Retest of the October Lows
Markets have come increasingly close to their October 10th lows. Contrary to what you may have read or heard on TV, this is precisely as it should be. Why? Major lows get retested. That is a basic tenet of market behavior, and crowd psychology. (This has been verified by a variety of studies by different technicians, economists and traders).
There are a variety of different ways to define the terms, yielding some variations, but the basic outline remains the same: All major sell offs hit a point where markets become so deeply oversold, that a rally ensues. Depending upon how deep the prior sell off is, this rally typically lasts anywhere from 3 to 6 weeks. Our work at FusionIQ shows that these snap-backs typically go for about 4 weeks and average ~24%.
Others have come up with some variations of these findings: David Rosenberg of Merrill Lynch looked at the 12 biggest market bottoms of the past century; he found that 35 days is a good rule of thumb for the length of time for the rally; the subsequent retest lasts a similar length of time. Justin Mamis developed a variation on this theme of bottom, rally, retest, rally. Ned Davis Research has also written on the subject.
On a closing basis, the SPX is a 3 points above its October 27th low, but 48 points below its October 10th lows. Nasdaq is significantly below the October 10th lows and 5 points below the end of month lows. The Dow is also below the closing lows of October 10th, but above the October 27th close.
Under most circumstances, I prefer to use closing data. However, October 10th was such a significant panic sell off — the Dow freefell 1000 points before snapping back intra-day — that trading, rather than closing prices might be preferred.
On that basis, the Dow and the SPX are above their intraday October 10th lows; the Nasdaq traded slightly below its intraday 10/10 lows, but climbed back over those levels.
The past 30 days saw a move that gained about 18%. We have traded around our October 10th and October 24th buys (which made money) and other subsequent buys (which did not). While these trades certainly did not capture the full 18%, they have overall outperformed the SPX over the past month.
Hence, we are buyers as markets approach those levels again. The October 10th intraday lows remain our line in the sand as far as trading stops go.
JPM Retest Window
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Dow Industrials, 3 Month Charts
S&P500, 3 Month Chart
Nasdaq, 3 Month Chart
November 13th, 2008 at 7:35 am
Almost all money managers have cash. They must be waiting for something. Are they waiting for the chance to stick it in if we break the low? I think so.
There is so much cash out of the market right now it’s unbelieveable. They say some $2T in cash money markets right now.
~~~
BR: There’s always trillions in money market accounts; Hussman did a good job showing that cash on the sidelines matters little to market bottoms.
November 13th, 2008 at 7:39 am
And why shouldn’t they be retested? And below?
Macy’s says same store sales will be down 10% this month..yep, 10%…and England says they are in their worst recession since 1980.
Problem here is that we are in a internecine loop, and the entire world has no strong spots.
Leftback..I will take your bet of 890 on the S and P….for a Whopper and raise you a 510k on initial claims tomorrow..
Bet?
~~~
BR: The question about M, INTC, BBY, etc. iis how much is already reflected in stock prices.
November 13th, 2008 at 7:47 am
Barry, I don’t understand your strategy, at all. Since it’s a given it’s a bear market, why aren’t you shorting at the top of the range, rather than buying at the bottom of the range? Wouldn’t shorting at the top of the range be both safer and more profitable, since we’re in a bear market? If you buy at the bottom, against the trend, and put your stops on the other side of the range (or 3 month low), you could lose a lot of money, very quickly. I know there’s all kinds of trading techniques, but trading with the trend, rather than against it, is generally best in the long run.
~~~
BR: We were short at 14,000. We were short AIG, BSC, LEH, FNM way way higher.
After you miss a 6,000 point move to the downside, you are in a position to trade more aggressively, to take advantage of these moves.
Its not for everybody, but given our circumstances, its a defendable thesis . . .
November 13th, 2008 at 7:48 am
thanks for the analysis Barry. i see the next major support levels at 7400. i won’t be buying anything until i see the market near this range. i’ll buy all the way down to 6000 where i believe we’re going before i put the olde 401k on auto pilot.
November 13th, 2008 at 7:51 am
I’m watching AMAT in particular this morning. They announced forcast of 0 cents to 4 cents EPS for 1Q. Talk about terrible. If AMAT keeps a bid here it’ll be interesting.
November 13th, 2008 at 8:13 am
The stock market will have some issues for a while. For those with cash, it looks like a great opportunity.
Yesterday, a lot was written here about credit and oil prices. Today, the WSJ printed a small story in Section 3 about how much less credit is available to those who want to hoard oil in tank farms. It implied that lower prices might make this strategy a bad idea.
Thinking about it, If over $500 million in credit is available for this incredibly stupid idea, then 1) there is no credit crisis and 2) there never was an oil crisis. There are probably credit dislocations that will fix themselves in time. There is probably massive fear that loans will really be used for stupid speculative schemes, so this is probably causing some problems at this time.
November 13th, 2008 at 8:16 am
BR, please put an ‘are you sure’ button somewhere in the posting process. Damn! I wasn’t finished and my finger kept hitting the tab key by accident.
November 13th, 2008 at 8:21 am
This is starting to sound like Cramer’s silly claims. “We beat the SPX.”
The only real trade I’ve seen Barry mention here is putting half his clients’ assets in SSO on 10/10/08 and leaving half in cash. That trade has done horribly up to now. That trade is off 15%, the SPX is off less than half that.
If you are going to make these claims about beating the market, please put up a model portfolio and let people see the trades in real time.
~~~
BR: Since you invoked, Cramer, let me respond by saying WRONG!.
I don’t see how you can possibly believe this is a losing trade. That call, made in real time at 7900, buying 2X leveraged ETFs, ran up over 30% (we didn’t catch all of it, but enough). The Oct 24th call made money also. A few others did not. But we didn’t merely outperform a falling index, we made money for clients this month. And last.
We don’t do model portfolios, we manage assets.
November 13th, 2008 at 8:29 am
Barry,
With all due respect, do you have some historical evidence of a major market that tests previous lows TWICE for a Triple Bottom? I agree that a market that sets a low and then gets tested one more time is “normal.” I don’t agree about testing it a second time for a triple bottom. The selling pressure should have exhausted itself on that first retest….
In regard to your stop loss at the Oct 10th lows…. There’s a lot of bottom-pickers with stop loss orders at 838 on SP500. …that 768 level should be some major support, so maybe reload down there. We could conceivably see a whoosh when we take out the Oct 10th lows, followed by a SEVERE counter-trend rally.
- AT
November 13th, 2008 at 8:30 am
So is this the low for the credit crisis but the being of the sell off due to lackluster earnings?
I am going to play it as an intermediate buying opportunity. Don’t think I’ll go more than 50% in though…
November 13th, 2008 at 8:38 am
I don’t think the lows will hold and I believe capitulation will occur at lower levels. I’m still 50% long and have made some nice swing trades over the last week but starting to eat into the profits I had made shorting so far this year. And I have no illusions about my ability to time the exact bottom.
November 13th, 2008 at 8:40 am
OK…about 30 minutes before the salt mine opens…
Many called cd’s this week. Bought 197k of 2 year callables at 4.25% yesterday and this morning. Mostly stuff called at over 6…
Interesting, since this is my policy short term, is that now the banks with the highest interest rates are pigs at the TARP trough…Schwab lists Goldman Sachs bank, GMAC bank, Morgan Stanley bank, etc. and just a few months ago these entities didn’t exist, and strong regional banks offered the highest rates…no more. I wonder if these regional banks are going to be hurt by the “new banks” and their access to low cost federal money………
Try and realize too, folks, that this isn’t your standard slowdown in the business cycle. The housing ATM is closed, and doesn’t work. The repairman appears to be hopeless…I think I saw him in Deliverance saying, “You shore have a purty mouth..” or something like that..at least I have no confidence in him and his mini-me, Bernanke…
Whitehead, the 86 year old former CEO of GS said yesterday he thinks this may well be worse than the Great Depression, and this unified slowing worldwide is the really scary part.
How are you going to get China to bail the world out? Tell them to hold another olympics in 2009?
I think deleveraging and deflationary pressures will persist for some time. Just be careful…
And leftback, I can taste that 890 S and P Whopper now…..
November 13th, 2008 at 9:02 am
Leftback, claims were today….sorry. Guess I will only get tomorrow’s Whopper.
But I was right! I may get as good at this as Jim Cramer…..(grin…)
November 13th, 2008 at 9:03 am
That may be a week early. If this is right, it will be testing those bottoms next week.
Then again, for something that was set by data a year ago, can you really slam it for being off by a week in any direction?…
November 13th, 2008 at 9:22 am
cash on the sidelines means nothing. cash that comes into the market is met by a seller so net net it is a wash. the only time new cash comes into the market is on IPO’s and secondary offerings. markets move on sentiment not cash build up.
November 13th, 2008 at 9:38 am
Just idle curiosity … the implicit assumption behind “re-testing the lows” seems to be that the previous lows are expected to be counced off of — what percentage of the time does this hold true, and what percentage of the time do the lows fail to hold? Or is it the case that history is re-written when the lows are penetrated, and the old lows are no longer noteworthy?
~~~
BR: If the old lows fail, then you should expect a very nasty downward break.
VERY nasty. . .
November 13th, 2008 at 9:39 am
damn. I DO wish this thing had a preview or better yet, an edit capability.
November 13th, 2008 at 9:45 am
quite frankly it appears the market has tested this level for a THIRD time and that is OMINOUS. a break here would give you s+p 760-770
November 13th, 2008 at 9:45 am
I’m most curious to see whether these lows will hold. My feeling is that they will not, but it’s just a feeling. All I know for sure is how I will react to whatever happens.
November 13th, 2008 at 10:06 am
My two EW scenarios suggest we continue to head lower or we bounce significantly once more for a week and then head lower. The key word I think being “lower”.
But hey, that’s just me…
November 13th, 2008 at 10:06 am
Hell yeah BR.
November 13th, 2008 at 10:07 am
Anyone who buys or even expresses general optimism at this level is admirable for their fortitude. Whether there is sufficient analytical basis for their position is another question altogether. Along those lines, I see only reason to sit tight or open/add short; but admittedly, that’s one trader’s perspective, with a timeframe where discounts are a passing thing.
A retest of Oct lows is on tap, obviously, and while there’s some statistical historic grounds for a rally, I’m certain (though I have no figures immediate to-hand) there’s ample precedent for a breakdown at support in similar technical scenarios. The LL in early November (v. mid-Oct’s high) on all three indices listed, at least, is an ominous mark.
November 13th, 2008 at 10:13 am
I’m not so confident a train wreck can be stopped simply by throwing sacks of freshly-printed money at the engines.
November 13th, 2008 at 10:15 am
The S&P 500 has been forming a so-called “descending triangle” since the middle of October. A triangle usually is a continuation pattern, i.e. when its occurs in a downtrend the break is usually on the downside. Based on technical analysis, such a breakout would imply a downside target of about 680. On the other hand (as a good economist will say), if a downside breakout does not occur and we see a reversal to the upside, a strong countertrend rally could surprise investors.
Marc Faber sees such an eventuality as follows: “… when based on some factors (technical and fundamental) a market is supposed to break out in one direction (up or down) and the breakout does not occur or fails, a very strong countermove usually gets under way. For what it’s worth, I covered all my short positions before Tuesday’s (November 4) almost 900 points rally [on the DJIA] and increased my equity exposure to 10% of my assets. I would consider a move above 900 for the S&P 500 to be a confirmation that a temporary low is in place.”
http://www.investmentpostcards.com
November 13th, 2008 at 10:23 am
i’ve heard from a few pros (hedge/ prop guys), smarter than i, no doubt, that are bullish.
what they have in common:
1) live/ work within NYC/ Conn complex.
2) all base their (or their bosses more likely) perception that the markets have already come off so much -6000, basically making a psychological/ technical analysis call.
i’m with subscriber @ 7:47.
the most humble trade, as i’ve said before, OOM Puts (banks & indices) averaging in (down) on rallies.
when this trade stops making money, i’ll consider reversing.
also, “market bottom” is a nonsense term.
happy trades. stay hedged.
November 13th, 2008 at 10:26 am
Karen,
After reading the PRGN financials yesterday, bought more at the open today. Will not sell this.
Thanks again.
November 13th, 2008 at 10:28 am
I am looking to see either a break throught the lows to 5300 and SP 600 or we hold and go back to 9000 ish. My bet is further down, just too much bad news not to push lower.
November 13th, 2008 at 10:30 am
“After you miss a 6,000 point move to the downside, you are in a position to trade more aggressively, to take advantage of these moves”
or just buy and hold… focus on stock selection… Buy some “good companies” that you think just might have a chance of being tenbaggers some day. That’s what value investing is all about.
Look at Hussman’s latest shareholder report and you will see lots of good ideas that are cheaper than they have ever been in my career.. Companies that he selects based on discounted cash available to shareholders. Look at some of the holdings that the hedge funds have had to blow out of that were once cornerstones of their portfolios.
Most people are down 50%+ this year in their equities and I missed all that. I’m getting 6% on prefunded munies and 2.0% on pre september 19 money market deposits for the other 50%.
November 13th, 2008 at 10:52 am
Bruce, i wish today hadn’t been ex-dividend because then you could have received the .50/share dividend; but hopefully you got a great price… anyway, i think that explains the drop into the low $4s.
November 13th, 2008 at 10:58 am
VT do you have a link to that report please? Didn’t see it on Hussman’s site.
November 13th, 2008 at 11:07 am
http://www.hussmanfunds.com/pdf/annrep08.pdf
November 13th, 2008 at 11:12 am
Karen,
I would have bought it anyway, but the financials I read say .50 dividend payable November 27 to shareholders of record on November 17th. Do you have other information?
Bruce
November 13th, 2008 at 11:17 am
Bruce,maybe i’m mistaken as my info came from e*trade. best to get it from the prgn web-site. i will double-check as i might like to buy more… thanks…
November 13th, 2008 at 11:23 am
Bruce, i wasn’t thinking. today is ex div because you need the 3 full business days for settlement. so to be a shareholder of record ON the 17th, your purchase day would have to be pre-nov 13.
November 13th, 2008 at 12:43 pm
i think you’re going to get killed! This next leg down will show some real panic.
November 13th, 2008 at 12:49 pm
Well, there went the intraday lows…
November 13th, 2008 at 1:05 pm
Oh barry. Buying 2x funds in the face of the worst bear ever. Another bear turned bull gets his face ripped off!!
~~~
BR: Nice call
U.S. Stocks Surge, Gain 11% from the lows
http://www.bloomberg.com/apps/news?pid=20601087&sid=abYNY5WnERMo&
November 13th, 2008 at 1:13 pm
I don’t know if we’ve hit new lows today, but it’s not looking good; wasn’t someone on this board calling others “idiots” for their continued bearish views?
Two quotes that are quite revealing: GS at 62, and BAC at 15. My, oh my. I wonder if BofA has any regrets swallowing Merrill and Countrywide?
November 13th, 2008 at 1:29 pm
karen, Bruce — I hafta ask, just to satisfy my curiosity (I searched but could not locate your prior PRGN discussion) — exactly what is the attraction here?
I looked at PRGN, it’s a Greek shipping company, with about $600M in property plant & equipment assets (presumably floating), and $300M in debt. It has a nice dividend history, but does not appear to be a bank with limitless central bank support (unless Bernanke is shoveling money to them too). OTOH, gross profit is VERY nice — if it can be sustained.
International trade appears to be in “shrinking-to-nothing” mode, with some risk of trade barriers being raised in an ill-advised “protect the home markets” gambit. If the planet does slide into a 3-7 year-long depression, their profits would seem to be at risk fer sure.
In short, this looks utterly poisonous to me, but y’all all clearly not stoopid, so I must be. Is a quick 10% return the enticement here? And that can’t be the case, as the stock will drop by the amount of the dividend tomorrow. So I have to assume that this is a contrarian buy, on the assumption that the global economy will lurch out of the pickle it’s in within months rather than years. Is that the rationale?
Please enlighten me — I have no interest whatsoever in the transaction (out of my area of expertise — obviously), just want to understand the rationale behind it. I figure that once I stop learning, they can turn off the support machinery, I’m dead. (although of late, learning has become increasingly painful)
November 13th, 2008 at 1:48 pm
Constantnormal:
I have been 100% cash for over 2 years, as you have been noting from my posts. I bought a little of this a few weeks ago when Karen and I were discussing the Baltic Dry Index and how severely it had dried up..as you know. We were discussing dividend stocks, and also how Jim Cramer had mentioned PRGN in June, followed by a 2/3 decline, another good call, Jimbo…
One of PRGN’s competitors announced a few days ago, and I took a chance knowing this and had a wonderful day…owned Prgn for 5 hours and made 23%…I bought it today, not to sell or trade, but to hold through this downturn, thinking that in a few years this could treble, maybe…it has a wonderful dividend history..
Not a lot, but I will hold it…virtually all my holdings here are cash, and this will just be my “toes”…as Barry says…and I assure you, I will not place any major wagers on any stocks until I am sure the bear market, and severe recession is over….
Just think of it as a “Christmas Club”…if it goes to zero, no harm to me….if it turns into a five bagger, still won’t affect my retirement, with the amount I bought today….
Bruce in Tennessee
November 13th, 2008 at 1:52 pm
OK, so this IS a statement that “the sun will come up to-morrow…”. Thanks.
November 13th, 2008 at 2:08 pm
Back to the general “re-testing” theme — does anyone have a believable story that would satisfy both the Steve Barry “the underling debt bubble is not being deflated” point, and the technical “nothing falls to zero (all at once)” point?
Seems to me that the systemic problems of global debt (and US total debt in particular) have GOT to be resolved in some manner or other before we can have any kind of a sunny future. Increasingly, it’s looking like our failure to allow large institutions to die (instead absorbing them into other large institutions and making even BIGGER problems) are putting the nation at risk.
I expect to see other nations besides Iceland hit the skids in the months to come. Credibility seems to be waning in the ability of nations to cover their institutions debt exposure.
In the face of that kind of risk, any “bottom” is likely to be transitory, lasting only a short while before taking the express elevator down once more.
November 13th, 2008 at 2:52 pm
There seems to be much predictability today… As if the tape is being painted. Everyone and their dog is looking for a bounce. But the dog is not in charge the Bear is.
November 13th, 2008 at 5:00 pm
great call!
November 13th, 2008 at 7:35 pm
jmborchers,
How can there be “so much cash out of the market”? Perhaps, you never thought about it before but when someone sells their stock and gets cash, the other party gets stock and losses their cash. Note that the amount of cash out of the market is exactly conserved and it doesn’t matter at what price the transaction occurred.
So whoever the people are that you are talking about, that have “so much cash”, there are an equal an opposite group who have gone all in and no longer have cash to invest. So this is not a reason why stocks should go up.
Dave
November 13th, 2008 at 7:45 pm
subscriber,
The statement “we are in a bear market” does not really make sense. All you can say is that “we have been in bear market” or “stocks are much lower than before”. That is, you never know when the bear market has ended and when it is a bull market. It is not even clear if the terms mean anything at all if your goal is predicting future movements. That is, you can easily make simulated random walks and you can identify whether you are in a bear or bull market but we know apriori that this gives you no insight in predicting the future since in this case it is completely random.
I think people spend way too much time on these kind of things. Has anyone ever demonstrated any evidence that technical analysis has any benefit at all? I think not. Why not just read tea leaves or do astrology?
Dave