Front Sight, Press

It was the first day ever for the Dow Jones Industrials to trade in a 1000 point range. It was exciting. I was watching the ticker before the open and the Dow futures were showing a 400+ point drop at the open. It did it and more, down over 700 points, but then something strange happened: the indexes turned on a dime and climbed to a couple of points above break-even. Then Dubya had to go on TV to “calm the markets" and the Dow sold off 450 points. Thanks, guy. It was back and forth for several hours and then, at about 3, the Dow began to rally. It went positive by over 300 points, but it didn’t hold. The close was off 128 points.

Anyone who can say for sure what that all means is a better teal leaf reader than I am, but it felt like the market was feeling for a bottom. Is this the end of the pain? Probably not, but I am getting the feeling that this sell-off thing is getting over-done and the psychology has become hysterical. The hotdogs on Wall Street are being shaken out of the trees. It’s the mother of all margin calls. There are a bunch of hedge funds that will be out of business in a week. While I do think we are entering a recession, America is not going out of business. This sell-off could end up to be the buying opportunity of a lifetime, or at least since 1987. To be honest, it could also be the harbinger of a new Great Depression. I don’t think a depression is the odds-on bet, but it isn’t out of the range of possibilities. Much will be shaped by how the world’s governments, central banks, and the markets themselves decide to behave. My hunch is that they will pull together to keep it from getting too bad. Chaos is not in the best interests of the powers that be.

Was today the end? No, but it may be the beginning of the end. I don’t believe in "v" bottoms. I believe in basing patterns which test the bottoms several times before giving a clear "buy" or “sell” signal. Reliable bottoms are generally shaped like a "w" or a couple of "w’s" before the market breaks out of the range defined by the base, either above or below – either is a signal. I think we have to establish a base before we can trust any rally. Without a base, the rallies will just tend to be "bull traps." Looking at the intra-day chart, there does appear to be a base formation, but reliable bases require more than one day’s action to be trusted.

I feel that the selling is starting to get overdone. People are going to get hurt in this thing. People who have borrowed too much money to make their trades are going to be wiped out. Some good companies will be irreparably damaged by short sellers and collateral calls. Others will reveal their strength and come out looking really solid. There’s a world of hurt out there. Careers and fortunes are being destroyed.

In another way, this is the markets doing what they do best – being efficient. A lot of unhealthy bullshit is being cleaned out of the markets. While my impulse is to hope for governments to step in to stop the carnage, it may be healthier in the long run to let the markets do their brutal errand.

Today, the low on the S&P 500 reached 839.80. That is 72 points above my target of 767. That’s a long way for the S&P 500, but the index gave up 200 points this weeks, so 767 is clearly within range in this kind of market. So, I think the message of today’s action is that we are reaching an area where significant support can be found, but we may not be completely out of the woods. Monday could be very difficult.

I am emotionally drained. I did some buying early on, and then spent some anxious hours wondering if I had done the right thing. I felt OK by the time the market closed, but I’m still somewhat uncertain. One way or the other, this has been an historic market event, one that will be discussed and studied for years to come.