of environment.  By all rights we should be in the midst of a counter-trend rally, yet we just ring up more and more entries for the history books.

That's the kind of environment where I want to do even less than I have been, and I've been exceptionally inactive over the past month.  If we could somehow fashion another upside reversal above 850, then it'll still look like a decent setup, but it's hard to count on anything lasting as we swing several percent with seemingly little rhyme or reason.

Get Oversold.  Bounce.  Repeat.

11/18/08 8:50 AM EST

Good Tuesday morning...We begin the day with some modest selling pressure in the pre-market futures.  They were down significantly earlier this morning, but are recovering before the open - as we saw yesterday, that isn't necessarily a good thing.

Yesterday, we touched on a couple of what-should-be-positives.  To recap:

*  November options expiration week has been positive for the S&P 500 tracking fund, SPY, during 11 out of the past 13 years, averaging +1.2%.

*  There have been 10 times that the fund was down 2% or more on a Friday, then gapped down at least another -0.5% lower the following Monday.  Buying Monday's open and holding through Wednesday's close resulted in 9 of the 10 trades being winners, averaging +2.4%.

*  The DJIA has closed lower by at least 2.5% on both a Friday and the following Monday 6 times since 1897.  By Wednesday's close, the Dow was positive all six times and showed an average return over those two days of +8.7%.

*  There have been 9 times that SPY has been down 2% two days in a row, then gaps down by any amount the following morning.  Buying that day's open and holding for three days resulted in 7 winners, averaging +4.9%.

With another modestly bad day today, the 10-day Up Issues Ratio will be back down to about 31% or so, among the most oversold readings in history.  The 10-day Equity-only Put/Call Ratio would also likely reach 0.90, usually good enough for a bounce.  Another bad day would also push the Down Pressure indicators for the S&P and NDX into extreme territory, a relatively good indicator of an imminent bounce.

That all seems pretty good, but that's the problem with bear markets - we get a wave of extreme readings which makes it seem like the worst is over, a quick bounce, then another wave that does the same thing.  Repeat ad nauseam.

Because of that tendency, I had no intention of chasing Thursday's upside reversal, but I was willing to try once again with very small positions if the market came back towards its breakout area (roughly 850 on the S&P 500), which it obviously has.

The evidence was just too strong to not try again - Thursday's reversal was a "key reversal day" which has a historical tendency to precede intermediate-term advances, and many other factors suggested it was a sign that the worst is probably over (i.e. seasonality, a multitude of historic oversold readings in mid-October, and subsequent signs of explosive buying interest - two 7% rallies within a month of each other, an exceptionally low Arms Index reading and the quick flip in breadth).

I keep repeating the above paragraph, because it still holds.  But if we can't maintain this breakout, then we'll be seeing a level of price destruction never before seen in such a compressed time frame, and it will throw any type of historical comparisons - even the 1930's - out the window.