Saturday, October 11, 2008

The Crisis is Over???

Yesterday someone declared that the stock market has hit a bottom “It’s going to be up from here.” The guy probably didn’t get his life boat seating assignment yet.

In the 1929 and 1987 stock crashes, there were tremendous surges in stock volume (there is nothing hard about picking them out on the following two graphs).

Double click for a larger image.
Friday saw close to 11.5 billion shares traded on the NYSE. It was high volume but not a triple of the normal volume. That’s what you need for a body count in a real panic (the far right side of the graph below is Friday's close).

The way the market gyrated within a range of 1,000 points leads one to conclude that the stock market is on life support. The day traders probably got creamed. At the market close, it looks as if “unknown market makers” bought everything that would have hit the fan. That means that the Fed gave some humongous loans to cover the "surplus purchased inventory." Everyone expected a sell off at the close. Friday's market makers wouldn’t normally want to carry a large amount of stock forward into next week. The Fed is renowned for its banking shenanigans and rule changes made on the weekends.

What we are looking at is a loss of faith in the economy. There is a lack of credibility. Our leaders claim everything is under control. The irritating thing is that they keep repeating it, after each new disaster. The graph below more or less shows a stock feeding frenzy that has gone hyperbolic on volume. There is nothing to worry about, Bernanke and Paulson have it under control. How come that doesn't calm my mind?

Let's face it, these graphs ought give a hedge fund manager spasms of the lower colon. Next week, look for a dramatic drop in the stock market. A tremendous surge in daily volume will indicate a temporary bottom. The only way to raise capital right now is to sell stock. The banks are not loaning money period. The mutual funds and IRA’s will be selling because of redemptions. The fund managers are in a catch 22. They want to buy into this panic, but they are forced to sell to raise cash for share holder demands.

After the volume surge, then comes a steady decline in trading and the slow slide down hill for 2 to 3 years. I think I’ll mosey on down to Wal-Mart and pick up a job application; there is no line--yet.

Copyright 2008 All rights reserved


Tyrone said...

Walmart? Don't even think about it!

Loss of faith in the economy sums it up pretty well. My lack of faith motivated the following over the past 2 weeks:
- 401K: Moved big bucks out of a bond fund to "stable" value
- Closed a CA Tax-free muni fund
- Moved small dollars (1000's) out of stock funds to cash (I was never too concerned about this, but decided I would not even leave crumbs)
- Bought more gold

My next move is to close a money market fund, moving it to my savings account; easier access.

Batten down the hatches!

Jim in San Marcos said...

Hi Tyrone

I'm not sure what you moved where, but short term bond fund are a good thing. There is not much risk with them. You will get your principle back.

If I were you, I'd diversify a tad and hope for the best.

Tyrone said...

The bond fund I moved out of was longer term. The stable value fund is much shorter--3 months if I remember correctly. This was all for my 401K. They don't give you many choices, but the only thing that was positive this week was the stable value fund, which already had 50% of my balance.

Sackerson said...

Hi, Jim - useful technical analysis. I, too, feel that next week will be a bumpy ride.

It may seem like a distraction, but even while we're trying to cope with the crisis, we should be laying plans to punish the perps, or it will happen again, a generation from now. You in the US have a better chance to achieve this - you do, at least, have something like a democracy, even if it seems to be wearing out at the elbows.

Jim in San Marcos said...

Hi Sack

I don't think that there are many perps to punish unless they committed fraud.

Everyone that enjoyed the free money is now being punished. They'll end up losing their home and going into bankruptcy. The wife will remind them of what they did for the rest of their life. All of that is punishment enough.

I agree that there is a strong drive to punish the guilty if you didn't participate. We are being punished along with the participants. That's not fair.

The real culprit here is Greed. We have now traded it for Fear.

I'll be watching Asian markets tonight and looking at your market the FTSE right at bed time.

This is one of the few times where front row seats suck.

Hold on, the ride is about to begin!

Anonymous said...


Last winter I moved my 401K into the "Stable Value Fund" and it's pretty much made about 3% (APY). At Fridays close, I moved about 50% back into the market, spreading it across several funds (each averaged 20% losses last 30 days).

I figured, I've avoided about 40% of the losses everybody else got hit with, so I figured I would jump in now even though I'm sure it hasn't hit bottom. However, I can't call that precisely. Hopefully things are flaring out. Although, I will miss the smug comfort of zero worries as my coworkers have panicked.

This may sound cynical, but some of the firearms stocks have gotten outrageously cheap, so I did some bottomfeeding on Friday (if things get bad, that's an industry that should do well!).

John in Texas

Jim in San Marcos said...

Hi John

Nobody is going to call a bottom, you should do alright.

If you run with the herd, you follow them over the cliff.

I believe that it is the independent thinkers willing to take a chance that stand a good chance of making money when there are panics.

Thank you for your comments

Anonymous said...

Jim, what is your opinion of the EU to Guarantee Interbank Lending?
Could this send the market skyrocketing tomorrow?

Jim in San Marcos said...

Hi Watchtower,

I'm not sure how this will play out in the stock market.

The EU is in a real bind. Their currency is not linked to the political system. The strong Euro will kill exports. The unemployed masses could riot.

The economic reality of not being able to feed your family, kind of outweighs the fiscal stimulus plan proposed for the EU. Some parts of the EU are in real bad shape. Germany in the 1930's became a Fascist State when the politicians couldn't keep the masses employed.

That article showed a lack of real commitment by everyone except Germany. They are all going to go back home and "think" about it.

Thank you for the link

Anonymous said...

Thanks Jim.