Subtitle: Ouch! Or Just Blowing the Head off The Beer?
The era of the orderly broad market selloff has clearly drawn to a close leaving in its place panic and fear induced aggressive selling and rapidly falling stock prices.
It had to come to this at some point… it was inevitable.
After years of an overly optimistic spin… mind you CNBC has been covering the housing decline for the better part of two years and allowing an endless and shameless stream of charlatans to pump away ridiculous ideas about the “Goldilocks Economy”, “Soft Landings”, the “Fundamentally Sound Economy” and endless housing “Bottoms”… the veil has finally lifted, at least for the moment, revealing clearly the truly dire state of affairs that has befallen our economy.
But unlike past stock market corrections, this one is coming too late… too disjoint with the fundamental correction brought by the massive housing deflation.
Was this happenstance or is this the result of some sort of mass delusion that engulfed the business media, the government and the investment community alike?
Why did it take so long for the majority to see what was, for some, so obvious for so many years?
As I see it, one of the most dangerous aspects of this stock market decline is in how long it took to get to any form of panic selling.
We have had a long mostly orderly trade down in what appears to have been the markets unwillingness to simply mark down to account for the true extent of the massive housing crisis.
Only now, as declines to the broad average cut deep to the bone are market participants showing their true animal spirits.
Is it possible that we are seeing a “GM-ization” of the broader stock market whereby thousands of stocks are essentially marked down to truly unsettling levels? ... Only time will tell.
One thing is certain though, after a truly remarkable period of low volatility trading, during expansion and initial decline, this massive markdown has only now just begun to heat up to a point indicative of a real Bull-Bear shakeout.
As regular readers know, I have been following along with the recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.
Be sure to study the lower chart well as it presents an interesting way of capturing market volatility (my invention) and compare to past market performance to what we are seeing today.
Notice that we are only now beginning to see the telltale signs of REAL volatility leading one to believe that we have a long way to go in this market shakeout.
There are also host of very interesting technical similarities (which are noted below) that indicates that we have fully transcended into another severe bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.
Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.
Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.
As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.
It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.
THEN (1998 – 2000 Top)
- A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
- B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
- A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
- B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
