After such a brutal market day, I have decided to share an excerpt from our nightly subscriber commentary with all ETF Prophet readers. Hang in there gang….
“When I wrote last week on reducing exposure in light of abnormal market conditions, I certainly could not have envisioned the last several-days’ action coming so fast and furious. News events included follow-on downgrades and outlook revisions for Fannie Mae, Freddie Mac, many insurance sector Co’s, including Berkshire Hathaway, a multi-billion dollar fraud claim against Bank of America filed by AIG, and, to many, an address by our President that fell flat. In-spite of the downgrade, treasury rates ironically fell as investors sought refuge from the global equity sell-off.
Breadth was among the worst seen in the history of U.S. markets and long-term trends rolled over to follow the Russell, bringing the S&P 500 down approx. -7.5% as of the time of this report. Ranked 100-Day Historic Volatility is now in the top 5th of observations over the last twelve months. While I tried to make an argument for this move remaining an ‘event’ over the weekend, with banks like Bank of America down 20% on the day and now the overhang of State and County follow-on downgrades, systemic implications are much more apparent. Lastly, with the major indices below their respective ten-month moving averages, quantitative systems will begin to favor active shorting — bear this in mind when we ultimately see a bounce.
Mean reversion signals continue to seek a statistical bounce, but the bias actually weakened today even as the term structure of volatility breached a zone associated with past bullish retracements (see VIX:VXV = 1.26). Technical ‘support’ areas have obviously lost significance in the face of fear and forced selling, but as a point of comparison to the 2010 rout, here is a multi-year chart to consider. The current SPY price is approx. $111, a touch off its after-hours lows.
Bulls’ hope for tomorrow will be a soothing policy statement from the FOMC (typically a bullish event in its own right; also note 12:30 EST timing). Ironically, with bonds out performing so dramatically the last several weeks, another hope may be policy statement driven stock vs. bond re-balancing by major institutions. Perhaps the fall in oil prices will help as well. It’s otherwise difficult for me to imagine this evening what the catalyst may be to stimulate a long overdue short-covering rally.”
