Not Out Of The Woods Yet

This week bore witness to the ancient and sacred art of buying the falling knife.  Traders said enough is enough and bought the 1100 level with great vigor.  Funny thing, it was only last week people were thankful to be alive and now everyone is proclaiming to be a dip buyer.  We’re deeply oversold and I hope we get some additional bounce for those in underwater positions.  The good news is the $IWM is two standard deviations below the $DIA and the $XLU is two standard deviations above the $SPY.  Growth ($IWM) is oversold and safety ($XLU) is overbought, which is the perfect recipe for a short term bounce.  I hate being bearish on the stock market but I can’t help but feel that we’re not out of the woods yet.  You can go through and debate every data point one by one, but you can’t argue with is that “the fear” is back on the table and traders have proven that they will use any and all speculative rumors to sell first and ask questions later.

Sentiment has changed for the worse and it will not turn on a dime.  I’ve been thinking about the relative differences between the panicked markets of 1998 and those of recent days (H/T @ChessNwine who made a great video post documenting some recent market crashes).  1998 is quite similar in that it was a banking crisis (LTCM getting wiped out) which seemingly came out of nowhere.  But to me that’s really where the similarities end.  Some of the critical differences between now and 1998 are the fact that they didn’t have a huge world wide bear market in the rear view mirror.  Plus the fact that in 1998 they were not just at 52-week highs, but all-time highs.  Clearly the psychology and sentiment is very different now — where they had a raging bull, we had a kind of Shetland Pony bull.

Barring some insane coordinated intervention, we should trade lower.  Hopefully we don’t go into a full zerohedge-style Robert Prechter deflationary hell.  I do believe that March of 2009 was a generational low.  If this whole thing turns out just to be garden variety panic and we reverse down here and rip past 1280 on the $SPX we’ll be telling our kids in 20 years that we were trading when the SUPER bull was born.

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